A digital dust-up

FEW subjects are as bloodless as the ins and outs of corporate tax—until they provide an opportunity to accuse a politician of coddling big business. George Osborne, the chancellor of the exchequer (Britain’s finance minister), got his critics’ blood up this week by hailing as a “major success” a deal in which Google agreed to cough up £130m ($185m) in back payments for 2005-15, in addition to the roughly £120m it had already paid. Almost everyone else, including bigwigs from his own Conservative Party, was scathing.

Tax authorities, particularly in Europe, have been stepping up efforts to claw back lost tax amid growing public anger over companies’ energetic tax avoidance. The main targets are technology giants, which have become masters at cutting their tax bills by shuffling intellectual property and profits to tax havens. In addition, governments around the world are implementing a raft of anti-avoidance measures proposed last year by the OECD. But as the Google kerfuffle shows, trying to look tough can backfire.

A ten-year bill of £250m looks light for a company whose revenue from British advertisers was $6.5 billion in 2014 alone. There may be a good explanation, but if so the taxman has not made it public. Google’s announcement that from now on it will be taxed differently, on a portion of its local advertising revenues, has done little to quell the uproar. This week a parliamentary committee announced an inquiry into corporate taxation, which, its chairman lamented, had become “a piece of elastic”.

Google won’t be the last firm targeted. Facebook is said to be resisting efforts to recoup back tax from 2010-14. The social-media firm paid just £4,000 in British corporation tax in 2014. The companies argue that they comply with all relevant laws. Maybe so, but only because the laws have failed to keep up with the globalisation of business. The mishmash of national laws and bilateral treaties covering corporate taxation dates back to when manufacturers ruled.

One question hanging over hard-to-tether digital groups is whether they should be forced to register a “permanent establishment”, tax parlance for a taxable presence, in countries where they make sales. Mr Osborne may not really be up for the fight. He talks tough and has introduced a “diverted-profits” tax, aimed at the most egregious offshore schemes. But Britain remains one of Europe’s most alluring countries in tax terms, offering numerous benefits to multinationals that others view as beggar-thy-neighbour policies.

The European Commission is trying to get EU members to pull together. It rolled out its latest anti-avoidance proposals this week. These include limits on the use of brass-plate subsidiaries and on tax deductions linked to intra-group loans, an esoteric but lucrative ruse. EU countries have already agreed to be more open about their tax rulings, which in the past often gave large companies an easy ride. The new proposals would be binding, but they have been watered down to increase their chances of becoming law. (EU tax measures require unanimous approval.)

The commission will unveil more proposals later this year, including a “common consolidated corporate tax base”, which would offer a single set of rules that multinationals could use to calculate their taxable profits in the EU. More investigations into iffy tax arrangements are likely, too. Having already targeted several of these (see chart), the commission plans to scrutinise another 300 tax rulings.

Governments in low-tax countries are responding to this assault. Luxembourg is moving towards ditching some multinational-friendly exemptions, while lowering its headline corporate-tax rate. Ireland is banning the notorious “Double Irish”, a structure that has helped Google and others shave billions off their tax bills.

How all these national and regional efforts will fit in with the OECD’s global initiative remains to be seen. In the meantime the triumphant Mr Osborne has been invited to appear before a committee of the European Parliament to discuss how, as its vice-chairman put it, Britain is becoming “a kind of tax haven”.