British Chancellor Proposes a 'Google Tax'

Amid calls in Europe for multinational companies to pay more taxes, Britain on Wednesday proposed a new 25 percent tax on the local profits of international companies, including tech giants like Google that use complicated structures to reduce their tax burden.

George Osborne, the British chancellor of the exchequer, said multinational companies that use these complicated tax structures to move profits from their British operations to jurisdictions like Ireland and Luxembourg where companies pay less corporate tax should pay more of their share.

"That's not fair to other British firms. It's not fair to the British people, either. Today we're putting a stop to it," Osborne said Wednesday. He added that the clampdown would raise roughly $1.6 billion (roughly Rs. 9,905 crores) over the next five years in extra tax revenue for the British government. "My message is consistent and clear. Low taxes, but taxes that will be paid."

The so-called Google Tax, which would go into effect in April, is part of European efforts to force global companies - including tech giants like Amazon that have faced criticism from local lawmakers for its aggressive tax structures - to pay more tax in countries where they have large operations.

To lower tax bills, many international companies have set up subsidiaries and offshore companies to move profits from high-tax to low-tax countries through complex transactions like internal payments for interest, royalties and patents.

Already, French and German politicians have called on Google to pay more tax in those European countries, where the search engine has more than 80 percent market share. Other U.S.-based tech companies like Apple and Facebook also have been criticized for running their extensive European businesses from Ireland, where the corporate tax rates stands at 12.5 percent compared with 33 percent in France.

(Also see: EU Says Apple's Irish Tax Deals Breach Rules)

A spokesman for Google declined to comment about the British tax announcement Wednesday, but Eric Schmidt, the company's executive chairman, wrote in The Financial Times in June that a clampdown on companies' tax structures would lead to "less innovation, less growth and less job creation."

The renewed focus on Google is the latest headache for the search giant, which already is facing an extensive antitrust probe by Europe's competition authorities over its dominant position in the region's search market. In addition, last week, some European politicians called for the breakup of Google.

The company also is struggling to handle almost 200,000 requests from individuals related to a recent privacy ruling, which allows people to request that information about themselves be removed from search results, under certain circumstances.

Yet while British politicians have taken aim at the complicated tax structures of companies like Google, tax experts questioned how individual European countries would force tech companies - whose operations span the globe - to pay more taxes in specific jurisdictions.

Low-tax countries like Ireland and Luxembourg have fought to hold on to their low corporate tax regimes that have attracted tech companies to set up their international headquarters there.

The Organization for Economic Cooperation and Development, whose members include the United States and the countries from the European Union, recently outlined guidelines to stop companies from shifting profits between jurisdictions, though the proposals have yet to be adopted by its members.

"It's clear that over many years global corporate tax rules have become outdated, complex and opaque," said Julian David, head of techUK, a local trade body whose members include Google. "The way to remedy this is not through unilateral action, but through international cooperation."

Osborne made the announcement as part of his annual Autumn Statement to Parliament, and in an accompanying note, the Treasury said the tax would be levied on company profits that have been diverted from Britain through complex arrangements and will ''apply to both U.K. and foreign multinational companies.''

How the new tax would be calculated has not been specified, but the Treasury said the details would be provided on Dec. 10, when the draft legislation is released.

Because the coalition government of Prime Minister David Cameron has a majority in Parliament, and a tax on multinationals can be expected to have support from the opposition Labour Party, the measure is likely to pass.

The 25 percent tax would be higher than the standard 21 percent corporate tax rate, and British officials seem to be betting that the measure will encourage multinationals to abandon complicated accountancy structures and pay what the government thinks they owe, rather than risk incurring the penalty tax.

But Toby Ryland, a partner at HW Fisher & Co., an accounting firm, said that even given the amount of money such companies make - totaling billions of dollars every year - the money that could be generated from this tax crackdown was relatively small.

''Sweeping measures like this," he said, "often come to nothing.''

© 2014 New York Times News Service