'Google Tax' targets 'double Irish' tax avoidance

The Government will face court battles over its new ‘Google Tax’ on multinationals, tax avoidance experts predicted on Wednesday, after the details of the levy were published.

City lawyers and accountants said the subjective test of what count as artificially diverted profits and the Chancellor’s decision to clamp down before international standards are established risked a legal quagmire.

The measures are designed to discourage manoeuvres such as the “double Irish” structure that Google uses to pay very little corporation tax in the UK in spite of making billion of pounds of highly profitable sales to British advertisers.

From 1 April next year companies will be required to tell tax officials if they believe they may be liable for the levy based on how they channel money out of the country.

The 25pc diverted profits tax will apply when a company does not have a permanent UK establishment but supplies goods and services to British customers. It will also apply to companies that do have a permanent UK arm but avoid corporation tax by paying fees to other subsidiaries within the group outside the country.

For instance Google's 'double Irish' arrangement would meet both conditions. It has a permanent UK arm and large London staff but pays very little corporation tax because its British sales transactions are made by an Irish subsidiary. The profits are then shifted to another subsidiary in Bermuda as fees for using intellectual property.

HMRC officers will assess whether company structures are designed to divert profits and how much of such profits are attributable to UK sales.

The discretionary aspects of the new tax prompted concerns of legal problems.

Ben Jones a tax partner at Eversheds said multinationals would find it “disappointing… that in most cases the application of the tax comes down to a reasonable assumption by the UK Revenue that a transaction or activity was undertaken to divert profit from the UK”.

Chris Morgan, head of tax policy at KPMG, said: “HMRC is effectively able to make an estimated assessment and the company has to then pay the tax within 30 days.

“This process – pay now, argue later - together with the 25 per cent rate, appears to be aimed at changing companies’ behaviour. A concern is, does this give too much discretion to HMRC?”

Although the tax has been labelled the ‘Google Tax’ it will apply to multinationals of all stripes with sales of more than £10m in Britain.

Chris Sanger of EY said the new laws were broader than expected and would apply to corporate structures not previously seen as tax avoidance methods.

He said: “This will raise questions as to how it interacts with the UK’s EU tax treaty obligations.”

The Chancellor said in his Autumn Statement last week that the diverted profits tax will raise £1bn over five years. The rules will be separate to the corporation tax regime as part of an effort to avoid legal challenges based on international treaties.

Robert Chote, the head of the Office for Budget Responsibility, told the Treasury Select Committee yesterday the calculations had been based on multinationals accounts, seen by tax officials.

He added: "We're not assuming that any company that's supplying a lot of goods and services is going to [leave the UK] as a result of this measure."

The OECD has been discussing similar ideas but is not expected to reach agreement until September next year. The Treasury has dismissed warnings it could put Britain at a competitive disadvantage by acting early and said it expects other major economies to follow suit.