Announcing the Diverted Profits Tax (the Google Tax to you and me) at last year’s Conservative Party Conference George Osborne quite reasonably observed that the quid pro quo of our low rates of business tax is that businesses should actually pay that tax. Picking up on his theme, when the detail of the measures was announced last year, I wrote that there was a case for action to secure a “new and more fiscally satisfactory world in which tax better reflects the economic substance of transactions.” Too often in the old world it did not.
Those opposed to the Google Tax have argued that such a new and better world is best brought about by the OECD’s Base Erosion and Profit Shifting (“BEPS”) project – one which has broad international support – rather than by individual countries going it alone. This is a compelling proposition. Logically one can only resist it by arguing that the BEPS project might fail, that there’s a compelling need to act now rather than wait, or that the scope of the BEPS project is too narrow. Unfortunately the Coalition – which should be roundly applauded for the vigour with which it has set about tackling tax avoidance – hasn’t conspicuously sought to engage with those arguments (I mean no criticism by this). And although I would like to examine them, beyond noting that an oft-cited criticism of the BEPS project is its breadth, I sadly lack the expertise.
But what I can do is ask how well the Google Tax succeeds on its own terms. Does it impose a liability to UK tax on transactions that ought to be subject to UK tax? And does it only impose a liability where a liability should be imposed?
The starting point is, perhaps, this. The Google Tax is intended to be punitive. In that sense it’s like a number of other recent (and contemplated) moves in the tax avoidance sphere. It marks out territory on the fiscal map which is susceptible to tax avoidance – and then sets a series of landmines. Step on a mine and you face a penalty tax rate (of 25% more than the general corporation tax rate). Enter the territory and you’ll also face a long period of uncertainty as to whether HMRC will impose a penalty rate along with a hugely complex and uncertain compliance regime
You don’t like that? Well then don’t enter that territory.
And it’s absolutely the case that the Government would rather you didn’t. We have decided to pursue a strategy of a low corporation tax rate with an expected increase in the tax base through increased investment. A lower rate applied to greater receipts is the logic. And that it’s Government’s purpose that the Google Tax shouldn’t disrupt this strategy can be seen in the low anticipated direct yield from the tax. The real tax benefits will, presumably, be felt in the form of higher receipts from the corporation tax.
All of this seems (to me at least) sensible in principle. But in practice I do have one particular concern.
The language used by the draftsman to mark out the ‘bad’ territory on the fiscal map is, as the Treasury Select Committee noted, “long and highly complex… and likely to be a source of uncertainty.” I’d go further. At times it has the precision of those cartographers of old who shrugged their shoulders with a “there be dragons.”
This creates very considerable practical difficulties for technicians, HMRC, taxpayers and the courts. It will also roll back, and substantially, conventional notions of what ‘bad’ corporate tax behaviour looks like. Many ‘vanilla’ transactions – to use a once convenient signifier now regrettably oxidised by Lord Fink – will attract the tax.
Given the speed with which the Google Tax was introduced, and the lack of consultation, can we be certain that all of these consequences are intended? Reader, we can not.
But it’s worse than that. The Google tax does not simply tax those transactions: it applies to them a penal rate.
In other areas of the tax code where we have adopted penal anti-avoidance measures, we have been careful to confine those measures to transactions which are clearly abusive. The draftsman of this regime, on the other hand, recognises quite explicitly (in draft section 19(1)(a), for any technicians reading) that it will penalise not only activity which avoids UK corporation tax – but also, remarkably, activity which attracts it.
It is not easy to discern why this should be so. If we have a corporation tax rate of 20% and an activity attracts that rate, 20% is (an idealist might think) the rate of tax that should be paid. It may be that a different rate of tax is likely to form an important part of our defence to the contention that the tax does not breach our Double Taxation Convention obligations.
So how do we address these problems? HMRC have been out and about in numbers, whispering sweet nothings into the ears of business: of course we will apply these rules sensibly, they say. Now I’m sure those feelings are ardently felt now, but business has seen enough of the world to know that HMRC might see things differently later on, when the Diverted Profits Tax has been put to bed on the statute books, and Margaret Hodge starts demanding fiscal purity. Business can’t take long term decisions based on sweet nothings.
I try to deal in the art of the possible when I write. Life’s too short to spend it scratching your spots. And the Coalition has invested, politically, too much in the Google Tax to pull it for further consultation just before a General Election: Labour would make electoral hay. And for its part, there is no prospect of Labour presenting the Conservatives with a fiscal open goal by blocking the measure (something the Opposition is uniquely able to do in the final Finance Bill before a General Election). In any event, there is (I continue to think) much that is good about the legislation.
The drafting which will go forward as the final text for enactment will be an improvement on the present version (particularly around the rightly criticised notification requirements) but it is not expected to resolve the problems I have identified above. But I would like to suggest – to both parties – one adoptable measure which might have some positive impact.
We should introduce an ‘overriding objective’ at the start of the legislation. We need a measure that tells HMRC, taxpayers, and (most importantly) the courts (who will have to make sense of all of this) what the purpose of the Google Tax is. We need something that will give to those HMRC whisperings a touch of justiciability, a written promise that what was ardently felt the night before will be acted on the morning after.
I’ve suggested something below.
The Overriding Objective
(1) The objective of the Diverted Profits Tax is to prevent the avoidance of corporation tax by companies with business activities in the UK which enter into contrived arrangements to divert profits from the UK.
(2) The overriding objective shall be given effect to by tribunals and courts in interpreting provisions in this Part.
My thanks to the tax department at Freshfields Bruckhaus Deringer for its help with certain aspects of this post. Blunders – in the unlikely event of doubt about this – are mine and mine alone.