Diverted profits, diverted investment?

Stephen Pritchard

Inside the Enterprise: The digital economy now features regularly in Budgets and Autumn Statements.

April 1 this year was no April Fool for some technology firms. The date marked the start of a new measure aimed at firms which, politicians believe, artificially move profits overseas to cut their UK tax bills.

The Diverted Profits Tax, or DPT, levies a higher, 25 per cent charge on profits handled this way; regular corporation tax, paid on UK earnings, fell on April 1, to 20 per cent.

The UK plays a significant role in the global technology industry, and technology attracts serious amounts of inward investment.

By introducing DPT, and cutting corporation tax, the Government wants to incentivise multinational and overseas firms to pay more tax in the UK rather than moving (or "diverting") profits to countries where company taxes are lower.

The measure, which was announced in last year's Autumn Statement and confirmed in the Budget, is clearly aimed at companies such as Starbucks, Amazon, Google and Apple. These are all firms with significant presence in the UK, and in the case of Apple and Starbucks, on the high street.

Such firms pay little or no corporation tax in Britain. Google is reported to have paid 20 million tax on a turnover of 5.6 billion; Starbucks paid no corporation tax at all between 2009 and 2012, according to the BBC. Instead, the companies use complex structures, including overseas headquarters and the payments of licensing fees and royalties to operations outside the UK, to cut their tax bills here.

The companies argue that they pay other taxes: payroll taxes on employees, business rates, and their customers, VAT. The Government hopes to raise 25 million from the tax this year, either directly from the DPT, or encouraging firms to keep more of their revenues in the UK, and so pay UK taxes.

For the technology industry, the new tax is more than an arcane change to tax rules. Coffee bars aside, all the biggest names being targeted for DPT are in technology. Do new taxes pose a risk that firms may decide to invest directly in countries with friendlier tax regimes?

The UK plays a significant role in the global technology industry, and technology attracts serious amounts of inward investment.

Studies of venture capital and other investment in technology regularly put the UK at the top of the list, when it comes to attracting foreign funds.

A study of VC investment in financial technology by Dow Jones VentureSource, for example, puts investment $950 million. The next largest investments, in Germany, mustered only a third of that sum. Techcrunch, the start-up industry Bible, reports that London start-ups attracted $682.5 million of VC funding in the first quarter of this year alone. The entire investment for 2010 was just a shade over $100 million.

Whether investors, and company founders, will be put off by the Diverted Profits Tax remains to be seen. Fortunately for start-ups, the Diverted Profits Tax regime only applies to companies with a turnover in the UK of more than 10 million.

If multinational technology firms are forced to keep more revenues in the UK, they may choose to invest more of it here too, and take advantage of R&D tax breaks. who knows, the technology industry as a whole may even benefit.

Stephen Pritchard is a contributing editor at IT Pro.