The British government has published draft legislation for a so-called 'Google Tax', designed to clamp down on aggressive tax planning by multinational companies.
Announced in last week's autumn statement by Britain’s finance minster George Osborne, the Diverted Profits Tax is aimed at multinationals who enter into "contrived arrangements" to divert profits from Britain.
This is often done by avoiding a British taxable presence or by other "arrangements between connected entities".
Measures in the British Finance Bill, published today, would introduce a tax of 25% on "diverted profits relating to UK activity".
It would apply to two situations - one where a business seeks to avoid a British "permanent establishment" - i.e. carrying on business in Britain in such a way as to avoid being subject to the normal British corporate tax regime, usually by supplying goods and services through a non-British resident company.
The second rule would apply to certain arrangements "which lack economic substance involving entities with an existing UK taxable presence".
The combined effect of the rules is to penalise companies that structure their tax affairs to avoid having a taxable presence in Britainand then route profits to a tax haven, often by structures like the ‘Double Irish’, using royalty payments or inter-company transfer pricing arrangements that leave little taxable profit in Britain.
The British government says tax planning by multinationals - taking advantage of different tax regimes and tax treaties between countries - is eroding the tax base there, putting pressure on government fiscal plans and leading to higher taxes on personal income and spending.
The new system is supposed to come into effect from the first of April 2015, but will only raise an estimated £25m next year, rising to £355m by the end of the decade.
The British government says the measure is not expected to have any significant economic impact.
