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Sensible solution to avoid "Tech Tax"?

Sensible solution to avoid "Tech Tax"?

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The idea of a "Tech Tax" is ridiculous. People talk about needing to tax some businesses on their sales. This is a taxation method born of madness.

Some businesses reduce their taxable profits by moving their profits into nil or low tax jurisdictions by having subsidiaries in low tax jurisdictions charging subsidiaries in higher taxed jurisdictions for "royalties" and "interest".

I would suggest that the way to counter this would be to add back to "high tax subsidiaries" taxable profits these expenses to the extent that the "low tax subsidiaries" have their tax reduced.

For example: Country A has a tax rate of 20% and country B has a tax rate of 5%. Subsidiary in country B charges subsidiary in country A £4m of royalties. The subsidiary in Country A has £3m (75% of £4m) of royalties added back to their taxable profits.

There could be a materiality test to not make the research for the calculations too onerous.

Is this a sensible solution?

 

Replies (12)

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Psycho
By Wilson Philips
04th Dec 2019 09:27

It is a sensible solution. You could call it something like, let me think ... how about Transfer Pricing? Other solutions might be things like Diverted Profits Tax, Controlled Foreign Company measures etc.

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Replying to Wilson Philips:
By petersaxton
04th Dec 2019 10:02

Diverted profits tax seems good. You dont have to limit it to royalties and interest,, you could use it for other types of multinational tax avoidance.

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By BromleyBob
04th Dec 2019 09:29

So the 25% / 75% figure of royalties that are accounted for in each country in your example is determined from the proportion that Country A's tax rate is to Country B's?

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Replying to BromleyBob:
By petersaxton
04th Dec 2019 10:00

Yes

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Replying to BromleyBob:
By petersaxton
04th Dec 2019 10:00

Yes

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Replying to BromleyBob:
By petersaxton
04th Dec 2019 10:00

Yes

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By johnhemming
04th Dec 2019 09:28

The OECD are looking at how to handle this sort of thing. It isn't that easy as there are real costs in developing software which can justify royalty and licencing costs.

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Replying to johnhemming:
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By Tax Dragon
04th Dec 2019 10:10

johnhemming wrote:

There are real costs in developing software...

And special types of coffee bean.

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Hallerud at Easter
By DJKL
04th Dec 2019 10:07

Devils Advocate, surely quoted companies will just split their existing Group into two "Groups", existing shareholders are given one share in Group A and one share in Group B, unless the new regime is to cover all cross border trade amongst all entities, or new rules re common control are used (and remember shareholdings will over time not marry, I used to own shares in Vodafone which split out to also give me Verizon shares which i have since sold), I can see a lot of wriggle room?

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Replying to DJKL:
By petersaxton
04th Dec 2019 10:18

Any splitting like that could be considered when it happens. If the two groups have similar shareholders controlling it I dont see a problem in still using the idea.

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By johnt27
04th Dec 2019 11:24

It's such as shame that HMRC are hamstrung by the ignorant monkeys that write the tax rules they have to apply in this respect. As Wilson Philips has said the legislation is there, but like IR35 it's almost impossible to use in the real world.

From my very basic knowledge of tax cases most of the TP challenges tend to be on sale of tangible items and not intangibles and so the structures used by Google, Facebook et al, which are perfectly legitimate in the eyes of the law remain unchallenged.

I also believe a tax on sales is the sledgehammer to crack the proverbial nut.

Thanks (1)
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By ms998
04th Dec 2019 11:47

Tech Firm sells phones from Luxembourg/Ireland into the UK using servers based outside the UK. Lets assume no UK subsidiary.

First question is should there be a UK corporation tax charge. If yes, then how as there is no substance in the UK.

If you aren't going to charge tax on this profit, then what stops many companies offshoring their sales process?

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