Googleâ€™s tax deal raises the question of whether the government is taking too soft a tone with multinationals over their tax.
When Google reached a Â£130m settlement with the British taxman last week, George Osborne described the deal as a â€œmajor successâ€. But the chancellor and the search giant have been on the back foot ever since, accused of striking a â€œsweetheart dealâ€ that might have short-changed taxpayers and has drawn the close attention of Brussels.
Should Osborne have hailed Googleâ€™s tax deal? Did he misjudge how it would be received?
The chancellor claimed Googleâ€™s settlement was thanks to his diverted profits tax (DPT), which was introduced last year to target multinationals artificially routing profits overseas. This was a mistake.
The search groupâ€™s settlement with HMRC â€“ Â£117m in back taxes and Â£13m in interest â€“ related to a period from 2005 to 2015, during which Osborneâ€™s new tax only applied for six months. Drawing a link with DPT was especially unwise because Osborne had previously promised the new measure would force technology companies to unwind their complex tax structures which â€œabuse the trust of the British peopleâ€. As a consequence, DPT was dubbed â€œthe Google taxâ€.
In fact, the Google settlement showed HMRC â€“ even with its new DPT powers â€“ was not going to put a stop to the California-based companyâ€™s aggressive tax planning. The groupâ€™s Â£4.6bn of UK sales would continue to be routed through Ireland.
Are global businesses allowed to negotiate their tax bill?
Sorting out where in the world multinationals make their taxable profits is fiendishly complex. Billions of pounds of cross border transactions within the same group can throw up confusion about where the true economic activity has taken place.
Adding to the complexity, big businesses also try to unlock huge tax savings by arranging their internal, cross-border dealings in a way that pushes tax rules to the limit. This leads to disputes with tax authorities that often drag on for years.
The disputes are supposed to be settled in an administrative manner, without grubby horse-trading. But with the outcome of case often turning on judgment and interpretation â€“ without public scrutiny â€“ suspicions have grown that the process has become infected with political trade-offs.
What was HMRCâ€™s dispute with Google about?
Google insists its Â£4.6bn of sales to UK advertisers are conducted by some of its 5,000-strong workforce in Dublin. That being so, any resulting profits ought to be none of HMRCâ€™s business â€“ in tax jargon, the Irish business does not have a â€œpermanent establishmentâ€ in the UK.
Google and HMRC have told parliament that this structure has been scrutinised very closely. In particular, tax inspectors have tested whether, in law, Google UK is acting as a front for the business activities of its sister company in Ireland.
Similar questions have been raised by tax officials in France and elsewhere. HMRC, however, now appears to be among the most relaxed tax authorities when it comes to Googleâ€™s tax structure.
Recent tax settlement confirmed that HMRC accepts Googleâ€™s claims that its UK staff only play a supporting role to Googleâ€™s main European operation in Dublin.
Is British corporate tax law unclear?
Britainâ€™s tax rulebook now runs to 17,000 pages, and has got fatter even after George Osborne became chancellor in 2010, despite his promise to slim it down by setting up a new Office for Tax Simplification.
But the test for whether Googleâ€™s Irish operations should pay tax in the UK is largely determined by Britainâ€™s tax treaty with Ireland. That treaty, in turn, closely follows a template provided by the Organisation for Economic Development and Co-operation (OECD), a club for the worldâ€™s biggest economies.
The OECD admits the tax rules are now so abused by multinationals â€“ particularly digital firms like Google â€“ that they are close to breaking point. Using the most conservative assumptions, the OECD believes big business is shifting profits and eroding the tax receipts of economies around the world at a cost of Â£65bn-Â£160bn a year â€“ equivalent to between 4% and 10% of global corporation tax revenues.
Why is Google paying tax arrears? Did it get behind with its accounting?
Tax audits for multinational companies can involve investigations, claims and counter-claims, as well as a long appeals process â€“ all behind closed doors. They take years to settle. That creates a potential problem, particularly for stock-market listed groups that are required to regularly update their shareholders on how they are performing.
The solution accounting experts have come up with is for groups to set aside sums of money as provisions against potentially big bills for back taxes. The accounts of big multinationals frequently disclose in the small print large provisions relating to tax settlements.
Could Google have paid more tax in the UK if it had a more conventional corporate structure?
Playing the â€œwhat ifâ€ game can be red herring when you have limited information. We know that between 2005 and 2013, Google make sales of more than Â£17bn from UK customers. The accounts of Google UK would look very different If that income had been booked in the accounts of Google UK â€“ but they would also show a huge leap in the British companyâ€™s outgoings. In particular, Google UK would have paid a huge bill to other Google businesses for the rights to use the brand and software technology that has for years been developed in California. How much in profit would remain available for HMRC to tax? It is impossible to say. What we do know, however, is that between 2005 and 2013, under Googleâ€™s existing tax structure, its UK business paid just Â£52m.
How important is it for countries to try to do favourable tax deals with multinationals?
There is growing acknowledgement that countries with sluggish growth and large budget deficits aresetting aggressive tax policies which they hope will persuade multinationals to relocate to their shores. Last year one of Europeâ€™s top tax lawyers, Philip Baker QC, put it plainly. â€œI donâ€™t think in the last 20 years or so one can say that governments have driven corporation tax policy,â€ he said. â€œItâ€™s the large companies that have driven the direction of corporate tax policy.â€ Sir Marin Sorrell, chief executive of advertising group WPP, has also described corporation tax payments as â€œa question of judgmentâ€. This week Rupert Murdoch said Googleâ€™s UK tax payments were â€œtoken amounts for PR purposesâ€.
Rupert Murdoch is no powerless taxpayer against Google
Would the government really have had no part in this?
While it seems improbable that Osborne actively intervened in a particular companyâ€™s tax audit, the tone HMRC takes with big business is certainly set by government. And about 10 years ago, the tone began to change quite dramatically, with companies being treated more as collaborative partners and less as incorrigible tax avoiders.
Who is leading efforts to tackle multinationals and create tougher international tax laws?
Last year an unprecedented agreement was reached on how to reform the worldâ€™s corporation tax system: 60 countries representing 90% of the worldâ€™s economy agreed to a detail package of reforms, drawn up by the OECD, which they promised would curb the worst excesses of tax avoidance by multinationals. The plan took two years to hammer out and is being slowly implemented around the world, with some countries moving faster than others. While the reforms have yet to bite, so far there are few signs that the markets expect big companies such as Google to pay more tax.
How effective is the EU in tackling the tax arrangements of multinationals?
The EU has no jurisdiction over corporate income tax. The tax rules for cross border trade in Europe are governed by a web of bilateral treaties between countries. They are all similar â€“ though not identical â€“ and follow a template set out by the OECD. The European commission is pushing for deeper coordination of corporate tax, but faces fierce opposition from countries including the UK and Ireland. This week tax commissioner Pierre Moscovici said agreement on his radical EU tax reform plans was unlikely at least six months.
Originally published in the Guardian 30th Jan 2016