UK governments are failing to curb corporate tax abuses and leaving people to pay the price

Governments remain obsessed with austerity and choose not to inconvenience the rich or curb tax abuses by corporations.

Prem Sikka is an Emeritus Professor of Accounting at the University of Essex and the University of Sheffield, a Labour member of the House of Lords, and Contributing Editor at Left Foot Forward.

The UK economy continues to flat line and governments remain obsessed with austerity and cuts in living standards for the masses and public services. They choose not to inconvenience the rich or curb tax abuses by corporations.

In a globalised economy, corporations have become adept at shifting profits to low/no tax jurisdictions, and dodging taxes to increase the wealth of their controllers. Successive UK governments have done little to check this abuse.

In recent years, the OECD’s Base Erosion Profit Shifting (BEPS) project has sought to develop international consensus on tackling profit shifting and related tax dodges. For example, over 135 countries agreed that transnational corporations with revenues above €750m will pay a minimum effective rate of tax of 15% on profits in all countries. This was estimated to generate $150bn in new tax revenues globally per year.

The OECD project is stuttering. The US President Donald Trump has unilaterally withdrawn  from the treaty and promised retaliation against countries taxing profits of US corporations operating within their borders.

What is the UK doing about profit shifting?

The UK collects little meaningful data about profit shifting and related tax losses. HMRC publishes an annual estimate of ‘tax gap’ i.e. the difference between taxes collected and what should have been collected. For the period 2010 to 2024, it failed to collect around £500bn of taxes. Others estimate it to be around £100bn a year, totalling £1,400bn for the period 2010 to 2024. 

On profit shifting HMRC says:

“Some forms of base erosion and profit shifting (BEPS) are included in the tax gap where they represent tax loss that we can address under UK law.   

The tax gap does not include BEPS arrangements that cannot be addressed under UK law and that will be tackled multilaterally through the OECD”.

In a nutshell, HMRC has little idea of the tax revenues lost due to profit shifting.

One estimate is that corporations are shifting annual profits of US$1.42 trillion into tax havens, causing governments around the world to lose US$348 billion a year in tax revenue.

Some US$329bn of profit is shifted into the UK’s Crown Dependencies and Overseas Territories, depriving the world of over US$80bn of tax revenues. This robbery is facilitated by a rapacious tax abuse industry located in the UK and its dependencies.

The UK is likely to be a major loser from profit shifting, but governments are relaxed about corporate tax abuses. The Criminal Finances Act 2017 gave government powers to prosecute companies for tax evasion. A Minister informed parliament that “since its introduction, there have been no prosecutions or convictions of corporations”.

Profit shifting in action

An army of accountants and lawyers have developed techniques for shifting profits and devouring the public purse. Consider the case of BHS, a major retailer that collapsed in 2016. A parliamentary report noted that BHS Group sold a number of its UK stores to Carmen Properties Limited, based in Jersey. The properties were immediately leased back. Wife of the BHS CEO was the major shareholder in BHS and the sole shareholder of Carmen. Over the lifetime of the sale-and-leaseback arrangement, rent of £153 million was paid by BHS to Carmen. The rent paid under the related-party transaction reduced BHS’s UK taxable profits and tax liabilities. The profits of Carmen were not taxable in Jersey as they were made abroad. All profits were eventually paid as dividends to the sole shareholder of Carmen who resided in Monaco. Monaco does not levy income tax.

The above is not unlawful, and is emulated by many corporations. The resulting tax losses are unknown and are not part of HMRC tax gap estimates. Governments can check leakage of tax revenues by deducting tax at source from dividends, interest, and other payments to entities in low and zero tax rate jurisdictions. If the recipient can show that s/he paid tax on the transactions elsewhere then the tax withheld can be returned, but governments chose not to curb the tax losses.

Transnational corporations use complex structures, affiliates and subsidiaries to shift profits to low/no tax jurisdictions. Companies like Starbucks, Google, Microsoft, eBay, Amazon and others use complex corporate structures to shift profits. Apple has parked billions of its global profits in Jersey even though it has no physical presence there. The UK government has not mounted any challenge.

