UK 'Google Tax' Will Target Inter-Company Payments

A new British tax on companies that shift profits out of the country and into tax havens will target inter-company fees for services like use of intellectual property, according to a Treasury document seen by Reuters.

Companies will also be required to report their potential liability to the new tax, which the note said will sit outside the existing corporate tax system. That is intended to avoid legal challenges under existing tax treaties with countries like Ireland, a major conduit for shifted profits.

The Treasury document said that the 25 percent tax would be effective April 1, 2015, and would target conduit-type structures, such as the "double-Irish" used by Google.

In that manoeuvre, Google denies having a taxable presence in its main business in Britain and reports its annual UK revenue more than $5 billion (roughly Rs. 31,000 crores) in Ireland. It then pays most of this to a Bermudan affiliate as a fee for using Google intellectual property.

Under the new rule, the charge paid to the Bermudan affiliate could be reduced by the UK tax authority when assessing how much profit is linked to UK activities.

The Treasury and HMRC declined to comment on the application of the new tax before the publication of the draft 2015 Finance Bill on Wednesday, when further details will be released.

Corporate tax avoidance has become a big political issue in Britain in recent years.

Treasury minister David Gauke told parliament on Tuesday that the diverted profits tax (DPT) announced last week was "an example of where the Government are taking tough, practical action to ensure that everybody pays what is required under the law."

(Also see: British Chancellor Proposes a 'Google Tax')

Recouping cash lost to tax avoidance has also become increasingly important to Britain's public finances. Conservative finance minister George Osborne said, if his party wins next year's election, he wanted to raise a further 5 billion pounds by tightening rules on tax avoidance.

Chas Roy-Chowdhury, head of taxation at accounting group ACCA, said the 1 billion pounds ($1.6 billion) expected to be raised over the next five years was modest given the size of the UK operations of the companies likely to be affected. However, he said, legal challenges were still possible.

"Just because the UK says the DPT is not Corporation Tax, this does not mean that other jurisdictions will accept it as such," he said.

© Thomson Reuters 2014