UK Chancellor Philip Hammond confirmed this week during his Budget speech that international tech giants will have to pay a significant amount of royalties for ongoing sales in the country.
Hammond said, "Multinational digital businesses pay billions of pounds in royalties to jurisdictions where they are not taxed [with] some of these royalties [relating] to UK sales."
"So, from April 2019, and in accordance with our international obligations, we will apply income tax to royalties relating to UK sales, when those royalties are paid to a low-tax jurisdiction," he reaffirmed.
As laid out in the government’s position paper on this initiative, the implementation of this Google tax “will ensure multinational digital businesses do not gain an unfair advantage from the international tax framework, ensuring a more level playing field that promotes competition and avoids entrenching incumbent positions.”
Furthermore, the paper asserts that the UK “government will take more immediate action against multinational groups, primarily in the digital sector, who achieve low-tax outcomes by holding their valuable intangible assets such as intellectual property in low-tax countries where they have limited economic substance.”
According to Hammond, the UK can expect to receive close to £200 million per year from this diverted profits or Google tax.
Studies Show Amazon Pays Less Tax than Actual Bookstores
As reported by The Guardian, several recent reports have concluded that companies such as Amazon have been paying significantly less tax than regular retailers.
A study by the Centre for Economics and Business Research concluded the American Internet giant pays roughly 11 times less tax than regular bookstores operating in the UK.
More specifically, this Bookselling Britain report states the same company made £1.5bn in 2016 and paid only £7.4m in corporate tax, while stores of the brick-and-mortar variety earned £540 million and coughed up corporate taxes worth £12 million.
Booksellers Association’s (BA) Giles Clifton, who serves as head of corporate affairs for the organization, said about these findings: “The BA has already highlighted the unequal treatment meted out by the business-rates system to British booksellers, the staggering 17 times differential between what the Waterstones on Bedford High Street pays in comparison with the Amazon business unit a short distance away.”
Analysts and Politicians Speak Out on Google Tax
Labour MP Frank Field lauded this initiative, commending the government for looking for ways to battle tax avoidance.
Field told The Guardian, “The budget offers the beginnings of a fightback against some of the most egregious and morally bankrupt methods of tax avoidance exposed by our campaign.”
“But taxpayers will expect a whole series of additional steps to follow, if this mega injustice is to be countered for good,” he added.
Alex Henderson, a Tax Partner at PwC, believes this move shows the UK government is willing to battle tax avoidance.
“I think it’s a very firm signal,” Henderson told Quartz.
“Even though it’s a signal of intent, it’s one that carries a price tag of hundreds of millions of pounds. I think it is something people will take very seriously,” he added.
On the other hand, Alison Lobb, an international tax partner with Deloitte, raised some questions regarding this new measure.
Lobb told the BBC, “It will be necessary to be able to clearly distinguish 'digital' companies subject to the digital turnover tax from other businesses.
“Even harder will be determining the appropriate… so that it represents a reasonable proxy for tax on profits, and so that it doesn't deter cross-border trade. Any moves made by the UK are likely to be mirrored by other countries, so UK digital businesses operating overseas will be equally affected,” she said.
Furthermore, Tax Justice Network’s Director Alex Cobham found the decision somewhat insignificant in the grand scheme of things.
“This is a drop in the ocean… I don’t think [tech giants] will care very much,” Cobham said, mentioning that the amounts to be collected from these royalties are “so marginal compared to the size of the misalignment of tech companies’ profits… that I don’t think anyone is going to see this as a solution.”
Besides this new development, the UK government plans on looking into a project that will require financial service providers who put together offshore structures for clients that could potentially be used for tax evasion purposes to report back to HMRC and inform them about clients who will be adopting them.
What are your thoughts on this latest move by the UK government to curtail tax avoidance? Let us know in the comments section!