A “Google tax” or are royalty arrangements “artificial avoidance”?

The Autumn Statement in the UK on 3 December saw the announcement of a “Google Tax” to come into effect on 1 April 2015 (no it’s not a joke). Details are sketchy but its described as “25% tax on profits generated by multinationals that are shifted out of the UK”.

I thought I would put “Google tax” into my google search but nothing but press coverage came out of the search including a vitriolic article in Forbes : “The Guardian’s absurd suggestion for Osborne’s Google Tax” which makes interesting reading. Tim Worstall is very clear that US inbound tax planning to Europe is just fine and dandy and that the Guardian writers are living “on a different continent, perhaps in an alternative reality altogether”.

I then turned to the FT coverage and thought the quote from Chris Morgan from KPMG was fascinating in contrast to that in Forbes:

“He speculated that the new tax would be a “deemed profits” tax rather than a corporation tax, so as to sidestep issues about double taxation. He suggested that the Treasury would identify profits that escaped tax in the UK because of royalty arrangements or the absence of a taxable presence.“

“Mr Morgan said: “It seems to be something completely novel…..It is a huge stick that will stop this artificial avoidance. The difficulty will be how it is defined in practice.””

Now this is a big quote, this is KPMG (one of the Big 4 accounting firms) saying that some of the structures using royalty arrangements are artificial avoidance. How does this reconcile with the statements by Google, Amazon, Starbucks and other firms that they are following the spirit of the law?

Despite the Forbes line, politicians had to do something about this issue as it is hitting the competitive position of local retailers who can’t benefit from the structuring that US firms can.

But the other announcement in the Autumn statement was probably more significant, that is the consultation on Neutralising the effect of hybrid mismatch arrangements which is described as:

“Proposals for rules to neutralise the effect of hybrid mismatch arrangements in accordance with recommendations of Action 2 of the G20-OECD BEPS project. The aim is to tackle aggressive tax planning where, within a multinational group, either one party gets a tax deduction for a payment while the other party does not have a taxable receipt, or there is more than one tax deduction for the same expense. Introduction of the proposed rules will largely eliminate any tax advantage arising from the use of hybrid entities and instruments and encourage businesses to adopt less complicated and more transparent cross-border investment structures.”

At 5.4 of the consultation document is set out:

“The proposed rules focus on hybrid mismatch arrangements. A hybrid mismatch arrangement is an arrangement that exploits a difference in the tax treatment of an entity or instrument under the laws of two or more jurisdictions to produce a mismatch in tax outcomes, where that mismatch has the effect of lowering the aggregate tax burden of the parties to the arrangement. “

Now these proposals would (if implemented throughout the EU) hit the structures which use the different taxable status of entities in Luxembourg and Ireland which are the cornerstone of much US outbound tax planning, and in the meantime the proposed tax would deal with the same issue until those BEPS recommendations are implemented. What is interesting about the consultation process is that it makes clear what the UK believes to be the spirit of the law and its intention.

It will be fascinating to see how corporates now respond to questions about their tax structures in the light of the proposals. Do they really want to be associated with “artificial avoidance” going forward?


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