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UK to tax profits shifted offshore

Clamping down: George Osborne, Britain's Chancellor of the Exchequer

LONDON (Bloomberg) — The UK became the latest country to take aim at multinational tax avoidance, announcing a new levy on companies that “artificially” shift their profits into havens, a move prompted by growing international outrage at manoeuvres used by businesses including Google, Apple and Starbucks.

In his end-of-year statement to Parliament in London, Chancellor of the Exchequer George Osborne said the UK government will introduce a 25 per cent tax on “profits generated by multinationals from economic activity here” that are moved out of the country. He named no companies.

“That’s not fair to other British firms,” Osborne said. “It’s not fair to the British people either. Today we’re putting a stop to it.”

The announcement — short on details — was made as tax planning by big companies comes under increasing scrutiny by global regulators.

In September, the Organisation for Economic Cooperation and Development set out new proposals to tackle corporate tax avoidance, a project it is carrying out at the direction of the Group of 20 nations. Later that month, the European Commission said Irish tax authorities failed to conform to international guidelines in a tax deal with Apple.

Last month, Ireland’s government announced it would phase out a tax shelter known as the “Double Irish,” which has been used by companies including Google, Microsoft Corp and LinkedIn Corp.

The UK Treasury singled out that technique today.

The UK Parliament has held a series of hearings on techniques used by various companies, including Google, Amazon.com and Starbucks, which have often reported little or no taxable profits in Britain even though they’ve made billions of dollars of sales.

Last week, European Commission President Jean-Claude Juncker and the other members of the European Union’s executive body survived a confidence vote after disclosures by the International Consortium of Investigative Journalists about tax deals between multinationals and Luxembourg, where Juncker served as prime minister for almost 19 years.

Also this week, US President Barack Obama told a gathering of chief executive officers that legislative tax reform should begin with business taxes, ideally lowering rates and closing loopholes.

Techniques like the “Double Irish” — first reported by Bloomberg News in 2010 — permit companies to collect the bulk of their profits through Irish subsidiaries instead of the countries where they have actual customers. Those units then route those profits through royalties and other payments to a second Irish subsidiary, headquartered in a low-tax jurisdiction like Bermuda.

Google, for example, cut its income-tax bill by about $2.5 billion last year, mostly due to such an arrangement. The company paid more than $11 billion in royalties to an Irish unit that lists its headquarters at a Bermuda law firm during 2012.

Ashley Zandy, a spokeswoman for Facebook; Hani Durzy, a spokesman for LinkedIn; and a Google spokesperson declined to comment. Amazon spokesman Craig Berman didn’t immediately respond to a request for comment. Starbucks also did not immediately respond to such a request.

It’s unclear how precisely the UK plans to measure the profits that should be properly attributed there. And such a unilateral plan could complicate the OECD’s plans to reform the rules for how companies allocate their taxable income around the world.

“There is a risk that the ‘Diverted Profits’ is unworkable,” Michael O’Brien, a technology partner at accountancy firm Reeves in London, said in an e-mailed statement. “To properly enforce any such rules there will also need to be significant international cooperation between countries and different tax jurisdictions.”