Some 80% of global trade takes place in ‘value chains’ linked to transnational corporations and creates opportunities for profit shifting and tax abuse. For example, a microchip company has its product designed in country A, manufactured in B, tested in C, patented in D, and marketing rights assigned to country E. Companies can adjust import and export prices to shift profits. Determining the allocation of costs and profits to each country becomes problematic, and affects the ability of governments to tax profits made within their geographical jurisdiction.

This issue is tackled by the OECD’s transfer pricing rules which require the use of arm’s length prices for determining costs and profits made in each jurisdiction. However, in a world dominated by monopolies and oligopolies, arm’s length prices are difficult to ascertain. Some 80% of global sales of coffee are attributed to just three multinational corporations. Two firms control 40% of global commercial seed market. Around 12 dominate auto manufacturing. Tax authorities struggle to apportion and tax profits.

Here is a well-researched example of how banana trading companies use complex corporate structures to shift profits and avoid taxes. A large proportion of the UK’s bananas come from Jersey in the Channel Islands, which doesn’t grow any bananas, and no banana-laden ship ever docks in Jersey. Rather the paper trail enables companies to book profits in Jersey. Bananas selling for £1 in UK supermarkets begin their journey from West Africa and Latin America. The initial cost is 10.5p for production, 1.5p for labour and 1p profit for local producers. As the ship heads to the UK, the cost of 13p escalates through intragroup transactions. Around 8p is added for using of a purchasing network based in the Caymans Islands; 8p goes to a Luxembourg subsidiary for providing financial services; 4p to Ireland for use of the brand name; 4p to the Isle of Man for providing insurance; 6p to Jersey for management services and 17p to Bermuda for providing a distribution network.  All of these places have low or no taxes on corporate profits. By the time the banana ship arrives in the UK, the 13p worth of bananas magically have a cost of 60p and are sold in the supermarket for £1.  

Supermarkets selling bananas incur costs and are likely to declare about 2p in profit which will then be taxed in the UK at tax rate of 25% and generate about 0.5p for the public purse.

Some 47p is booked in offshore havens and profit element of that is not taxed in the UK even though profits are generated in the UK. Almost every transnational corporation uses similar tactics. The rules are that if a company is classed as UK resident for tax purposes then it must pay UK corporation tax on all its profits. This is normally adjusted for taxes already paid elsewhere. So, if profits of a UK resident company are not taxed anywhere the UK government can tax them but it rarely challenges corporations.

Transparency is a key requirement in challenging tax abuses facilitated by profit shifting. Annual audited accounts published by the companies are opaque and do not provide any information about intragroup transactions or profit shifting. Some visibility of profit shifting can be provided by Public Country-by-Country-Reporting which shows that profits are booked in places where companies lack employee and physical presence.

To appease civil society, Section 122 of the Finance Act 2015 required defined corporations to publish a Public Country-by-Country-Report. However, the legislation was never implemented and was subsequently repealed by Section 349(11)(b) of the Finance (No. 2) Act 2023.The UK has been overtaken by the European Union and Australia. Both require companies to publish a Public Country-by-Country-Report to highlight profit shifting.

With the weakening of the OECD consensus (see above), the UN Framework Convention on International Tax Cooperation provides the best way forward in creating an effective and equitable international tax system and curbing tax abuses. The UK, together with the US, voted against the UN resolution.

HMRC has made ‘sweetheart deals’ with large corporations, often appearing to accept less than what the liability ought to be. Despite the occasional report by the National Audit Office, insufficient details are known of the terms and extent of such deals. Parliamentary Committees are unable to scrutinise the deals because HMRC and companies hide behind claims of ‘confidentiality’ of tax affairs. The only way of empowering committees is to require public filing of corporate tax returns, just like their annual accounts. Such a proposal formed part of the Labour Party’s 2017 and 2019 manifestos, but was dropped from the 2024 manifesto.

The UK governments are too close to giant corporations and have failed to curb corporate tax abuses. Governments have instead forced people to pay more for crumbling social infrastructure, and eroded their purchasing power. This poses serious questions about the nature of governments and democracy and is not conducive to building a sustainable economy.