UK tax avoidance: New tax rule to target double Irish strategy used by Google

The proposed 'Google Tax' in the UK to stop tax dodging by companies will target inter-company fees, which have been frequently used by multinational companies in their tax strategies.

A Treasury document seen by Reuters said the new rule, which will sit outside the existing tax system, will target inter-company fees for services like use of intellectual property, and will require companies to report their potential liability to the new scheme.

Britain looks to avoid legal challenges under existing tax treaties with countries like Ireland through the move.

The new 25% tax, which would become effective on 1 April 2015, will target conduit-type structures, such as the double Irish used by Google.

The US tech giant generates more than $5bn (€4bn, £3.2bn) in UK revenues every year, but it reports the revenue in Ireland, and subsequently pays most of this to a Bermudan affiliate as a fee for using Google intellectual property.

Under the new rule, the charge paid to the Bermudan affiliate could be reduced by the UK tax authority when assessing how much profit is linked to UK activities.

With corporate tax avoidance being a big political issue in the country, UK leaders are looking to tame multinational companies with new rules, while complying with international agreements on tax.

The country has proposed a new corporation tax code, which will lead to multinationals being taxed 25% on profits derived from economic activity there.

The new rule change has been dubbed the 'Google Tax' because large US tech firms have become synonymous with aggressive tax avoidance despite making billions of dollars in profits each year in European markets.

Following Britain's path, Australia is also planning a similar tax code to recoup lost revenues. Treasurer Joe Hockey looks to earn A$1bn in revenues over the next three years from the clampdown.

A separate plan to eliminate base erosion and profit shifting approved by the G20 nations and developed by the Paris-based Organization for Cooperation and Development is underway to be implemented among the group nations.

However, the plan is not expected to become alive even by the end of 2015.