British Chancellor, George Osborne, today revealed the UK budget. In amongst the changes announced, include something that has been named as “the Google tax” by popular press, but could just as easily be called the Starbucks, Amazon or Apple tax. It’s also more accurately known as the “diverted profits tax.” This new tax ruling is designed to discourage large companies from diverting profits out of the United Kingdom in order to avoid paying tax. George said, “Let the message go out: this country’s tolerance for those who will not pay their fair share of taxes has come to an end.” The confirmation of the diverted profits tax follows months of speculation and goes hand in hand with new legislation due to be revealed in detail tomorrow outlining new criminal offences and penalties for helping tax evasion. The Chancellor expects these changes to raise over £3 billion, over $4.5 billion, in the next five years.
The change to the UK tax regime closes a loophole whereby multinational businesses make significant profits in the UK but have their headquarters in Ireland, where the corporation tax rate is much lower. The businesses outlined above are currently being investigated by the European Commission over their tax arrangements. The new rules mean that a company with an annual turnover of £10m or more has to tell Her Majesties Revenue & Customs, HMRC, if they believe their company structure could make them liable for the new diverted profit tax. HRMC will then assess the business and decide how much profit has been artificially diverted from the UK, levying a 25% tax onto the business. The company then has a month to dispute the tax charge. It’s easy to see why the UK government is interested in tapping this market: in 2013, Google paid £20 million ($30 million) tax in the UK but its British revenues were £3.6 billion ($5.4 billion).
It’s important to add that the European Commission has been investigating if the corporation tax arrangement of several member states, including Ireland, has been in effect set up to provide state aid to businesses. It’s no coincidence that Ireland, geographically very close to the UK, has many big name corporations headquartered within its boundaries. And today’s news comes at an interesting time for the world’s largest technology companies, where there are several ongoing antitrust investigations taking place across both the UK and the European Union. The UK Chancellor has also pledged £600 million (almost $900 million) to improve British broadband situation including clearing spectrum for better mobile coverage, installing free public WiFi into libraries and a commitment to boost broadband speeds to at least 100 megabits a second. There’s also cash set aside for research and development projects, including driverless car technology, Internet of Things and digital currencies.
It’s unclear in the detail as to how the UK inland revenue is to implement the tax, but we are sure to have more details ready for the introduction in April. To our readers: what do you think to the concept of businesses deliberately avoiding paying a tax by conducting business in one region and having a headquarters in another? Let us know in the comments below.