Approximate read time: 20 minutes

The House of Lords is scheduled to debate the following motion on 30 January 2025:

Lord Sikka (Labour) to move that this House takes note of the tax implications of corporations shifting profits to low- and no-tax jurisdictions.

Lord Sikka is an emeritus professor of accounting at the University of Sheffield and the University of Essex.[1] He is also a contributing editor to the Left Foot Forward website, where he has written opinion articles discussing corporate profit shifting.[2] He has argued “companies dodge taxes by profit shifting to low/no tax havens”.[3]

1. Profit shifting, low- and no-tax jurisdictions and lost revenue estimates

1.1 What is profit shifting?

‘Profit shifting’ refers to when multinational corporations use intragroup transactions (undertakings between different corporate entities) to artificially shift profits to low- or no-tax locations to lower their exposure to corporation tax.[4] They may use a variety of techniques to do this, including shifting debt to higher-tax jurisdictions, adjusting prices used in intragroup transactions, and paying royalties among subsidiaries.[5] Because profit shifting activity involving deductible payments such as interest or royalties can erode domestic tax bases, the Organisation for Economic Co-operation and Development (OECD) uses the term ‘base erosion and profit shifting’ (BEPS) to refer to such activity.

In the UK, HM Revenue and Customs (HMRC) suggests a corporation’s use of artificial transactions to shift profits from locations where economic activity has taken place to jurisdictions where they have engaged in little or no economic activity, but which levy low or no corporation tax, constitutes tax avoidance.[6] HMRC defines tax planning as involving the use of tax reliefs for the purpose for which they were intended. It characterises tax avoidance as going beyond this to involve “contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage”. HMRC has added that such activity “involves operating within the letter, but not the spirit, of the law”.[7] Furthermore, tax evasion occurs when an individual or an entity acts against the law.[8]

Commenting on the issue of corporate tax avoidance in 2013, the House of Lords Economic Affairs Committee observed:

The UK faces a serious problem of avoidance of corporation tax, due in part to the complexity of the tax regime in the UK, but mainly because the international tax system gives multinational companies opportunities to shift profits between countries in ways that reduce their liabilities in the UK. This damages the economy and undermines trust in the tax system.

Under the present international framework of corporate taxation, companies operating globally can make their taxable profits arise in low-rate jurisdictions, such as Ireland and Luxembourg, even when their customers are in the UK or elsewhere. The amount of corporation tax a company pays in any one country, such as the UK, can be determined by how aggressively the company seeks to shift its profits to other lower-taxed countries. The effect is to make corporation tax payments in a given country largely voluntary for multinational companies.[9]

The committee added that corporate tax avoidance strategies involving profit shifting cause loss of revenue to the exchequer, mean an uneven playing field between home-based, home-market firms paying corporation tax and multinationals engaged in profit shifting, and reduce trust in the tax system as a whole.[10] It welcomed an OECD action plan aimed at tackling BEPS published that same year. See section 2 below for further information on the action plan and subsequent developments.

While there is broad consensus that profit shifting affects revenue collection, some literature has suggested there may be a trade-off between increased revenue collection through reduced corporate profit shifting and investment by multinationals in certain jurisdictions through an increased cost of capital.[11]

1.2 What are low- and no-tax jurisdictions?

Jurisdictions with low or no corporation tax rates are often referred to as ‘tax havens’. There is no precise definition of a tax haven.[12] However, the OECD has previously characterised them as having several features: no or only nominal taxes; lack of effective exchange of information; lack of transparency; and no requirement of substantial activity.[13]

Many lists of jurisdictions with tax haven characteristics exist.[14] However, one of the most high profile is the Tax Justice Network’s ‘Corporate tax haven index’ (CTHI).[15] The network defines the index as:

