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By Ben Stupples
The U.K. tax agency is threatening multinational companies with a “Google Tax” to collect extra corporation tax receipts, according to two people familiar with the tax authority’s private meetings.
Introduced in 2015, HMRC’s diverted profits tax—dubbed the “Google Tax”—targets multinational companies in the U.K. that shift profits away from the country by avoiding a taxable U.K. presence, with HMRC applying a punitive tax rate to any profits that multinationals divert from the country.
In meetings with multinational companies, HMRC officials are “sitting across the table and basically telling companies to pay more tax or face a DPT notice,” according to a person familiar with HMRC’s discussions on the diverted profits tax, who asked not to be identified as the meetings are private.
That approach risks “damaging trust between HMRC and large companies,” Heather Self, a London-based tax partner at law firm Pinsent Masons, the second person familiar with HMRC’s discussions with multinationals, told Bloomberg BNA in a March 16 telephone interview.
“If you get a company with real exposure to DPT, it’s cheaper to pay corporation tax instead as DPT is applied at a penal rate” of 25 percent, Self added on the U.K.’s diverted profits tax.
“What’s concerning is whether HMRC is seeking to gain the maximum amount of tax or the right amount of tax.”
While it was originally expected to target technology companies like Google and Facebook, U.K. multinational companies have recently cited the risk of a DPT charge from HMRC, which has led to suggestions that the tax authority is using it more aggressively than tax practitioners first thought.
London Stock Exchange Group Plc, Europe’s second-largest stock exchange by market capitalization, warned earlier this month in its 2016 annual report that it has made an accounting provision of 4.5 million pounds ($5.6 million) for “uncertain tax positions,” including the diverted profits tax and intangible assets.
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 global tax and accounting firm 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,” he added.
“DPT is something of much greater concern than we expected,” Self told Bloomberg BNA March 16.
The revelation of HMRC’s aggressive stance on multinational companies’ U.K. corporate tax payments comes as the tax authority aims to reach its target of raising 27 billion pounds between April 2016 and March 2017 by tackling non-compliance.
Between April 2016 and December 2016, HMRC had a total compliance yield of 17.4 billion pounds, according to HMRC’s corporate report, last updated Feb. 16. That yield has left HMRC needing to collect 9.6 billion pounds from January to March, according to data compiled by Bloomberg BNA.
The British government “will make sure that big multinational businesses pay their fair share” of U.K. taxes, former Chancellor George Osborne said on the U.K.’s DPT at the 2014 Autumn Budget. “Some of the largest companies in the world, including those in the tech sector, use elaborate structures to avoid paying taxes.”
In a March 16 emailed statement, an HMRC spokesman described the introduction of the diverted profits tax as a “game changer” designed to alter the behavior of large companies aiming to minimize their taxes.
“Corporates, like any other taxpayers, must pay the tax that is due and we do not settle for less,” they said.
At its existing rate, the diverted profits tax is 5 percent higher than the U.K.’s corporation tax rate on companies’ annual profits, which will fall to 19 percent next month and to 17 percent by 2020.
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 with the 2014 Autumn Statement.
Since that U.K. announcement of the DPT, Australia has announced a similar 40 percent tax rate based on the U.K.’s measure.
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