UK chancellor George Osborne today announced a revolutionary new measure to ensure multinational corporations that operate in the UK aren't able to avoid tax by shifting their profits abroad.
As part of his Autumn Statement 2014, the chancellor said that a new tax levy will be introduced from April 2015 to address the issue. Called the "diverted profits tax" and affectionately dubbed by the media the "Google tax", the scheme should generate revenues for the UK from major tech brands that otherwise were not paying taxes to operate in the country.
But what is the Google tax exactly? And will it ultimately affect the consumer?
What is the Google tax?
It has been much publicised in recent times that major corporations, such as tech firms Apple, Amazon and Google, plus Starbucks and several other US multinationals, were shifting their pre-tax profits on money made in the UK by their UK-based subsidiaries to other, lower tax nations, such as Ireland and Luxembourg.
It helped them avoid paying corporation tax, which currently stands at 21 per cent.
The diverted profits tax, or Google tax, enforces a new tax rate on profits that were generated in the UK but "diverted" abroad. From April 2015, any company that conducts a lot of activity in the UK but moves its profits to another country will be eligible for the new tax, which stands at 25 per cent.
In essence, as that is 4 per cent higher than corporation tax, it is hoped by the government that they will choose to pay the original rate of tax in the UK instead. As many homegrown businesses and competitors do already.
How will it affect me?
Aside from the government predicting that it will generate an extra £1 billion per year through application of the Google tax or tech firms paying corporation tax, the companies themselves will be in a quandary on how to raise the additional funds.
It is obviously the fairest solution, which will put major manufacturers on parity with smaller, British companies, but prices of products may rise to generate the additional amounts payable to the government.
Ultimately, it is highly possible that the consumer will have to foot the bill. After all, many products are already more expensive in the UK than, for example, the US thanks to a number of import duties, tax and other localisation issues. This could add on top of that.
Where it will be of benefit however is that local companies will be able to compete on prices on a more even footing, with a possible generation of new jobs for UK citizens in companies that previously couldn't match discounts afforded by online retailers who avoid paying the same tax rates.
These are hypothetical scenarios though. We will only see the benefits and pitfalls of the enforcement of the Google tax after it comes into affect for the next financial year. There's no doubt however that it should help answer a lot of issues raised in the last.
You can read more on the Autumn Statement 2014 on gov.uk.
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