George Osbourne
“You are welcome here in Britain with open arms,” George Osborne said recently in a speech aimed at multi-national firms, mentioning Google, Amazon and Facebook by name.
And yes they are, as they’ve been credited with the creation of thousands of often well paid jobs and also for the support and encouragement they give to small tech start-ups companies. However, the Chancellor went on to say: “Whilst we offer some of the lowest business taxes in the world, we expect those taxes to be paid.”
Many companies, especially the high-tech ones, have been criticised for paying small amounts of tax in the UK despite Britain being one of the most important online markets in the world, with UK consumers generating billions of pounds of revenue for technology businesses such as Google.
The problem is that whilst the UK’s corporate taxes are now the lowest in the G7, our tax system does not tax sales, it taxes profits and these profits can be incredibly difficult to pin down. One example of this is the tendency of high-tech companies to vest the so-called Intellectual property rights into holding companies registered in countries that charge minimum levels of tax. The holding company is then paid high levels of royalty payments to divert the bulk of the profits.
Eric Schmidt, the chairman of Google, was quite open about what Google were doing and is quoted as saying, “It is my financial duty to the shareholders to structure the company in such a way as the pay the lowest amount of tax possible.”
The Autumn Statement
George was as good as his word when during his speech he stated his intention to introduce into law before the next election a 25% tax on companies making profits in UK but diverted them abroad and is calling it The Diverted Profits Tax (DPT). He has estimated that within 3 years this tax is likely to raise £1bn per annum.
Sounds great doesn’t it, but the CBI has warned the Chancellor that it might be dangerous for the UK to go it alone, especially as the OECD is already putting together a plan for tackling the most aggressive tax schemes. CBI boss John Cridland said, “action by the UK outside that process would be a concern for global businesses”. He then went on to say, “International tax rules are in urgent need of updating, but the decision for the UK to go it alone, outside the OECD process, will be a concern for global businesses, and moving the goalposts on offsetting losses risks creating a worrying precedent.”
The companies being targeted, Google, Amazon, Starbucks et al are doing nothing that is illegal, they are avoiding tax, not evading it. In an attempt to highlight the worst offenders, the plans for legislation will include a new requirement for companies to detail revenue and tax payments made country by country. This way, the public will have some idea of the tax contribution businesses make to the UK; some Companies, notably Vodafone, are already doing this and Treasury officials have made it clear they like the model.
A recent Financial Times analysis of seven US global giants found they paid just £54m in UK corporate tax in 2012, even though their overall sales to British customers totalled $15bn with profits estimated at $3bn giving a potential tax yield of £600m or 12 times what they currently pay.
So, what might the government do to bring in the £1bn that it is looking for?
The UK is already no slouch when it comes to talking tough on tax avoiders and hand in hand with Germany, we are leading the OECD development of an Action Plan on Base Erosion and Profit Shifting or BEPS (what you and I would call aggressive tax avoidance) and the Chancellor never wastes an opportunity to voice his support for it.
But the action plan still has a way to go and won’t be completed for another year with probably at least a further year for implementation, so Mr Osborne’s decision to bring in DPT next year is ahead of the curve.
Kevin Hindley, managing director at professional services group Alvarez & Marsal Taxand, said: “We thought the government would do something like this, as part of implementing the OECD proposals, but not so soon. It really is superseding what is happening internationally and it is a bit of a surprise that it’s happening without consultation or discussion with business.”
But what Mr Hindley forgets is that Mr Osborne has an election to fight next year and can’t afford to wait for all the other members of the OECD to catch up.
Rather than upset our friends in the OECD the Chancellor could consider other methods to bring in a Diverted Profits Tax, such as through withholding taxes (a tax deducted from an internal payment) or by denying companies the ability to deduct tax when paying royalties to other parts of their organisations. This would work but there may be difficulties with existing double taxation agreements.
Tax Accountant’s Opinion
I personally have my doubts as to whether our government can implement a “Google Tax” in just four months. The Autumn Statement contained very little information on how they intend to bring in the Tax, but a detailed breakdown has been promised for later this month and I await with interest what is contained in the fine print.
I for one applaud what the Chancellor is trying to do and it is likely to be one tax that everyone agrees with, but I suspect his announcement last week is just the first shot in what is likely to be a long war against the tax-avoiding global giants.
If any of you would like more detailed information on any aspect of Diverted Profits Tax , send me an e-mail and I’ll be pleased to advise further.
David Jones is the Senior Partner and Founder of Morgan Jones & Company. Born in Liverpool and an Accountancy graduate of the University of Wolverhampton, David spent twenty years working for the Customs & Excise in London then Shrewsbury before starting his own business. David's depth of knowledge of the UK tax system and his ability to communicate this learning has seen Morgan Jones & Company grow into Shropshire's most respected Accountancy Practice.