[…] a ranking of countries most complicit in helping multinational corporations underpay corporate income tax. The index evaluates how much wiggle room for corporate tax abuse a country’s laws and regulations provide—this is the country’s ‘haven score’. The index also monitors how much financial activity by multinational corporations enters and exits the country—this is the country’s ‘global scale weight’ [GSW]. These two factors are then combined to determine how big of a role the country plays in enabling global corporate tax abuse—this is the country’s ‘CTHI value’ and is what the country is ranked on.[16]

The index ranks the following jurisdictions as having the 25 highest CTHI values:

Table 1. Tax Justice Network’s corporate tax haven index, updated October 2024

CTHI rank Country Haven score GSW CTHI value CTHI share
1 British Virgin Islands 100 2.9% 3,061 7.1%
2 Cayman Islands 100 2.4% 2,891 6.7%
3 Bermuda 100 1.5% 2,478 5.8%
4 Switzerland 89 3.4% 2,279 5.3%
5 Singapore 86 3.5% 2,059 4.8%
6 Hong Kong 78 7.1% 1,948 4.5%
7 Netherlands 74 11.1% 1,945 4.5%
8 Jersey 100 0.5% 1,756 4.1%
9 Ireland 79 3.4% 1,622 3.8%
10 Luxembourg 69 8.8% 1,480 3.5%
11 The Bahamas 100 0.2% 1,313 3.1%
12 Isle of Man 100 0.1% 1,144 2.7%
13 Guernsey 100 0.1% 1,122 2.6%
14 Cyprus 79 0.9% 1,046 2.4%
15 Mauritius 80 0.8% 1,005 2.3%
16 China 62 7.3% 974 2.3%
17 United Arab Emirates 82 0.6% 964 2.2%
18 United Kingdom 59 8.3% 894 2.1%
19 France 65 3.1% 883 2.1%
20 Malta 77 0.4% 747 1.7%
21 Belgium 64 1.8% 698 1.6%
22 Hungary 70 0.8% 681 1.6%
23 Germany 55 4.2% 590 1.4%
24 Spain 60 1.8% 557 1.3%
25 USA 46 15.6% 527 1.2%

(Tax Justice Network, ‘Corporate tax haven index’, accessed 22 January 2025)

The network placed the UK in 18th place out of 70 countries. The following Crown Dependencies and British Overseas Territories also featured in the index: British Virgin Islands (1st); Cayman Islands (2nd); Bermuda (3rd); Jersey (8th); Isle of Man (12th); Guernsey (13th); Anguilla (35th); Gibraltar (37th); Turks and Caicos Islands (43rd); and Montserrat (69th).

The Tax Justice Network also maintains the ‘Financial secrecy index’, which it describes as a “ranking of jurisdictions most complicit in helping individuals to hide their finances from the rule of law”.[17] It combines a ‘secrecy score’ and ‘global scale weight’ to determine how much financial secrecy a jurisdiction supplies, meaning larger ‘suppliers’ of financial secrecy may rank more highly than more secretive jurisdictions. The network argues this “more accurately captures how laws and financial activity intersect in the real world to create secrecy” when compared with “tax haven blacklists which usually only factor in laws”. The network ranked the UK in 13th place out of 141 jurisdictions, with the following Crown Dependencies and British Overseas Territories also featuring: British Virgin Islands (9th); Guernsey (10th); Cayman Islands (14th); Jersey (19th); Bermuda (49th); Isle of Man (61st); Gibraltar (96th); Turks and Caicos Islands (120th); and Montserrat (141st).

However, some have criticised the network’s work. For example, during a debate on tax avoidance and evasion in 2020, the then financial secretary to the Treasury, Jesse Norman, said a Tax Justice Network report had generated “absurd outcomes” and contested any suggestion the UK had a “less robust and effectively transparent tax jurisdiction” than lower-ranked jurisdictions such as Liberia.[18] He further alleged the methodology used to calculate financial secrecy scores in particular was “entirely flawed”.

