UK government makes political gesture with 25% ‘Google Tax’ aimed at tech giants

SUMMARY:

The UK government’s going it alone with a ‘Google Tax’ but is this anything more than gesture politics?

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George Osborne

The headline grabber in yesterday’s Autumn Statement from UK finance minister George Osborne, the Chancellor of the Exchequer, was the announcement of a so-called Google Tax to punish tax avoidance, but there is in fact quite a bit of digital ambition tucked away elsewhere.

On the ‘Google Tax’, this is the introduction of a 25% tax on profits on multi-national companies that make money in the UK, but based themselves legally in low tax regimes to avoid paying the UK rate of 21% corporation tax.

There’s been a growing public demand in the UK for the likes of Amazon, Facebook and Google to pay far more in tax than they have been. A recent Financial Times analysis of seven US technology giants found they paid just £54 million in UK corporate tax in 2012, even though their overall sales to British customers totalled $15 billion.

So Osborne’s move is clearly ‘play to the gallery’ in the run up to the next election in May. But the devil’s in the detail and no-one’s entirely sure today just how this new tax will work in practice. All Osborne’s said to date is:

Some of the largest companies in the world, including those in the tech sector, use elaborate structures to avoid paying taxes. Today we’re putting a stop to it.

Today I am introducing a 25% tax on profits generated by multinationals from economic activity here in the UK which they then artificially shift out of the country. This new Diverted Profits Tax will raise over £1 billion over the next five years.

Is this wise?

But UK business leaders association the Confederation of British Industry (CBI) is uncomfortable with the idea of the UK going its own way on corporation tax reform while the Organisation for Economic Cooperation and Development (OECD) is working on global plans. John Cridland, CBI Director-General, said:

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.

Technology industry lobby group techUK also questioned the decision to act alone. Julian David, CEO of techUK, commented:

It is clear that over many years global corporate tax rules have become outdated, complex and opaque. The way to remedy this is not through unilateral action but through international cooperation to make rules simpler and more transparent. Today’s announcement should be part of an ongoing international process through the OECD which techUK supports.

Meanwhile Michael Devereux, director of the Oxford University Centre for Business Taxation and an adviser to the European commission on taxing digital companies, told The Guardian:

There has been a lot of political buildup to this moment, which was billed as the statement that was going to get to grips with tax avoidance tactics of US technology companies like Google.

Given the sums being raised, it doesn’t seem to be that. The fundamental problem is the structure of the international tax system, which needs fundamental overhaul.

The OECD’s head of tax Pascal Saint-Amans warned earlier this year against unilateral action because:

Governments are frustrated and may be more aggressive. As countries are more aggressive you have more controversy and more double taxation, but that’s not due to a change in international rules. That’s about countries trying to protect themselves.

Google et al have yet to respond.

My take

Gesture politics perhaps, but politically sensible from Osborne’s perspective with an election just round the corner. This has been coming for several months since the Conservative Party’s annual convention when Osborne started waving vague threats in the direction of global companies.

While working within the OECD on this might make sense, the slow pace of progress to attain consensus is frustrating and subject to many vested interests putting a spoke in things.

Osborne may yet be vindicated in his decision. His counterpart in Australia has already announced that his country is likely to follow in the UK’s wake and impose a similar national levy down under.