The UK Treasury on Wednesday published the details of its planned tax on multinationals' diverted profits, known as the 'Google tax,' despite criticism from business.
The measure, announced in last week's Autumn Statement, is targeting "large multinational enterprises with business activities in the UK who enter into contrived arrangements to divert profits from the UK by avoiding a UK taxable presence and/or by other contrived arrangements between connected entities."
The Treasury said: "The diverted profits tax will operate through two basic rules. The first rule counteracts arrangements by which foreign companies exploit the permanent establishment rules. The second rule prevents companies from creating tax advantages by using transactions or entities that lack economic substance."
A rate of 25% will apply from April 1st next which will compare with the corporation tax rate of 20% and the tax is expected to raise £1.4bn over the next five years. The annual revenue threshold is £10m.
The new tax will apply when a company does not have a permanent UK establishment but supplies goods and services to British customers. It will also apply to companies such as Google that do have a permanent UK unit but avoid corporation tax by paying fees to Google's Irish unit.
Facebook reported a loss in the UK last year.
Business groups have raised issues such as the subjective nature of what profits arise in the UK.
Chris Morgan head of tax at KPMG, the Big 4 accounting firm, said: “HMRC (Her Majesty's Revenue & Customs) is effectively able to make an estimated assessment and the company has to then pay the tax within 30 days. After this there is a one year review period to determine if the assessment was correct and only then can the company appeal to the courts in the normal way. This process – pay now, argue later - together with the 25% rate, appears to be aimed at changing companies’ behaviour. A concern is, does this give too much discretion to HMRC?
“Notwithstanding the Government’s reasons for wanting to do this, the UK has, in some ways, jumped the gun in terms of the Base Erosion and Profit Shifting (BEPS) project. Our latest Tax Competitiveness Survey shows that companies value ‘stability’ and ‘simplicity’ above all else in terms of tax legislation. The Diverted Profits Tax rules tick neither box. However, in a small nod to simplification, these rules do not apply to companies whose UK revenue is less than £10m per year.
“Overall it would have been better to wait for the outcome of the BEPS process in a year’s time."
John Cridland, director-general of the CBI, the UK's biggest business lobby said: "International tax rules are in urgent need of updating but there is already an OECD process underway to do this. It is unfortunate that the UK has decided to go it alone with a Diverted Profits Tax, outside this process, which will be a real concern for global businesses.
“The legislation will be complex to apply, and if other countries follow suit businesses will have a patchwork of uncoordinated unilateral rules to navigate, which risks undermining the whole OECD approach.”
Nevertheless, despite problems that may arise with implementation, it is a significant move.
The House of Commons Public Accounts Commmitte (PAC) said in a June 2013 report [pdf] : "It is quite clear to us that sales to UK clients are the primary purpose, responsibility and result of its UK operation, and that the processing of sales through Google Ireland has no purpose other than to avoid UK corporation tax."
Matt Brittan of Google told the PAC that around 99% of companies in the UK that spend money with Google do so without talking to Google Ltd’s staff as they conduct their transaction online, through an automatic auction.
The 1% are big name companies are responsible for between 60-70% of the total spend of all British companies with Google. Google Ltd’s UK staff have a direct relationship with these clients and meet them regularly.
The challenge is to catch both the 99% and the 1% of big fish.
The existing permanent establishment rule (PE) is that just selling into a market without physical presence or a dependent agent in the country is not sufficient to create a permanent establishment allowing that country to claim a share of the enterprise’s profits.
The Ireland-UK tax treaty provides that an Irish company would be subject to UK tax on its profits earned from UK activities only if it were trading in the UK through a PE.
The OECD is looking at the creation of an "economic presence" PE where a business includes "fully dematerialised digital activities" and such activity in a territory amounts to a "significant digital presence."
The UK accounts for about 11% of Google's global revenues which amounted to $55.5bn (ex-Motorola) in 2013.
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