Diverted profits tax may make companies think twice


Filed Under: UK Business

Companies like Google may think twice about investing in the UK if the proposed Diverted Profits Tax is introduced on April 1st as proposed.

Paul Smith, a partner at Blick Rothenberg, said: “In the future companies like Google making sales in the UK may think twice before setting up significant operations here.”

He added: “The new tax will apply if another company within the group provides sales and marketing support to the foreign company that makes the sales to UK customers.  However, if the foreign company undertakes these activities abroad or if it engages the services of a UK based independent agent to assist it in its marketing and sales to UK customers, then the foreign company should not be within the scope of the new tax.”

“This means that companies like Google will not set up sales and marketing operations here and therefore jobs and ultimately tax could be lost.”

Smith said that Google UK employs some 1,800 staff with a payroll in excess of £300m and according to its 2013 accounts pays some £20m plus in corporation tax to HMRC However, its functions are support functions for overseas group companies in the US and Ireland. Had it never set up any such operations in the UK then it would not be within the scope of the new tax.

Smith added: “Surely HM Government wants to encourage future Googles to set up their UK and European support functions in the UK, employ lots of staff who pay income tax, NIC and when they spend their salaries, VAT.

“HM Treasury estimates that the annual tax from the Google tax will be approximately £350m per year.  However, this is a modest sum if you compare it with the future reduction of jobs in the UK and the associated tax collected by the Government from such employment.”

Smith said that another company within the scope of the Government’s ”Google” tax was Amazon.  However, the UK is not the only Government queuing up to levy additional tax on Amazon.

He said: “Last week the European Commission published its report on Amazon’s Luxembourg tax rulings, particularly in relation to its transfer pricing arrangements.  The Commission concluded that the arrangements with Amazon may constitute state aid and it has decided to initiate formal state aid proceedings.  The Commission has requested further information from the Luxembourg Government and has reminded Luxembourg that if there is unlawful state aid then it should recover that aid from Amazon. Amazon would then have an additional Luxembourg tax liability to the extent that the country charges its tax in relation to sales made to UK customers. This is likely to reduce the amount of UK tax that might otherwise be payable by Amazon when the UK introduces the Diverted Profits Tax in April.”

He added: “As it is likely that this tax will deter future Google type groups from setting up businesses in the UK and as the tax to be collected by Britain will reduce as other tax jurisdictions levy additional taxes, the loss to the UK economy resulting from the reduction in businesses attracted to the UK may well outweigh the benefit of the overall tax collected from the 'Google' tax.”

Bob Rothnberg, senior partner at the firm, said: “These proposals make the UK tax system less attractive and more uncertain."

He added: “Businesses wanting to set up in Europe may well look to countries that have more stability in their tax regimes than the UK has had in the last few years.”

For more information, please contact Paul Smith.