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By Ben Stupples
London Stock Exchange Group Plc, Europe’s second-largest stock exchange by market capitalization, has warned in its annual report that it faces a possible “Google Tax” charge in the U.K.
The London-based company has made an accounting provision of 4.5 million pounds ($5.5 million) due to “uncertain tax positions” with the U.K.’s diverted profits tax, dubbed the Google Tax, and accounting changes for intangible assets, LSE said in its 2016 annual report, filed Friday.
Introduced in 2015, the U.K.’s diverted profits tax largely targets foreign multinational companies with U.K. operations that shift profits away from the country by avoiding a taxable U.K. presence.
Imposing a 25 percent tax on the diverted U.K. profits, the measure earned its nickname from the way it attempted to crack down on U.S. technology companies—like Facebook Inc. and Google Inc., now part of Alphabet Inc.—using complex tax arrangements to move their U.K. profits overseas.
Yet the fact U.K.-based multinational companies outside the technology sector, like LSE, are warning about the diverted profits tax suggests the U.K.’s tax authority is enforcing it far more strictly than expected, according to Heather Self, a London-based tax partner at global law firm Pinsent Masons.
“What we’re seeing is that HMRC is using it quite aggressively to challenge companies that didn’t expect to be anywhere near DPT,” she told Bloomberg BNA in a March 3 telephone interview about the U.K.’s diverted profits tax.
“The fact London Stock Exchange disclosed it in their annual report is a signal that HMRC is looking to apply the DPT far wider than companies had originally expected,” Self said.
According to its 2015 annual report, LSE has subsidiaries and affiliates in low-tax jurisdictions such as Luxembourg and Bermuda. While multinational companies may have legitimate reasons for locating activities there, the U.K.’s tax authority will probably scrutinize any low-tax jurisdiction as part of its diverted profits tax investigations, according to Malcolm Joy, a London-based tax partner at BDO.
“They may hold some intellectual property and have some economic substance,” he told Bloomberg BNA in a March 3 telephone interview about multinational companies’ subsidiaries and affiliates in low-tax jurisdictions.
“When you strip it back and look closer, they may have been there for several years, but now the diverted profits tax is causing problems for many companies,” said Joy.
The U.K.’s diverted profits tax overlaps with the OECD’s efforts to combat multinational companies avoiding a taxable presence, otherwise known as a permanent establishment, through its base erosion and profit shifting, or BEPS project.
Changing the definition for a permanent establishment is part of the seventh action of the OECD’s 15-action BEPS project developed with the Group of 20 countries.
The OECD’s changes expand the PE definition to include commissionaire arrangements—structures used when companies sell products of foreign entities in exchange for a fee. These structures then allow companies to avoid having a permanent establishment, or PE, to which the sales are taxed.
A non-compulsory part of BEPS, Action 7 also seeks to challenge the way companies fragment their operations into auxiliary or preparatory activities, such as warehouse operations, which are exempt from the existing PE definition. To continue their exemption, multinational companies cooperating with Action 7 would have to prove that such activities aren’t a core part of their U.K. operations.
Yet in December 2016, Bloomberg BNA revealed that the U.K. will not adopt the OECD’s wider PE definition, a move which risked upsetting countries that had already signed up to BEPS Action 7.
Since then, though, Australia has adopted a similar measure based on the U.K.’s diverted profits tax.
In a March 3 emailed statement, an HMRC spokesman described the introduction of the diverted profits tax as a “game changer” to encourage large companies to change their tax arrangements.
It does not target a specific company or sector, and all corporates must pay their tax due, he added.
Two LSE spokespeople did not respond March 3 to separate telephone calls requesting comment. One request related to clarification on LSE’s diverted profits tax position, while the other concerned if the company’s low-tax jurisdictions and affiliates were the cause of the annual report disclosure.
LSE boosted its annual dividend to 43.2 pence per share, a 20 percent gain, as it revealed a 17 percent rise in total income to 1.7 billion pounds for 2016, the company said in its annual report.
The dividend boost may compensate shareholders over the likely failure of the $13 billion merger between LSE and Deutsche Boerse AG, Europe’s largest stock exchange by market capitalization.
In the company’s annual report, LSE said it “continues to work hard” on the deal as it awaits the outcome of a European Commission review on the proposed merger within the next month.
The diverted profits tax is expected to raise 1.4 billion pounds for the British government by 2020, according to HMRC’s summary of impacts document published at the 2014 Autumn Statement.
At 25 percent, the diverted profits tax is five percent higher than the country’s current tax rate on companies’ annual profits, which will fall to 19 percent next month and to 17 percent by 2020.
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London Stock Exchange's 2016 annual report is at http://src.bna.com/mG8.
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