George Osborne has warned against demands to shake-up the way multinational firms are taxed following the row over the £130 million deal with Google.
The Chancellor insisted strengthening the existing tax system based on profits was better than moving to a levy on turnover.
Mr Osborne has come under pressure following the internet giant’s agreement with HM Revenue and Customs covering 10 years of back taxes.
He was challenged about the Google settlement while answering questions at a FSB conference in London, where he was told that corporate giants should be made to play by the “same rules” as smaller firms.
Mr Osborne said: “There is a challenge, which is the tax laws used to tax multinational corporations were devised in the 1920s and they didn’t keep pace with not just the growth of the global economy and all the trade that has happened since then, but also the growth of the internet.
“We have been trying to get international agreement to change those laws and that international agreement is coming - only last week we got 30 other countries, the rich countries of the world, to sign up to an agreement to exchange information on the tax affairs of companies, so we know what each other are up to as tax authorities and we are seeking to get a change so that they also publish that information so there is transparency.”
Critics of the Google deal have claimed that the amount the firm has agreed to pay 3% tax on its profits from UK sales, but the corporation tax system is based on profits from “economic activity” rather than sales.
Mr Osborne said: “I have heard lots of proposals about getting rid of corporation tax altogether and raising a turnover tax.
“I would just enter this note of caution: that means a business that has made no money in a particular year, it maybe in a recession or a company that has lost a big order - they would be being hit with a tax bill.
“So I think before we rush to some other solution I would try and make corporation tax work, which is a tax on profits.
“And, in particular, make sure we are taxing the genuine economic activity that happens in this country.