Google tax is the popular term used to refer to “Diverted Profits Tax” (“DPT”), which is a legislative fix heralded in the Chancellors 2014 Autumn Statement and then ratified in the April 2015 budget.
Recently, in a similar vein, the Australian government's Multinational (Tax) Anti-Avoidance Law was introduced in their May 2015 budget.
The Diverted Profits Tax (DPT) now contemplates that taxable profits have been diverted from the UK and are, therefore, not otherwise subject to UK tax. Exceptionally, this new tax has extra-territorial effect and can impose a UK tax charge on businesses that would not otherwise expect to be subject to UK tax.
The DPT has been introduced to deter and counteract activities that divert profit from the UK. The legislation is a response to the perception that large companies are generating significant profits from the UK, but paying very little UK tax. The DPT is intended to target those large multinationals that avoid or reduce UK tax on profits generated in or connected to the UK.
The chancellor George Osbourne has announced plans to crackdown on multinational technology companies avoiding UK tax. While Osborne did not mention Google by name, people were already widely referring to the measure as the “Google tax”. This was because Google makes a lot of money in the UK, but it collects nearly all of the profits in Ireland. It doesn’t pay much tax in Ireland either, with most of the money shifted to Google Ireland Holdings, a Dublin-registered company located in Bermuda for tax purposes.
While Google made $5.6bn (£3.4bn) of revenues in the UK last year, it paid corporation tax of just £20.4m.
In Chancellor George Osbourne’s Budget 2015 speech regarding tax avoidance, he stated ‘my RHF the Chief Secretary will tomorrow publish further details of our comprehensive plans for new criminal offences for tax evasion and new penalties for those professionals who assist them.’
‘Let the message go out: this country’s tolerance for those who will not pay their fair share of taxes has come to an end.’
“While we offer some of the lowest business taxes in the world, we expect those taxes to be paid - not avoided.”
“Some technology companies go to extraordinary lengths to pay little or no tax here. If you abuse our tax system, you abuse the trust of the British people.”
Osborne has outlined plans to force companies to declare profits made in the UK and pay tax on those profits here, not offshore, which would generate “hundreds of millions” more in UK tax.
“My message to those companies is clear: we will put a stop to it. Low taxes, but low taxes that are paid.”
Introducing the changes earlier may have scared the companies away from the UK and the nation could have lost them as big employers. But now “the tide of global political opinion” has changed and the rest of the world agrees that tax avoidance must stop.
Australia has already taken tough domestic action to crack down on multinational profit shifting. The Australian Taxation Office has ordered reviews of 86 multinational companies’ tax affairs to assess if they are paying sufficient tax on their activities in Australia. Thirty of the reviews have been completed, with concerns identified by officers in about a third of cases, according to the taxation office, which expects to commence 10 audits based on these concerns.
Australia has followed the UK in implementing a “diverted profits” levy on multinationals to crack down on tax avoidance, which it says is costing the country up to A$3bn a year, but claims their initiate goes much further than the UK’s.
Joe Hockey, Australia’s treasurer, said his office was exchanging information with London on its “Google tax”.
“I am absolutely determined to ensure that everything is done to make sure that people or companies who earn money in Australia pay tax in Australia,” he said. “We are contemplating additional legislative action.”
Joe Hockey, has warned Australia is “losing control of our destiny from a taxation perspective” because of “holes” in the tax treatment of multinational corporations and has flagged a so-called “Google tax” in the budget similar to the new “diverted profits tax” in Britain, which requires multinationals to pay a rate higher than the company tax rate on profits sent offshore.
But the tax office and tax experts appearing before the Senate committee were divided about the usefulness of a “Google tax”, saying it should be seen as a substitute measure while the Organisation for Economic Co-operation and Development (OECD) finalised an international response to profit shifting and this would mean it could not be a “carbon copy” of the British version.
Mr Hockey also acknowledged the danger that unilateral action could prompt a backlash from other countries.
“This is one of the challenges,” he said. “There are a large number of Australian companies that do operate overseas and again I emphasise that is why we need to work collectively, globally, to address this.”
It is interesting to note the political angle to all of this. We note with interest (having worked in HMRC) that there are some very tough Transfer Pricing rules (that effectively override non-arms length transactions and impute an arms-length value) that could nip the whole issue of profit shifting in the bud, if HMRC and the Government had the determination to take on the multi-nationals toe to toe. Political posturing seems like an easy out!