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Tax move 'to cost poor states £4bn'

Planned Treasury changes to tax rules on multinational companies will deprive governments in poor countries of as much as £4 billion a year in revenue, a development charity has warned.

ActionAid said that the relaxation of Controlled Foreign Company (CFC) rules, expected to be introduced in Chancellor George Osborne's March 21 Budget, will create a loophole allowing global businesses to dodge tax on the profits they make in the world's least developed states.

The Treasury's own calculations suggest that the UK could lose almost £1 billion a year from the change, said ActionAid.

However, the Treasury challenged the charity's figures, arguing that the method it had used to reach the £4 billion total was "overly simple". Any attempt to estimate the impact of changes in UK tax law on other countries in this way would require making so many assumptions that the result would not be sufficiently robust or accurate to be of value, said a source.

ActionAid called for an "urgent rethink" of Mr Osborne's plans on CFCs, as a poll found that a large majority of voters (79%) think the Government is not doing enough to tackle tax avoidance. The YouGov poll found that 72% of voters thought that companies that use legal loopholes to avoid tax bills in the UK or developing countries were behaving "irresponsibly".

Under existing CFC rules, if a multinational headquartered in the UK shifts its profits from anywhere in the world into a tax haven to lower its bills, the Treasury tops up the tax to bring it in line with the standard 23% rate payable here.

After the proposed reforms, this rule will apply only when profits are shifted directly from the UK into a tax haven abroad. ActionAid said this would make it much easier and more lucrative for companies to move profits out of developing countries and into tax havens, for instance by making large royalty payments to subsidiaries based in a low-tax jurisdiction.

ActionAid campaign manager Martin Hearson said: "If the Government waters down these rules in the March Budget, it could inflict huge collateral damage on poor countries like Zambia, Ghana and Tanzania who desperately need that money to fund doctors, nurses and teachers and to ultimately help lift them out of poverty. And with a cost to the UK of £1 billion everyone loses out."

A Treasury spokeswoman said: "The Controlled Foreign Companies (CFC) rules are designed to protect the UK tax base from artificial diversion of profits. Similarly, other countries have CFC rules that are designed to protect their local tax bases.

"The best way to prevent tax avoidance in developing countries is by helping them to develop robust and stable tax systems which enable them to collect the tax they are owed. Through the Department for International Development and HM Revenue and Customs, the UK delivers targeted and effective support to make this happen."

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