By ActionAid UK

A huge new tax loophole specifically for multinational companies will be hidden in the UK Chancellor’s new budget due to be released on 21 March. This move bizarrely comes at a time when polling shows that 79% of the British population thinks that the government is not doing enough to tackle tax avoidance.

The briefing shows how this loophole will make it much easier for UK-based global businesses to avoid taxes in the developing countries they operate in, at an estimated cost of £4 billion a year.[i] Some of the poorest countries in the world, with minimal public services, will be losing vital revenues they could be investing in healthcare and education, keeping them more dependent on foreign aid. It will also allow the same multinationals to enjoy a tax rate of just 5.75% on the profits of some group companies based in tax havens, costing the UK Treasury £1 billion a year. At a time of global economic turmoil, the poorest will lose most.

A new poll commissioned by ActionAid reveals just how concerned the British public is, with nearly 80% saying the government is not doing enough to tackle tax avoidance by large companies.

The UK government recognises that tax revenues are essential for development, and admits that “tax avoidance in developing countries deprives governments of the vital income needed to build and maintain their public services.” David Cameron has noted both the importance of “effective tax systems” to ensure that developing countries benefit from British investment, and also the way that companies “use the complexity of the tax and legal system to try and endlessly reduce their tax payments.”

Yet this new tax loophole would be a huge step backwards for developing countries and a major contradiction in the UK’s international development policy. The government has so far refused to assess the impact of the proposed changes on developing countries, despite requests to do so from ActionAid over the last two years.

Some multinational businesses, including many involved in high profile tax avoidance disputes, have lobbied hard to make this new loophole – a relaxation of what is known as “controlled foreign company” rules – as big as possible. Some 30 companies, with a total of well over 3,000 subsidiaries located in tax havens, lobbied for the changes through advisory groups set up by the Treasury. This last minute corporate lobby push resulted in a change in the rules which is estimated to save corporations and cost governments an extra £100 million, due to effective tax reductions.

The Treasury has not only ignored ActionAid as it develops changes to anti-tax haven rules: organisations such as the OECD and IMF also recommend that governments undertake so-called “spillover analyses” of the impacts on developing countries following these kind of rule changes, but their advice has not been heeded.

Unless this is rectified, developing countries will suffer huge collateral damage, from changes that will primarily benefit multinational companies that make the most use of tax havens.

Take Action: British citzens send an email to you MP – asking them to press the government to reconsider opening this new tax loophole

Download the full report: Collateral damage How government plans to water down UK anti-tax haven rules could cost developing countries – and the UK – billions