Speech by Exchequer Secretary to the Treasury: Creating a competitive tax system

A speech delivered by David Gauke MP on creating a competitive tax system and tackling avoidance and evasion.

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

The Rt Hon David Gauke MP

Good morning. I’m very pleased to be here. I have to say – having spent an awful lot of the last fortnight in the House of Commons taking through this year’s Finance Bill – it is a great pleasure to be speaking to a different sort of audience. In fact this is already the longest I’ve gone during a speech in the last two weeks without a member of the audience standing up and asking me to give way! So thank you for that.

As I’ve been taking that Bill through the Commons, I’ve often referred to its three key themes; namely:

  • Supporting growth and enterprise – through creating a competitive tax landscape
  • Tackling avoidance and evasion – through the work of HMRC
  • And increasing fairness – through ensuring that our income tax system supports those who want to work

This morning, I’d like to talk to you about the link between the first two of those. Because some people would have you believe that countries or Governments face a choice between being in favour of dealing with tax avoidance and being in favour of tax competitiveness.

But I believe that reputable companies – companies like many of those represented here today – want to operate in jurisdictions where competitively low tax rates are properly enforced. And that’s what we’re trying to achieve in the UK.

I realise that when I spoke at this forum two years ago I focussed on the steps we were taking to make our tax system more competitive. And as such, this time out I’d like to focus on our work – particularly our work internationally – on anti-avoidance measures. But I also want to set out the steps that this Government has taken since coming to office to make the UK a more competitive tax location.

Starting with corporation tax, we set out our roadmap three years ago, with the aim of achieving a system with low levels of CT, low levels of distortion, and low levels of complexity. And we’ve made real progress in achieving that.

In the last two years we’ve reduced our main rate of corporation tax from 28 per cent to 23 per cent. From April 2014 that rate will drop again to 21 per cent. And in April 2015, the Corporation Tax rate in the United Kingdom will fall to just 20 per cent, which is set to be the lowest business tax of any major economy in the world. So our record on CT demonstrates two attributes that I know are crucial to companies like yours. First, a recognition of the need to be competitive, and second, a recognition of the need for stability and predictability – setting out our plans in advance and then delivering on them.

Alongside the reduction in the rate of corporation tax, we have also introduced new Controlled Foreign Companies rules, which came into effect from January this year. These reforms have modernised the UK tax system for business while protecting the country from the artificial diversion of UK profits. They reflect modern, global business practices and significantly reduce the compliance burdens of business. And, like other areas of the corporate tax system, the rules adopt a more territorial approach, focussing on taxing the profits from UK activities.

On top of those changes, the recent introduction of targeted tax reliefs for the creative industries – as well as our patent box and R&D reforms – have helped to make the UK a truly competitive tax environment.

Every year KPMG survey tax professionals, asking them to compare how competitive the UK system is against a range of countries. I was delighted to see the UK was ranked first in the 2012 survey. Respondents are asked to name the three most competitive tax regimes. In 2009, the UK was nominated by just 16% of respondents – by 2012, that number had increased to 72%. That report is – I hope – a reflection of the way this Government has rebalanced the UK tax regime from being a business hindrance to a business facilitator.

And there is other evidence that our approach is working. Several years ago, the UK corporate tax system was not regarded as an asset in this way. And we saw headlines of businesses moving operations overseas as a result of this. Since we embarked on these reforms, the flow of businesses leaving the UK has been stemmed – indeed we have seen businesses returning to the UK or coming here for the first time, like WPP, Lancashire, AON, Rowan and Seadrill.

A couple of weeks ago, I travelled to California to promote the UK tax system as one of many reasons why companies should bring economic activity into the UK. And the consistent messages that I heard from businesses were very positive about the corporate tax environment we have created in this country. So I remain very optimistic that the reputation for tax competitiveness that the UK has rightly earned will continue to attract investment and jobs. And that is a key point.

