Autumn Statement: ‘Google tax’ on profits going offshore may prove unworkable

Tech companies like Google and Facebook could be hit

George Osborne’s dramatic plans to impose a punitive “Google tax” on the profits that multinational companies divert offshore could face a legal challenge and even prove “unworkable”, have experts warned. 

The new Diverted Profits Tax, at 25 per cent, is higher than the standard 20 per cent rate of UK corporation tax and is designed to hurt companies, particularly US tech giants such as Google, Facebook and Amazon, which have been legally diverting UK sales and profits through offshore havens such as Ireland and Luxembourg.

Mr Osborne expects the tax, to be introduced in April, to raise £1.3bn over the next five years – rising to £355m by the 2019-20 financial year. This suggests he estimates that tech companies could be making more than £1bn a year in UK profits that are going untaxed at present.

The Chancellor will also require multinationals to disclose a “high level” of information about “their global allocation of profits” and “indicators of economic activity” such as turnover on a country-by-country basis to help to decide the amount of tax levied. He is enforcing rules agreed by the Organisation for Economic Co-operation and Development – a 34-strong group of leading countries.

Cormac Marum, a tax director at the accountant Harwood Hutton, welcomed Mr Osborne’s intervention, saying: “He has changed the rules – about time too – and that’s good for the general taxpayer. The big question is how much will the new tax bring in?”

However, Mr Marum cautioned that the Treasury could still face problems as the tech firms could mount a challenge if “the new rules discriminate under European law”. He added: “There could be a challenge from another EU member state such as Luxembourg or Ireland.”

Mark Weston, a partner at commercial law firm Matthew Arnold & Baldwin, warned that the new tax could be “unworkable” because of rival “national interests of each government”.

The accountant Ernst & Young, which advises many tech firms, admitted the higher 25 per cent tax rate “is clearly intended to encourage companies to invest directly in the UK” and cut back on their offshore set-ups.

Margaret Hodge, the MP, who chairs the influential Commons Public Accounts Committee, branded Google “evil” last year, saying it made more than £3bn a year in UK sales but declared only about £600m in its UK accounts.

It has paid virtually no UK corporation tax by “booking” the majority of its sales in Ireland, while making huge profits for the US parent company. Facebook has paid virtually no UK corporation tax for the last three years, despite British sales estimated at over £300m a year.

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