1.3 How much corporation tax revenue is estimated to be lost to profit shifting?

Evidence of profit shifting has been presented in many studies and reports on the subject, although estimates of the potential revenue cost of such activity by corporations vary considerably.[19]

At the global level, the OECD has noted lost revenue from profit shifting could range from US$100–240bn annually.[20] It observes this is equivalent to 4–10% of global corporate income tax revenue and adds that developing economies suffer disproportionately from the practice.[21]

The Tax Justice Network has gone further, alleging corporate profit shifting causes US$348bn a year in lost direct tax revenue globally.[22] It has contended profit shifting through the UK and the Crown Dependencies and Overseas Territories, which it describes as a “network of British tax havens”, is responsible for 23% of these losses, “costing the world over US$80bn” in lost tax revenue each year.[23] However, the reports featuring these estimates have been criticised as misleading by individuals including Professor Richard Murphy, a co-founder of the network who is no longer associated with it.[24]

In the UK, Lord Sikka is among those who have observed HMRC does not estimate revenue lost to corporate profit shifting.[25] TaxWatch, a UK charity and investigative think tank, also notes that HMRC does not “attempt to quantify the amounts lost to the UK exchequer represented by profit shifting by multinational corporates under the current international tax rules”.[26] It has, however, estimated that seven large US-based technology groups avoided paying roughly £2bn in UK tax in 2021 alone.[27]

The Tax Justice Network estimates around £13.8bn may be lost to the UK exchequer through corporate tax avoidance, although this estimate is disputed.[28] It has further called on the UK to support a UN framework convention on international tax cooperation.[29] The UN General Assembly approved the terms of reference for such a framework convention in late 2024, although the UK voted against the resolution.[30]

2. OECD initiatives and subsequent developments

2.1 OECD/G20 inclusive framework on BEPS

At a summit held in June 2013 in Lough Erne in Northern Ireland, G8 leaders agreed to a series of initiatives to counter tax avoidance by multinationals.[31] The following month G20 finance ministers agreed to an action plan on BEPS prepared by the OECD. This was later approved by G20 leaders at a summit in September 2013. The abstract to the action plan read as follows:

Taxation is at the core of countries’ sovereignty, but in recent years multinational companies have avoided taxation in their home countries by pushing activities abroad to low- or no-tax jurisdictions. The G20 asked OECD to address this growing problem by creating this action plan to address base erosion and profit shifting. This plan identifies a series of domestic and international actions to address the problem and sets timelines for the implementation.[32]

The subsequent OECD/G20 inclusive framework on BEPS, launched in 2016, includes 145 countries and jurisdictions working on implementing 15 actions to “tackle tax avoidance, improve the coherence of international tax rules, ensure a more transparent tax environment and address the tax challenges arising from the digitalisation of the economy”.[33] There is annual reporting on progress on four minimum standards concerning harmful tax practices, preventing tax treaty abuse, country-by-country reporting for tax purposes, and dispute resolution in cross-border taxation.[34]

2.2 OECD global minimum tax

Following the earlier BEPS initiative, in June 2019 G20 finance ministers agreed to OECD proposals for a consensus-based solution to challenges posed to the global tax system by digitalisation and the emergence of major tech companies.[35] These are sometimes referred to as BEPS 2.0 and would modify the fundamental rules for allocating the profits of multinational corporations among countries.[36] The proposals consist of two main ‘pillars’ which interlock:

  • Pillar one would reallocate part of the profits of the largest and most profitable multinationals from where they earn income to where they sell products and services.
  • Pillar two would impose a 15% minimum tax on global corporate profits, based on the residence of the corporation.