Our desire to have the most competitive tax system in the G20 is not driven by a general sense that it would be nice to do well in surveys or have something to say in speeches. There are many factors which determine a country’s competitiveness – such as a skilled workforce, a flexible labour market, linguistic and cultural links with the rest of the world, the quality of infrastructure, legal certainty and political stability. But one factor which a Government can change quickly is tax competitiveness.

It is increasingly the case that business and individuals can choose where to locate and invest. We want businesses to choose to locate and invest here. When devising and implementing tax policy, a Government that ignores these realities will see less investment – and as a consequence fewer jobs and lower growth. We make no apologies for competing in this area.

But while we create that low and competitive tax regime, we need to make sure that businesses are paying that low and competitive rate, as the law requires. And this Government has been very clear on this. We expect businesses to pay tax in accordance with the letter of the law. We also expect that taxpayers do not engage in contrived or artificial avoidance behaviour.

It is right that the UK is not a jurisdiction that offers ‘preferential special deals’. We are very competitive but it is on the basis of all taxpayers being equal under the law. And I believe that also gives us a stronger reputation for respectability than some of our international competitors. But we know that we are operating in an international tax environment and – as such – we know that we need to work with our international partners through the G20 to address areas where the international architecture has not kept up with fast paced global business practices.

This is why we are driving forward the OECD’s work on improving the international tax standards. Both the Chancellor and the Prime Minister have set out clearly that global tax issues need global solutions. The OECD report on base erosion and profit shifting identifies that international tax rules have failed to keep up with the age of electronic business.

The international corporate tax architecture was first drawn up in the 1920s, and it is widely acknowledged that today’s globalised economy presents new challenges for the international tax rules to keep up with modern business practices. Our system deals adequately with a wine producer exporting bottles of wine from France to the UK, or a German car manufacturer producing right-hand drive cars for the UK market. No-one in those circumstances argues that corporation tax should apply in the location of the consumers. There is no confusion between turnover and profit.

But businesses now operate in a world where it is easier to transact physical goods over the internet. While it is easy to know the location of a physical good, the location of a service is less clear cut. And where the service provided involves no physical object – where it is simply the downloading of digital bytes from a server which could be anywhere on the planet – then things become even hazier. It is now therefore much easier for businesses to locate their activities in countries that are distant from the physical location of their customers.

In some cases the tax system can be changed to adapt to these changing ways of production and consumption. For example, from 2015 we have agreed that, across the EU, VAT on e-services – including e-books, telecoms and broadcasting – will be charged in the customer’s country, not – as now – the provider’s.

But on the wider issues these changes present, I don’t believe that the answer is for us in the UK to take unilateral action. Such an approach would do us no favours as a location for business investment, and would risk setting in train a disparate approach among our trading partners, with serious consequences for international trade and growth.

The OECD report on base erosion and profit shifting, which was endorsed by the G20 this February, shows that to tackle this issue effectively requires collective action to strengthen international tax standards. And the UK Government - through the OECD – has been at the forefront in taking forward work on this issue.

We have made a commitment to act and we have backed that up with extra resources for the OECD. We have also been actively participating in the development of the OECD’s comprehensive action plan for tackling these issues, which will be presented to the G20 in July this year. And I’m sure everyone here will be very interested to see the proposed way forward for dealing with these issues.

So, before we enter the Q&A session – and I’ll be very happy to answer your questions on both the issues I’ve discussed today and the Finance Bill – let me be very clear on this Government’s beliefs. We believe that the best way to attract businesses to our country is to create a competitive tax environment. But we also believe that those businesses must pay those competitive rates as the law requires.

We face challenges internationally on this; particularly on such issues as Base Erosion and Profit Shifting, and indeed in the way that technological developments have changed the way in which we consume an increasing number of products and services. But I want the UK to be at the forefront of tackling those issues internationally, and through our work with the G20 we are doing exactly that.

So thank you for listening. Thank you for not asking me to give way! And I’m very happy to take your questions.

Published 24 April 2013