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May 3, 2013

We must work together for a better tax system

Last month, two announcements were made on tax which have implications for the profession and business globally. In the UK, the Public Accounts Committee (PAC) criticised the Big Four, suggesting that they were instrumental in helping business avoid tax. Internationally, the Organisation for Economic Cooperation and Development (OECD) said that nations need to collaborate to achieve a sustainable international tax regime.

Corporation tax and its avoidance are on all of the front pages at the moment. Where large multinational companies, especially those reporting large global profits, are perceived to be working around their tax obligations there is understandable anger. It would be disingenuous to pretend this is not also informed by the current global economic situation; low growth and the bite of austerity measures have done much to raise popular awareness of the state of public finances. But companies are often doing no more than responding to the tax incentives put in place by countries to encourage investment. Moreover, they are also often working within the international tax rules – which are currently under review by a number of international organisations, most notably OECD.

Part of the problem is that tax law is struggling to adjust to the nature of modern global business. Most of the rules were designed for a time when it was comparatively easy to see where value was created within a supply chain, and when most companies operated within their home market. Now it is no longer necessary to have a physical office in a country to operate there. People and assets can be easily moved, and supply chains are complex. E-commerce and the growing importance of intellectual property have accelerated this and are two areas where tax law is well behind the realities of doing business.

In June, the G8 summit will provide an opportunity for countries to come together to debate this. We need international co-operation on a tax system that both drives global trade and growth and is fair. This does not necessarily mean banishing competition on corporation tax, but the ultimate goal must be to have an international tax regime which appropriately reflects the way international business is now carried on.

Chartered accountants have a central role to play in this process. This was recognised by the OECD in 2008 and more recently by HMRC it its tax agent strategy. A balance needs to be struck in order to create systems that are both simple and well-designed to minimise aggressive avoidance. Moreover, across the world, strong accountancy professions are just as crucial as strong national rules when it comes to building robust tax systems – without us the system would not work and the right amount of tax would not be collected. This is especially important in developing nations, where a nascent accountancy profession is often growing alongside rapidly evolving industries and economies, which is why ICAEW, for example, works with the World Bank to develop capacity in countries such as Bangladesh and Botswana.

International tax systems need to be both simplified and updated for the 21st century. We also need more transparency to enable proper enforcement. And we have to ensure that we build something that is both fair and inspires growth without encouraging avoidance or driving companies away. None of these aims will be easy. But by working together it should be possible for governments, the accountancy profession, business and civil society to reach a consensus on what is equitable. The G8 nations cannot solve this alone, but they can begin a debate to take forwards to the G20 Finance Ministers in July. Without multilateral cooperation, this problem cannot be cracked.

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