In June 2021 G7 finance ministers announced an agreement on the OECD’s ‘two pillar’ approach to reform.[37] In October 2021 over 135 jurisdictions joined the initiative, with some of these, including the UK, planning to partly introduce the minimum tax in 2024.[38] The OECD estimated the minimum tax, once implemented, could reduce under-taxed profits by around 80%.[39]

On 21 January 2025 the Financial Times reported that US President Donald Trump had signed a memorandum withdrawing US support for the OECD agreement.[40] It cited OECD Secretary-General Mathias Cormann saying: “There have been concerns raised with us by US representatives about various aspects of our international tax agreement”. He added the OECD would “keep working with the US and all countries at the table to support international co-operation that promotes certainty, avoids double taxation, and protects tax bases”.

3. UK government policy

In its 2024 general election manifesto the Labour Party said it “supports implementation of the OECD global minimum rate of corporate taxation and backs international efforts to make sure multinational tech companies pay their fair share of tax”.[41]

In its October 2024 budget the Labour government said it would “legislate for the undertaxed profits rule (UTPR) in [the] Finance Bill 2024–25”.[42] This would implement pillar two of the OECD agreement. The government added this was the “final part of the G20-OECD global minimum tax agreed by over 135 countries and jurisdictions” and would “take effect for accounting periods beginning on or after 31 December 2024”. The government published a corporate tax road map alongside the budget, in which it said it remained “committed to removing the digital services tax (DST) once the pillar one global solution is in place” and remained committed to pillar two on a global minimum tax.[43] It reiterated these commitments in response to a question on the subject in the House of Commons in December 2024.[44]

4. Read more

4.1 Selected articles and House of Lords questions and reports

4.2 House of Commons Public Accounts Committee reports


Cover image by Nataliya Vaitkevich on Pexels.

