The UK risks undermining an international clampdown on tax avoidance if it signs more deals like the agreement with Google to recover £130m in back taxes, a tax expert has warned.
HM Revenue & Customs is thought to be close to striking deals on back taxes with the likes of Facebook and Amazon, which generate large revenues in the UK but have paid little corporation tax historically.
Multinationals are under pressure to reach agreement with the UK tax authority before the diverted profits tax is brought in on 1 April, which will levy a 25% tax on profits that are deemed to have been artificially moved outside the UK.
Chancellor George Osborne celebrated the deal with Google, under which the online search firm agreed to pay £130m on top of the £70m it has paid on profits in the UK since 2005, as a “really positive step”.
Under a deal which will keep it clear of the diverted profits tax, Google has agreed to pay tax on an element of future revenues from UK advertisers as well as on profits. However, the company will be able to keep taxes low by continuing to book advertising deals with UK clients through its international headquarters in Ireland.
Tax expert Richard Murphy, who was a prominent backer of Jeremy Corbyn’s leadership campaign, estimates that Google should be paying £200m a year in corporation tax, based on the firm’s declared profit margins and sales 2014 sales in Britain of £4.5bn.
“I can’t understand why the deal with Google is so cheap. I’m worried if they are going to repeat that with other companies. What was agreed is far removed from what is required for sustainable corporation tax in future,” Murphy said. “They are undermining the new international tax consensus which David Cameron and George Osborne have worked for, supposedly.”
He said the Google agreement was not in line with proposed rules backed by the Organisation for Economic Development (OECD) and supported by Osborne, which link taxes to revenues earned in a particular country.
At present, many multinationals avoid local taxes by using a complex network of companies to shift profits elsewhere.
Murphy said: “It’s one thing offering deals for the past and a different thing to offer deals for the future when we’ve had the OECD give a stronger basis for taxation which considers a company as a UK resident.”
The HMRC said it would not comment on the tax affairs of particular businesses.
However, a spokesperson for HMRC said: “We intensively manage the tax risks posed by multinationals. At any given time approx two thirds of large businesses are under enquiry.”
The UK body is working with five other tax authorities to share information about how digital multinationals might be shifting their profits to tax havens under the E6 project.
Shadow chancellor John McDonnell is set to demand details of Google’s deal from Osborne in parliament on Monday. He described the online search firm’s payment as “derisory” and argued the public would be sceptical about what he warned looked like a “sweetheart deal”.
Prof Prem Sikka, a tax avoidance expert at the University of Essex who is undertaking a review of HMRC for Labour, said the deal with Google “raised more questions than answers”. He said the company had effectively paid an annual rate of corporation tax of just 2.77% over the last decade. British businesses currently pay coporation tax of 20% of their profits.
Meanwhile, EU authorities are aiming to shut down ‘brass plate’ companies in Europe, the practice where multinational corporations create a letter-box subsidiary in one country to cut their tax bill in another.
The proposal is part of sweeping reforms from the European commission to close the main tax loopholes and end sweetheart deals that have helped multinational companies avoid billions in corporation tax.
Officials think the measures to be announced on Thursday spell the end of “brass plate” companies in Europe – letter-box subsidiaries that do little genuine business, but help a firm lower its tax bill. In 2014, tax campaigners found one address in Luxembourg that was home to more than 1,600 companies.
The commission is also seeking to close the most commonly used tax loopholes, including the practice of setting up a subsidiary in a non-European tax haven, as well as taking advantage of tax relief in two countries, known as “double non-taxation”.
The proposals represent the EU’s attempts to get to grips with multinational tax avoidance, following the Luxleaks scandal and growing evidence that hundreds of companies, from Apple to Starbucks, have taken aggressive action to cut their tax bill.
Under the commission’s plan, multinational companies would be obliged to report profits to local tax authorities, if they are generated in that country. This is an attempt to clamp down on tax-avoidance on highly profitable businesses – a practice that shot to notoriety when it emerged that Starbucks had paid £8.6m in taxes on a reported £3bn in UK sales over 14 years in the UK.
“Tax planning has become more elaborate in recent years,” says a draft copy of the commission proposals seen by the Guardian. “Now more than ever, co-operation between member states’ tax authorities is crucial in order to tackle tax avoidance and aggressive tax planning.”
