Implications of a Brexit: A U-turn in tackling global tax avoidance?
June 20, 2016
By Daniel Neale
With just days remaining until Britain decides on its EU membership, the UK is at a crossroads. It has a historical choice to make, with various consequences attached to the decision on the 23rd of June on whether it becomes the first ever country to leave the EU. Those consequences could include undermining the leading role that Britain has taken in the global fight against corruption and transforming Britain into an even greater tax haven for multinationals.
According to a recent report by the British Treasury, £36 billion would be sucked out of the UK’s financial sector by 2030 due to the economic costs of pulling out from the EU. Taxpayers will be forced to pay 8p more in income tax on every pound earned, and the economy risks shrinking between 3.4 percent and 9.5 percent by 2030 depending on the exit strategy it chooses.
With these numbers in mind, how might a potential Brexit affect the global financial transparency agenda, particularly in terms of tackling tax avoidance?
Domestically, the UK could feel a great deal of pressure over time to use its tax system more aggressively to attract and retain capital so that the revenue losses are offset.An obvious policy choice would be to further reduce corporate tax rates from the current 20 percent rate or the planned rate of 17 percent by 2020 to compete with the 12.5 percent level that is present in Ireland, for example. With fewer political implications attached to its national tax legislation, the UK would also be freer to market itself as a freewheeling hub for emerging-market finance—a sort of Singapore on steroids. However, this could lead to multinationals engaging in tax avoidance by shifting their profits into the UK, which would hardly offset the loss of domestic revenue given the low tax that corporations would be offered.
Internationally, the wider implication of the UK’s economic pressures is that the political climate for clamping down on tax avoidance might stall. Britain has been playing a leading role in tackling global corruption and as such, it is crucial that a country with some of the largest financial firepower in the world remains on the right side of the agenda. According to Tax Justice Network, the UK is 2nd to the United States in terms of the size of its financial industry and the amount of financial services that it provides to non-residents.
If Britain were to leave the EU, both would see their ability to exchange and collect information on tax abuses significantly reduced in scope. Britain would lose its participation in various intra-EU information exchange treaties to combat tax avoidance, such as the recent EU proposal on Country by Country Reporting. If adopted, the rule would require multinationals to publicly disclose how much tax they pay in each EU member state, among other things, but the UK would not be included.
What would remain unchanged however, is the UK’s extensive network of bilateral treaties on double taxation along with its membership of the OECD. In this sense, it would still be subject to the number of agreements that it has adopted, such as the OECD/Council of Europe Convention on Mutual Administrative Assistance in Tax Matters. But these agreements are narrower in scope than the corresponding EU laws, providing a greater amount of loopholes for corporations to take advantage of.
Being inside the EU, therefore, not only guarantees that the UK can continue pushing Europe ahead in countering tax avoidance, but also gives the UK considerable leverage in its tax dealings with large corporations. Whether pressure from the EU could still influence the UK if it were to leave would depend on the post-Brexit arrangement that would govern the EU-UK relationship, but nothing has been set in stone yet.
Being inside the EU means that the political will that is in favor of addressing corporate corruption will not be jeopardized by losing one of its crucial players. Only through proper cooperation will the international community start seeing the real detrimental effects that corporate profit shifting has on the developing world. Breaking away in isolationism would prove to be a rejection to take advantage of the momentum that has built around fighting global tax avoidance. The result would be detrimental to the UK, the EU, and the rest of the world.