References

  1. University of Sheffield, ‘Professor Prem Sikka’, accessed 22 January 2025; and University of Essex, ‘People: Professor Prem Sikka’, accessed 22 January 2025. Return to text
  2. Left Foot Forward, ‘Opinion articles by Prem Sikka’, accessed 22 January 2025. Return to text
  3. Lord Sikka, ‘Personal X account’, 30 December 2024. Return to text
  4. Organisation for Economic Co-operation and Development, ‘Base erosion and profit shifting (BEPS)’, accessed 22 January 2025. See also: Fotis Delis et al, ‘Global evidence on profit shifting within firms and across time’, Journal of Accounting and Economics, 30 October 2024; and Financial Conduct Authority, ‘Glossary: Intra-group transactions’, accessed 22 January 2025. Return to text
  5. Congressional Research Service, ‘Tax havens: International tax avoidance and evasion’, 6 January 2022, p i; and House of Lords Economic Affairs Committee, ‘Tackling corporate tax avoidance in a global economy: Is a new approach needed?’, 31 July 2013, HL Paper 48 of session 2013–14, pp 7–8. Return to text
  6. HM Revenue and Customs, ‘HMRC internal manual: Avoidance handling process’, updated 4 March 2024. Return to text
  7. HM Revenue and Customs, ‘Introduction to tax avoidance’, updated 26 May 2022. Return to text
  8. For a discussion on the general distinctions between tax planning, tax avoidance and tax evasion, see: House of Commons Library, ‘Tax avoidance and tax evasion’, 24 November 2021, pp 8–11. Return to text
  9. House of Lords Economic Affairs Committee, ‘Tackling corporate tax avoidance in a global economy: Is a new approach needed?’, 31 July 2013, HL Paper 48 of session 2013–14, p 5. Return to text
  10. As above, p 8. Return to text
  11. See, for example: François Bares et al, ‘The impact of pillar II on incentives: A trade-off between revenue and investment’, Oxford University Centre for Business Taxation, 3 March 2020; Steeve Mongrain et al, ‘Tax competition in the presence of profit shifting’, Journal of Public Economics, vol 224, August 2023; and Katarzyna Bilicka et al, ‘Tax policy, investment and profit shifting’, Oxford University Centre for Business Taxation, 1 November 2024. Return to text
  12. Congressional Research Service, ‘Tax havens: International tax avoidance and evasion’, 6 January 2022, p 3. Return to text
  13. As above; and Organisation for Economic Co-operation and Development, ‘Harmful tax competition: An emerging global issue’, 19 May 1998, p 23. Return to text
  14. For a detailed overview of these over time, see: Congressional Research Service, ‘Tax havens: International tax avoidance and evasion’, 6 January 2022, pp 3–10. Return to text
  15. The Tax Justice Network is a UK-registered non-profit company that campaigns on global tax issues. Its indices have been supported by EU Horizon funding (Tax Justice Network, ‘The state of tax justice 2024’, 19 November 2024, pp 2–3). Lord Sikka was a co-founder of the network and later served as a senior adviser to the network (University of Essex, ‘Professor Prem Sikka: Curriculum vitae’, accessed 22 January 2025, p 71). He is no longer listed as a senior advisor. Return to text
  16. Tax Justice Network, ‘Corporate tax haven index’, accessed 22 January 2025. Return to text
  17. Tax Justice Network, ‘Financial secrecy index’, accessed 22 January 2025. Return to text
  18. HC Hansard, 25 February 2020, cols 234–5. Return to text
  19. See, for example: Thomas Torslov et al, ‘The missing profits of nations’, Oxford University Centre for Business Taxation, 5 June 2018; Alexander D Klemm and Li Liu, ‘IMF working paper: The impact of profit shifting on economic activity and tax competition’, International Monetary Fund, 20 December 2019; Alex Cobham and Petr Janský, ‘Estimating illicit financial flows: A critical guide to the data, methodologies and findings’, 2020 (see in particular the chapter entitled ‘International corporate tax avoidance’, pp 81–128); Barbara Bratta et al, ‘Working paper: Assessing profit shifting using country-by-country reports—a non-linear response to tax rate differentials’, Italian Ministry of Finance, February 2021; Congressional Research Service, ‘Tax havens: International tax avoidance and evasion’, 6 January 2022, pp 17–26; Ludvig Wier and Gabriel Zucman, ‘Working paper: Global profit shifting, 1975–2019’, UN University World Institute for Development Economics Research, November 2022; and Alessandro Chiari, ‘Revenue losses from corporate tax avoidance: Estimations from the UNUWIDER government revenue dataset’, Review of Development Economics, 8 November 2023, vol 28, issue 2, pp 601–29. Return to text
  20. Organisation for Economic Co-operation and Development, ‘Base erosion and profit shifting (BEPS)’, accessed 22 January 2025. Return to text
  21. As above. See also: Evert-jan Quak, ‘The impact of international tax competition on low- and middle-income countries’, Department for International Development, 23 April 2018. Return to text
