Tech giants face tax avoidance crackdown

Bermuda
The recent Paradise Papers showed how profits are moved to tax havens Credit: Getty Images

Multinational companies that divert billions of pounds to tax havens will have to pay more to the Exchequer from 2019 after a new crackdown on technology giants shifting profits offshore.

The move, designed to raise £200m a year, is meant to combat a tax avoidance measure in which companies pay substantial royalties to subsidiaries in low-tax jurisdictions. It was announced alongside new demands that “marketplace” shopping websites such as eBay and Amazon take more responsibility for sellers that do not pay VAT.

The Treasury already levies a “withholding tax” on big tech companies that attempt to limit their taxable profits by making royalty payments from a UK subsidiary to one in a tax haven. However, many large tech companies book their sales from UK customers abroad.

The measure announced at Wednesday's Budget would allow the Government to levy the same tax on foreign subsidiaries when they make royalty payments related to sales in the UK.

Facebook, Apple and Google have all come under criticism for registering sales from British customers in Ireland, while Amazon has historically recording all European sales in Luxembourg.

Nike, the US sportswear giant, was recently revealed to have paid vast royalty fees from a Netherlands subsidiary to Bermuda in order to limit tax payments.

The Office for Budget Responsibility predicted that the new tax would raise £800m over four years, with income decreasing from £285m in 2019-20 to £130m in 2022-23. It will apply even if the company does not have a taxable presence in the UK. The Government is due to consult on how the tax will be enforced and at what rate it will be levied.

“Multinational digital businesses pay billions of pounds in royalties to jurisdictions where they are not taxed. And some of these royalties relate to UK sales,” Philip Hammond, the Chancellor, said.

He said that while “this does not solve the problem [of multinational tax avoidance], it does send a signal of our determination”.

Philip Hammond
Hammond said the moves send 'a signal of our determination' Credit: Eddie Mulholland/Telegraph

Mr Hammond also announced that online marketplaces, such as eBay and Amazon, would be liable when third-party sellers fail to pay VAT on purchases made through the websites. The Government already introduced measures to crack down on VAT avoidance last year but said it was giving HMRC special powers to collect sales taxes from the companies if they knew or should have known that the seller was not VAT registered.

However, this policy is only expected to raise £145m by 2023, compared to an estimated £1.5bn a year that the National Audit Office said was being lost every year due to online VAT fraud.

Countries around the world are struggling with how to tax digital companies, which sell software and services across borders, instead of goods. The Government has published a position paper on “corporate tax and the digital economy”, floating the idea of taxing tech companies’ domestic revenue, a proposal that has also been put forward by France and backed by Germany and Spain.

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