Editorial- March -2016

The British House of Commons, Public Accounts Committee has stated that the Google’s settlement for tax avoidance payments to HMRC (Her Majesty’s Revenue & Customs), the British Revenue department, is “disproportionately small.”

A new regulatory morality on tax rules for MNCs is taking root in the European Union and the national governments of the continent. At the heart of this is one issue – MNCs pay their fair share of taxes. After a multi-year audit by HMRC into whether Google avoided paying tax for over a decade by allocating profits to Ireland, Google, agreed to pay £130 million ($185.39 mn) in back taxes in the UK and higher taxes in the future, in a deal with HMRC. But the deal got resoundingly thrashed in sections of the British media as a ‘sweetheart deal’ and as one whose value to the taxpayer could not be considered satisfactory. Opposition parties in UK, SNP and Labour said the tech giant’s £130 mn amounted to special treatment.

The European Commission too joined the issue saying EU authorities could investigate the British Government’s deal with Google.

But the most important critique about the “low sum offered by Google in lieu of taxes dating back over a decade,” came from the British PAC, which said, that the sum paid by Google reinforces concerns that the “rules governing where corporation tax is paid by multinational companies do not produce a fair outcome.”

Google’s headquarters for European operations is in Ireland, an attractive base for most American tech companies, given its low rate of corporate tax at 12.5 pc. Corporate tax is a tax on profits. In UK it is 20 pc, in France it is 33-33.6 pc and in Germany it is 30-33 pc. On top of it, in the Budget for 2016 (announced in October, 2015) Ireland created another competitive layer, a corporate tax rate of 6.5 pc under a policy known as Knowledge Development Box. To avail this low rate, tech firms will need to demonstrate that they are genuine innovators employing highly skilled people and this will need to be proven by the linkages of their earnings to the patents and copyrighted software that were carried out by R&D in Ireland.

Such policy behavior is activating obvious reactions. In the UK momentum is building to tax Google’s advertising revenue that is initiated in UK. Routing sales through Ireland may no longer be possible in near future. European Commission has said that days are numbered for tax avoiding companies and has published measures to “hamper aggressive tax planning.” France and Germany have been campaigning for a common EU corporate tax; this is strongly resisted by UK as being detrimental to British businesses.

What happens in these jurisdictions will definitely impact India and those complaining about 6 pc tax for B2B online advertising transactions with non-resident entities, should keenly consider the European developments.