  22. Tax Justice Network, ‘The state of tax justice 2024’, 19 November 2024, p 8. The network estimates a further US$145bn of tax revenue is lost to wealthy individuals hiding wealth, although this is contested (As above, p 9; and see below). Return to text
  23. As above, pp 24–6. Return to text
  24. See, for example: Richard Murphy, ‘The Tax Justice Network’s state of tax justice report is hopelessly misleading, yet again’, Funding the Future (formerly Tax Research UK), 25 July 2023; and ‘The Tax Justice Network’s review of the state of tax justice is not credible’, Funding the Future (formerly Tax Research UK), 14 July 2021. See also: University of Sheffield, ‘Professor Richard Murphy’, accessed 22 January 2025. The network disputes Professor Murphy’s criticisms of its methodology (Tax Justice Network, ‘Response to erroneous claims about the state of tax justice report’, 24 August 2023). Return to text
  25. Lord Sikka, ‘Personal X account’, 30 December 2024; and Chartered Institute of Taxation, ‘Peers debate tax gap: VAT gap and profit shifting in the spotlight’, 13 April 2022. Return to text
  26. TaxWatch, ‘State of tax administration 2024’, 10 October 2024, p 3. Return to text
  27. TaxWatch, ‘Seven large tech groups estimated to have dodged £2bn in UK tax in 2021’, 16 October 2023. Return to text
  28. Tax Justice Network, ‘United Kingdom’, accessed 22 January 2025. Estimate of US$17bn converted to sterling using January 2025 exchange rates. See above for Professor Richard Murphy’s criticism of the network’s methodology. Return to text
  29. Tax Justice Network, ‘UN General Assembly votes overwhelmingly to begin historic, global tax overhaul’, 27 November 2024. Return to text
  30. EY, ‘UN General Assembly approves terms of reference for framework convention on international tax cooperation’, 2 January 2025; and UN Department of Economic and Social Affairs, ‘Intergovernmental negotiations for UN framework convention on international tax cooperation’, accessed 22 January 2025. The UK had set out its reservations at an earlier meeting of the assembly’s second committee (economic and financial affairs) (United Nations, ‘Concluding its session, second committee approves four resolutions, two decisions, including texts on tax cooperation, affordable energy access’, 27 November 2024). Return to text
  31. HM Government, ‘Trade, tax and transparency: The 2013 UK G8 presidency report’, 19 December 2013, p 3; and House of Commons Library, ‘Corporate tax reform (2010–2020)’, 7 July 2021, p 90. Return to text
  32. Organisation for Economic Co-operation and Development, ‘Action plan on base erosion and profit shifting’, 19 July 2013. See also: ‘Addressing base erosion and profit shifting’, 12 February 2013. Return to text
  33. Organisation for Economic Co-operation and Development, ‘Base erosion and profit shifting (BEPS)’, accessed 22 January 2025. Return to text
  34. For further information, see: European Parliamentary Research Service, ‘Understanding BEPS: From tax avoidance to digital tax challenges’, 21 October 2019. Return to text
  35. Japanese Ministry of Finance, ‘Communiqué: G20 finance ministers and central bank governors meeting—Fukuoka, Japan’, 9 June 2019; and House of Commons Library, ‘Corporate tax reform (2010–2020)’, 7 July 2021, pp 148–9. See also: Organisation for Economic Co-operation and Development, ‘Programme of work to develop a consensus solution to the tax challenges arising from the digitalisation of the economy’, 31 May 2019. Return to text
  36. Tax Policy Center, ‘What are the OECD pillar 1 and pillar 2 international taxation reforms?’, accessed 22 January 2025. See also: House of Commons Library, ‘Digital services tax’, 8 January 2024, p 5. Return to text
  37. HM Treasury, ‘G7 finance ministers and central bank governors communiqué’, updated 5 June 2021. See also: House of Commons Library, ‘Digital services tax’, 8 January 2024, p 5; and Congressional Research Service, ‘International tax proposals addressing profit shifting: Pillars 1 and 2’, 31 January 2024. Return to text
  38. Organisation for Economic Co-operation and Development, ‘Global anti-base erosion model rules (pillar two)’, accessed 22 January 2025; and ‘Global minimum tax’, accessed 22 January 2025. See also: House of Commons Library, ‘Digital services tax’, 8 January 2024, p 6; and Emma Agyemang, ‘Global minimum tax on multinationals goes live to raise up to $220bn’, Financial Times (£), 1 January 2024. Return to text
  39. World Economic Forum, ‘What does the OECD global minimum tax mean for global cooperation?’, 2 February 2024. Return to text
  40. Claire Jones et al, ‘Donald Trump threatens to double tax rates for foreign nationals and companies’, Financial Times (£), 21 January 2025. Return to text
  41. Labour Party, ‘Labour Party manifesto 2024’, June 2024, p 122. Return to text
  42. HM Treasury, ‘Autumn budget 2024’, 30 October 2024, p 136. Return to text
  43. HM Treasury, ‘Corporate tax roadmap 2024’, 30 October 2024, pp 21–2. Return to text
  44. HC Hansard, 3 December 2024, col 140. Return to text