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Google Tax: too complex, too vague and too soon - IoD

17 Feb 2015

The Diverted Profits Tax, dubbed the “Google tax”, is being rushed into law for short-term political reasons and against the Government’s own rules on setting business taxes, the Institute of Directors warns today (Monday).

In 2010 the Coalition introduced a Corporate Tax Road Map, which committed the Government to “open and transparent” consultation with business before introducing tax changes, and set out principles for reform including “avoiding complexity” and “maintaining stability”.

According to Stephen Herring, Head of Taxation at the Institute of Directors, the proposed Diverted Profits Tax, to be introduced at a penalty rate of 25 per cent, “represents a dramatic breach with the government’s own road map on tax, and we can only conclude that short-term political pressure has given the Government the confidence to ride roughshod over its own rules.”

Herring continues:

“We fear that the perceived political imperative of being seen to do something about the treatment of global corporations will mean that this tax is enacted too hastily and without adequate consultation.

“There is no doubt that there has been increasing public concern about tax avoidance expressed in the media and, most vocally, if not always accurately and fairly, by the House of Commons Public Accounts Committee.

“However, whilst we fully agree that global multinational companies ought not to benefit from a more favourable overall tax treatment than that obtained by purely domestic companies, we cannot support the enactment of the Diverted Profits Tax in its current form without adequate consultation with business.”

The OECD and G20 are currently undertaking an initiative (known as Base Erosion, Profits Shifting – or BEPs) to establish what changes are needed in the global tax environment to take account of globalisation, tax competition between governments and the impact of the digital economy. It will be 2016 at the earliest before the outcome of this process is known and the IoD believes that these efforts represent the best way of securing necessary reforms.

In contrast, the IoD believes that if the Diverted Profits Tax legislation is introduced before the dissolution of Parliament, as the Coalition plans, then key points of detail will avoid the scrutiny and consultation necessary to ensure effective tax legislation.

The Diverted Profits Tax legislation was described last week by Parliament’s influential Treasury Select Committee last week as “long and highly complex”, which was “undesirable in itself” and “likely to be a source of uncertainty” for companies. Herring says that a number of questions need to be answered:

“Companies and HMRC will need to determine whether a UK taxable presence has been avoided, or whether one was simply not required. The proposals could be challenged under EU law, as foreign businesses may be taxed more severely than UK companies. Frankly, if the UK is to remain open for business, this tax would make it difficult to work out the admission price.”

Many companies will need to undertake extensive research, typically with significant input from tax advisers, to establish whether a Diverted Profits Tax liability arises. This generates a compliance burden that will be grossly disproportionate to the estimated £360 million raised by the proposed tax.

When surveyed, 74 per cent of IoD members agreed that a Diverted Profits Tax of some kind is necessary to combat some of the arrangements entered into by certain multinationals, but just 30 per cent are in favour of fast-tracking the legislation before the end of this Parliament.

The IoD therefore recommends that the government and Opposition agree to either postpone the enactment of the Diverted Profits Tax until after the General Election or, preferably, postpone its enactment until the outcomes of the OECD/G20 review are clear.

Stephen Herring:

“We are firmly of the view that tax policies affecting UK businesses ought to be driven purely by their economic impact on the UK and its citizens, rather than the short term political positioning that has led to the invention of this proposed tax.”

Read the full paper here.


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