Crackdown on tax abuses by technology companies
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Multinational companies are braced for a tax crackdown after George Osborne vowed to use his Autumn Statement on Wednesday to put a stop to businesses abusing the system.
Mr Osborne plans to block companies’ ability to exploit differences between the tax rules of different countries by tackling “hybrid mismatches”, used to avoid billions of pounds of tax.
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He has also promised to raise hundreds of millions of pounds in tax from Google and other internet companies under plans announced at the Conservative party conference in September, when he attacked technology companies that “go to extraordinary lengths” to cut their tax bills.
The loopholes in the chancellor’s sights have been identified in international plans to rewrite the corporate tax rules, although there is much more agreement about tackling hybrid mismatches than changing the tax rules for technology companies.
Mr Osborne needs to be seen to be taking action. Just one in five people believe political parties have gone far enough in their promises to tackle tax avoidance by large companies, according to a new opinion poll for Christian Aid and Action Aid.
He is under particular pressure to tackle tax planning by internet companies. Last year the Public Accounts Committee attacked Google’s structure, which it described as an “elaborate corporate construct” used to avoid tax by processing sales through Ireland.
Many internet companies pay relatively little tax in Britain because they put their main profit-generating activities in lower tax countries like Ireland and ascribe little value to their UK sales and marketing operations. At present the tax authority in Britain cannot levy tax on profits that are generated from the sales booked offshore, unless the sales force based in the UK has the authority to close the deals.
The Treasury is expected to allow the UK to tax more of the profits arising from a sale which largely takes place in Britain but is finally executed offshore. Chris Sanger of Ernst & Young, professional services group, said the Treasury was likely to introduce a “substance over form” test that would stop everything being focused on the final transaction. He said “it moves from being an all or nothing question to something more nuanced”.
Some experts doubt whether Mr Osborne can make anything but minor changes to the taxation of technology companies until governments across the world have reached a consensus.
Bill Dodwell of Deloitte, the professional services group, said this would require cooperation from other countries. “The challenge is how to override double tax treaties…It is much easier to see how this would work through an international agreement.”
Businesses argue that Mr Osborne will face significant legal constraints from existing treaties, and that a crackdown by the UK might backfire by encouraging other governments to claim that British businesses have a taxable presence in their country.
An FT analysis of seven US technology giants found they paid just £54m in UK corporate tax in 2012. The only revenue booked in Britain was the commission paid by the European head office for the sales and marketing services performed in the UK. Their UK turnover was just £1.7bn in 2012, even though their overall sales to British customers totalled $15bn.
Many technology companies drive down their foreign tax rates still further – below 5 per cent in some cases – by holding key intellectual property in tax havens. Many use a structure, known as a “double Irish”, that allows royalty payments for the use of intellectual property to be sent to a company that operates in Ireland but has its headquarters in a tax haven. Ireland has agreed to abolish this structure.
