U.K. Takes Step That May Impact Tax Loophole Favored by Big Tech

(Bloomberg) -- A small provision buried in the budget, unveiled this week by U.K. Chancellor of the Exchequer Rishi Sunak, could eventually lead to larger tax bills for multinational technology firms.

Sunak’s plan repeals legislation that means companies based in European Union member states could stop benefiting from tax exemptions on intra-group interest and royalties payments. While the immediate impact is small, it potentially removes a barrier to future changes that could target tax haven payments utilized by big tech companies, experts say.

“This feels like an important step, albeit small, to help the U.K. curtail tax avoidance via profit-shifting,” said Paul Monaghan, chief executive officer of U.K.-based Fair Tax Mark, by email.

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Big tech companies like Apple Inc. and Alphabet Inc.’s Google have used such royalty payments to lower their tax burden, according to a report from the U.K. think tank TaxWatch. Companies can reduce profits in higher-taxed jurisdictions by having those subsidiaries pay royalties to another corporate body that technically holds the intellectual property and is based in a lower-tax state like Ireland.

Such profit-shifting helped big tech companies pay billions of pounds less in annual taxes than they would have if the U.K. portion of global profits corresponded to the share of global sales, the think tank found.

A Treasury spokesperson called it a “post-Brexit technical change” that was necessary to prevent EU companies from getting more favorable treatment than businesses based in the rest of the world.

“The U.K. abides by its international obligations including its Double Taxation Agreements, and continues to be at the forefront of global action to tackle tax avoidance, with a series of robust measures in place to tackle profit shifting arrangements,” the spokesperson said.

Representatives for Apple and Google didn’t respond immediately to requests for comment.

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The repeal will only have a 10 million-pound ($13.8 million) impact annually in the next few years, according to government estimates. There isn’t much immediate significance because of various treaties that stipulate reductions in withholding taxes, according to George Turner, executive director of TaxWatch.

“The repeal would make it easier for the U.K. to target royalties and interest payments to European tax havens if the U.K. wanted to override tax treaties, as there would not be a second layer of the directive to prevent the override,” Turner said. The decision follows the U.K.’s exit from the European Union, which means it’s no longer required to follow the bloc’s tax directives, he said.

The budget also included other changes that impact the tech sector, including money for a public-private fund to invest in tech startups, and a fast-track visa program for highly skilled researchers.

“It’s one small part in a very big story about how policy makers get their heads around the taxation of the digital economy,” said Leo Ringer, a former U.K. government adviser and founding partner of Form Ventures. “The main implication for corporates is one of essentially planning, and cash flow, and making sure they understand what those double taxation treaties look like.”

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