Update global tax law for the 21st century and beyond

CBI Director-General Carolyn Fairbairn wrote to the Financial Times highlighting the need for new tax rules agreed in the OECD to be implemented consistently in the UK to make the system fit for the 21st century and beyond.

Sir, Global tax law is struggling to keep pace with new business models. Public concern is justified. However, the recent spate of armchair accounting is unhelpful and damaging. Back of the envelope tax calculations and trial by public opinion risk harming the UK’s reputation as a place to invest.

Global tax rules state that tax is paid where economic value is created, not profit. So if companies have operations in the UK but the source of the value is largely overseas, their UK tax bill will be lower. This works both ways. Great UK creative exports, like our costume dramas, are sold all over the world but the intellectual property is created here and so the bulk of the tax revenue flows back to the UK. And when foreign firms set up in the UK, more tax is paid where the intellectual property is created. It’s a principle that may not be intuitive, but it encourages innovation and ensures major investments can be paid back.

Many of the current global tax rules were designed decades ago when businesses had fixed locations and sold tangible products, before the digital economy took off. This is why HMRC has a rigorous investigation process to establish how the tax rules apply to new and complicated business models. And this is why the CBI has been supporting the ground-breaking work of the international community to update the global tax rules, a collaboration of over 80 countries through the OECD.

It is now up to individual countries to implement the OECD’s recommendations. The UK Government should do so in line with the international consensus. One of the OECD’s key recommendations is country-by-country reporting to tax authorities of multinational companies’ tax information. It is tax authorities who have the expertise to adjudicate that the right amount of tax is paid in each country and they must have the resources to do this job properly.

Government has a responsibility to set the tax rules and businesses have a responsibility to the pay the right amount of tax within them. Firms recognise the rules need changing, which is why they back the OECD reforms. Let’s redouble our efforts to bring them in. In the meantime, companies should not be tried in the court of public opinion for acting within the law.

Carolyn Fairbairn

Director-General, CBI