There has been much grumbling recently about the strategies employed by major multinational companies to reduce their tax burdens. Now, the Conservative government in the United Kingdom, committed for years to building the “most competitive tax regime in the G20,” is pitching itself as an unlikely standard-bearer in the fight against corporate tax avoidance. In early December chancellor of the exchequer George Osborne unveiled the outline of a Diverted Profit Tax (DPT), informally known as the “Google tax” because it is expected to affect Internet companies first and foremost. Starting in April 2015, this proposal would impose a 25% charge on the local income of “large multinational enterprises with business activities in the UK who enter into contrived arrangements to divert profits from the UK by avoiding a UK taxable presence” according to official government documents. This would apply, for example, to the infamous “double Irish.”
Osborne’s plan is unquestionably bold, great in principle and, some say, openly political as it would take effect ahead of the parliamentary election scheduled for May and at a time when elected officials the world over are under increased pressure from their constituents to do something about widespread abuse of the tax code by international companies. “The DPT is framed in a way that is really quite radical,” says Ian Roxan, an expert on international tax law at the London School of Economics. “It would have a fundamental effect on how international tax planning is done.” Unsurprisingly, it has already provoked outcries by a variety of industry groups and is getting a lot of attention from other governments. Australia is evaluating a similar move, which has also been met with a degree of skepticism. Such is the hype around the Google tax, and so complex is the problem it tries to address, that, in the end, the risk is that it might end up where it started, exactly nowhere.
For one, it is potentially in breach of EU law and of the UK’s bilateral tax treaties, though the Treasury has envisioned it as a completely new levy, unattached to existing corporate taxes and therefore perfectly valid. “This argument is by no means obviously successful,” says Roxan. “It partially depends on who gets to decide whether it’s a matter for UK courts or for international arbitration panels.”
The April target is also overly ambitious. The draft legislation is undergoing a period of public consultation that will last through the beginning of February. And plenty of comments are expected. This already leaves little time for parliament to adopt it. How likely is it that MPs will choose to push this measure through right around the final stretch of what is expected to be a harshly contested campaign season? They might rather defer the matter to the next legislature, meaning that the fate of the DPT will depend in large part on the composition and political leanings of the new government.
Finally, the Google tax jumps the gun on ongoing multilateral efforts, led by the Organization for Economic Cooperation and Development, to improve coordination among corporate tax systems across G20 countries. The Action Plan on Base Erosion and Profit Shifting, also known as BEPS, aims to produce a series of recommendations that will close the gaps between different nations’ tax codes that are exploited by multinational corporations to shift their profits around to get the most favorable tax treatment possible. BEPS is where the real action is, so much so that Forbes contributor Joe Harpaz recently called it “one of the biggest business stories of 2015.” The next round of guidelines by the OECD is expected in the fall of 2015. But the UK’s go-it-alone approach could upend these efforts by triggering an unwieldy corporate tax war, whereby each country introduces its own version of the diverted profits tax, potentially resulting in cases of double taxation and, overall, in a less effective mechanism to curb tax avoidance, which is the goal to begin with.
In any case, there might not be reason to worry, as the UK’s Google tax may never see the light of day, at least not in its present form.