Meet "Google tax", a strange measure directed to multinationals avoiding tax payment in the UK

Cameron's government intends to raise 1 billion pounds with the help of 'Google tax' recently announced by George Osborne, the Chancellor. However, as the WSJ supposes, this tax sends a bad signal to companies and investors, and is a reminder of why so many Britons are disappointed in the Cameron government.

“The chancellor said this will raise a billion over five years, but ultimately this is a tiny proportion of the profits the multinationals he has in mind are generating,” said Toby Ryland, a partner at accountants HW Fisher & Company, cited by The Guardian.

“In reality, many of the UK’s double tax treaties with other countries dictate where profits can be taxed. Sweeping measures like this often come to nothing. The chancellor has made the right noises, but most multinationals will be able to side-step these new rules without breaking into a sweat.”

Google paid just £20m tax in the UK last year, but its actual British revenues were £5.6bn, says The Guardian. The group as a whole has a profit margin of 20%, suggesting the company’s real profits in the UK could have been as high as £1.2bn. Taxed at the proposed 25% rate, this would deliver £280m a year in revenues for the Treasury from just one company. But the government expects to collect no more than £360m a year from the diverted profits tax.

Mr. Osborne unveiled plans for a “Google Tax” in his Wednesday's Autumn Statement. The measure, technically called the diverted-profits tax, would hit multinational companies with a 25% tax rate on any profits earned from activity in Britain that the company attributes to a subsidiary based in a lower-tax jurisdiction. Since the rate is higher than Britain’s normal 21% corporate tax rate, the Chancellor definitely is hoping companies will stop so-called revenue shifting and pay regular taxes instead.

This move seemed strange to the WSJ's columnist, as not so long ago the Tories understood the stimulative power of tax cuts. Cameron and Osborne have cut the top corporate tax rate to 21% from 28%, and have reduced personal income-tax rates and adjusted the tax brackets so that fewer earners pay the higher rates. By keeping more cash in the productive private economy and improving incentives for saving, investment and work, these moves have contributed to a growth rate now expected to hit 3% for this year.

Eliminating the 55% tax on pensions that transfer to a widow or widower when the beneficiary dies will remove a senseless punishment for prudent saving and investment. Even better, Mr. Osborne is seeking to dramatically ease or eliminate stamp duty for the vast majority of housing transactions, which makes the failure to apply that principle to corporate taxation all the more mystifying.

David Cameron has previously supported greater coordination among governments on tax issues, but the Google tax proposal is the furthest his government has gone to join France in making a political target of corporations. It’s an attempt to steal some of the populist thunder of the high taxers in the Labour Party on the left.

Any attempt to tax corporate profits in this way will probably founder on EU rules that currently govern business taxation within the single market—another reminder that, every now and then, Brussels lives up to its founding principles and stands in the way of bad national policy.