The voters hate Google. Heeeeyyyy… how about a ‘Google Tax’?

You may have noted there’s an election in the offing

Worstall on Wednesday As the tech news outlet of record has told us, UK chancellor George Osborne is preparing to bring in the “Google Tax”.

Properly known as the Diverted Profits Tax, it is supposed to be a way of scraping tax revenue off those profits that the tech giants are diverting out of what should be righteously paid to HM Treasury and instead off to Caribbean islands, via Ireland, where the money gets to sip rum punch and catch a tan.

The problem with this plan? It’s not going to work. Well, it won’t work in the sense of raising any cash, although obviously it’ll help at the coming election for Osbo will be seen to be doing something about a matter of public import (for which read “something that people are shouting about”).

The proposal, as you probably know, is that those large tech companies, Google, Facebook, Amazon, Apple, Microsoft and on, will have to declare the profits that they are diverting out of the UK and then pay 25 per cent tax on them. As this is higher than the standard 20 per cent corporation tax rate, the assumption is that they’ll stop diverting said profits and cough up like good little boys ‘n’ gals.

This is not, to put it mildly, what I expect to happen. Rather, there’ll be the most almighty cat-fight in the courts and no money at all will be raised. However, by the time that happens the election will be over and the cunning plan will have done its work: those shouting about it will believe that something has been done.

It should be said that there are those who don’t agree with me – Pellinor, for example, who makes their point in the comments to that El Reg piece, and whom I happen to know is an experienced bod in this area of law. However, I still think that this trips up over the implications of EU law.

The first and most obvious point to make is that shovelling profits into Ireland is not actually tax avoidance. And if it’s not tax avoidance then it’s very difficult indeed to say that it’s diversion either. As FCAblog points out, the reason can be taken from HMRC’s own guide to “Taxing the profits of multinational businesses” (PDF):

In broad terms, companies are required to pay corporation tax in the country where they carry on the economic activity that generates their profits, not where their customers are located. Many elements contribute to a multinational business’s economic activities including: sales, employees, technology, physical assets and intellectual property. Tax rules need to establish how much of a business’s overall activities should be treated as ‘belonging’ in a particular country….

Non-resident trading companies which do not have a branch in the UK, but have UK customers, will therefore pay tax on the profits arising from those customers in the country where the company is resident, according to the tax law in that country. The profits will not be taxed in the UK. This is not tax avoidance: it is simply the way that corporation tax works.

Most major economies operate corporation tax in the same way as the UK, so UK-resident companies are treated in a similar way in other countries. In other words, UK companies do not pay corporation tax to another country on the profits from sales in that country, unless they trade through a branch based there. Instead, they pay corporation tax in the UK.

The definition of a “branch” (another word for much the same thing being permanent establishment, not quite but good enough here) is well laid out in the various international tax treaties and they’re not going to be changed as a result of some change to UK domestic law.

Various campaigners have been shouting that people have been evading and or avoiding taxes, none of which actually stand up as being avoidance even, let alone evasion. But they’ve been shouting loud enough that various mouth-breathers glue themselves to shop windows and thus frighten the horses.

What’s going on with the tech giants may be something people don’t like, but it simply isn’t tax avoidance. It has never been that corporation tax is chargeable where the customers are. It’s chargeable where the company is. Bleating about “but they’re selling in the UK” is irrelevant. That just isn’t how the system works. And it would, of course, be possible to change that basis, laws are man-made after all, but it’s not something that’s within the domestic power of the UK to do.

EU know what… that just ain’t going to work
Quite apart from anything else, we’re governed, within the EU, by EU tax law. As we saw with the Vodafone case, when asked, EU law trumps UK law and that’s just the way that it is. And EU law states, very clearly and unequivocally, that any corporation duly established in any EU state may legally sell right across the EU. And corporation tax will be payable where that brass plate of the company is and not where any sales might take place.

This isn’t something that’s negotiable: this is one of the pillars of the Single Market rules, that it is actually a single market. You can no more demand that a company pay corporation tax in the UK for selling in the UK than you can demand someone pay rates in Somerset if they sell into Somerset from Dorset (subject, of course, to those branch rules above, which are as noted not something that the UK can unilaterally change).

There’s also a more minor point that can and should be made, which is that companies doing less than £250m in business are apparently going to be let off this. Those investigations in Luxembourg and Ireland, into Amazon, Fiat, Apple and so on should be giving people pause. Why? Because the EU is quite clearly stating that a special tax deal that does not apply to everyone is state aid. And state aid is illegal and must be repaid. So, letting small companies off (you can have a rigid law that says “all small companies pay a lower tax rate” but you cannot say “here’s the new tax but we’ll not bother with the small fry”) is state aid and it will have to be recovered from them in the future. So if it does work, it won’t be limited to the Big Boys.

But it won’t work: it’s going to run direct into the brick wall of the basics of both corporation tax and the Single Market.

What Osborne is doing is pitching up a law that will be struck down by the first court that gets a good look at it. ®