The announcement by Chancellor George Osborne this week of a new tax, aimed at giant high-tech companies like Google which pay relatively little tax in the UK, could be an important precedent for developing countries as they try to collect their own fair share of tax from multinationals.
Osborne hasn’t yet spelt out what this new “Google tax” will involve – the details will be released in the autumn. But government sources are briefing that the tax will target the so-called “Double Irish” and other complex arrangements involving strings of offshore companies and transactions.
These arrangements, which play on the differences in tax rules between one country and another, have been used by big internet companies to ensure that the taxable profits from their billions of pounds of UK sales are booked in countries where they face little or no tax. (We should note that Britain itself has long been a very big player in the offshore tax avoidance industry).
How effective is the "Google tax"?
It’s hard to know how effective the “Google tax” will be until we see the detail, because there are various different ways for a multinational to shift profits on paper from one country to another. If the new legislation is too narrowly-defined, then it could end up being little more than an invitation to the fertile minds of the tax avoidance industry to figure out clever ways around it. But if the new tax is broadly and robustly designed, it could be used to cut through the thickets of legal and accounting complexity which some big companies hide behind to avoid tax without breaking any laws.
Corporate tax dodging in developing countries
The new measure is intended to protect Britain’s tax base from sharp-but-legal practices by foreign multinationals and it has no direct implications for developing countries. But it could be symbolically important as an example of the kind of simple, effective legal tool which these countries could adopt in response to similar practices by multinationals.
Most developing countries are destinations for foreign investment and they have struggled in a global tax system which is biased towards the home countries of investors, including Britain. Osborne’s proposal is striking because it tacitly recognises that Britain, despite its massive advantages in the world economy, also struggles with tax dodging by multinationals.
The “Google tax”, if it’s properly designed, could be a model for developing countries as they try to raise the corporate tax revenues they need to pay for health, education, roads and other public goods which will help to lift their people out of poverty. So, tax authorities around the world will be watching with interest to see what Britain comes up with.