UK firms face retaliation threat over ‘Google tax’: Crackdown on tech firms could enrage other nations

The Treasury will this week detail sweeping new powers for the Revenue to investigate tax-avoiding global companies, and will issue a list of suspect structures which it says are designed to dodge British dues.

The Chancellor declared war on tech giants such as Google, Amazon and eBay, which pay little or no tax in the UK, in his Autumn Statement last week but issued no detail on how he would claw back up to £1 billion.

It is thought that the system, due to be outlined on Wednesday, will create a new type of tax, not based on reported profit but attempting to define how much profit should have been declared in Britain. On the same day the Treasury will also outline a series of tax structures that it believes ‘artificially divert’ profits.

The overhaul has won plaudits for the Chancellor, but tax experts are warning it could be hard to implement, could ensnare innocent companies and may prompt rows with tax authorities in major countries.

One of the structures targeted is the ‘Double Irish’ tax scheme used to divert revenues stemming from intellectual property to tax havens. It is so-called because it involves the setting up of two Irish companies.

This in turn can be part of a wider scheme called a ‘Dutch Sandwich’.Several other complex structures will be identified and the taxman will be given powers to force a company to disclose in advance any scheme that cuts its tax bill – powers which already exist to stamp out tax avoidance by rich individuals.

Research by The Mail on Sunday two years ago suggested that five technology giants – Apple, Google, eBay, Amazon and Facebook – had avoided £650 million in UK corporation tax in 2010 using international structures, all of which remain intact. They do so by claiming their main European operations are in Luxembourg and Ireland. And it is to these offshore companies that UK customers pay their cash.

These groups have UK businesses, but these are set up to ‘provide a service’ to the Irish or Luxembourg business. The offshore businesses pay the UK company a fee for the service, but that is only a fraction higher than the UK company’s costs – meaning its official profit in Britain is either very low or zero.

Google reaped £3.6 billion from UK customers last year. However, its UK company recorded turnover of just £650 million and paid £21 million in tax. Its global profit margin – roughly 25 per cent – would imply a tax bill of almost £200 million.

Apple’s UK sales are estimated at more than £6 billion, but its British arms record just over £1 billion in turnover. It paid about £10 million in tax in the UK in 2013 , but if its global profit margins were applied to its estimated UK sales it would have paid hundreds of millions.

It is by no means clear whether Apple will be specifically targeted, and Apple sources suggested that the measures weren’t aimed at them. Google, eBay, Amazon and Facebook all declined to comment.

The problem for the Revenue is that its plans are expected to involve taxing royalty payments for the use of the Apple or Google brand. But Bill Dodwell, a tax expert at accountant Deloitte, said: ‘Some of these companies are not making royalty payments from the UK at all.

The taxman will also struggle to get information from UK businesses, Dodwell predicted.

He added: “You can’t make a UK company disclose something it doesn’t know. If the information is not in its possession, there’s nothing you can do to get it out.”

Other countries could help out, but because the new regime will be a new form of taxation it will exist outside of international treaties, so the UK wouldn’t automatically get information from other countries.

Heather Self, a tax expert at law firm Pinsent Masons, warned: ‘The tax will be very complex and could encourage retaliation against UK businesses trading overseas. The expected yield of around £1 billion could be far outweighed by the harm done to UK businesses seeking to expand internationally.’

The UK’s move has come as countries are looking to agree new rules to tax the tech giants. There are proposals to beef up rules determining where a business is truly based. Last year Amazon employed more than 4,000 staff in the UK, compared with just 500 in Luxembourg. And there are plans to restrict the use of royalty payments to offshore companies where there is no real activity.

Some fear the UK is jumping the gun before those rules are agreed. This is expected in September next year for implementation in 2016.

Experts say a unilateral UK move could give powers to the taxman that would allow it to arbitrarily identify businesses it didn’t like and hit them with a tax charge. One added: ‘That wouldn’t be a good way to run the tax system.’

The rules might catch other companies, such as reinsurance businesses, whose structures look similar, sources also warn.

Chancellor George Osborne wants to look tough on those multinationals which he says use ‘elaborate structures to avoid paying tax’.

Some think, however, that if his new tax rules are not thought through properly, he may end up looking not tough but silly.