Poor old Google. Well, not so poor actually. According to their SEC 10-K filing group profits amounted, in 2014, to $17.26bn. Google’s UK sales (mainly internet advertising), based upon the billing address of customers, were around $6.5bn in 2014. Lots of sales, but, apparently no profits. Google themselves told the Public Accounts Committee in 2012 that they don’t actually make UK sales. Of course, that is true. To suggest otherwise, might imply a permanent residence for tax purposes and trigger all sorts of consequences – such as paying more Corporation Tax. There are, though, sales from a Dublin registered company to people in the UK. The basic corporate tax rate in Ireland is 12.5%, in the UK 20% and in the US, 35%! So, Ireland get the business. If I buy a product from an American company or an Irish company then the sales and profits are generally accounted for in the country of origin. A British company selling in the US would account for and pay tax on the transaction in the UK. Well, that’s the easy bit. It gets much more complicated when subsidiaries are involved and there are transactions between them…as we will see.
So, what’s the problem?
Mind you, for a Professor of Accounting, Prem Sikka, seems rather naïve. He estimated that rather than the £130m settlement Google reached with HMRC the figure should have been nearer £1.8bn. I have no idea if he has the right figure. And neither does he. HMRC said that they collect the full amount of tax due on profits and no less.
Why the discrepancy?
Before, rushing to judgement (John McDonnell described the payments as ‘derisory’), let’s try and be objective.
Google pays a lot of tax.
Most of its corporate taxes are paid in the US (approximately $2.5bn in 2014). The company also pays corporate tax – at a lower level ($0.8bn) – in Ireland. Google also pays a lot of tax in the UK and collects even more on behalf of the government. Google has around 2,400 employees in the UK (though I cannot confirm the exact figure). Let’s assume that the average salary approximates to that of the Top 100 companies in the UK, namely, £31,929. So that is an annual tax bill of, say, £7.9m per annum in National Insurance Contributions (NIC for employers is 13.8% for all remuneration above £8,160). Not to mention business rates and all the taxes on consumption and irrecoverable VAT the company incurred. It might be that the tax burden on Google and other companies should be higher. Or not. But we must remember the total tax bill that companies face, not just Corporation Tax.
An awful lot of other people seem to think they know what Google should pay
It’s odd how tax campaigners always seem to know how much tax companies should pay. It is a very strange morality. Google can be forgiven for, perhaps wrongly believing that the taxes they are due to pay should be determined by the rule of law, the tax provisions set in Parliament. We do not know what Google’s UK profits are, should be, or should not be, unless there are some rules to determine the calculations.
The rules are complex and not always clear
George Osbourne introduced the Diverted Profits Tax in order to deal with large multi-nationals potentially diverting profits. Google, we are told, would not have been caught. I read the Diverted Profits Tax legislation. Like the rest of the tax code it is not straightforward, complex and requires interpretation to determine whether a company is caught by its provisions or not. This was a simple reminder of the complexity of the tax code, a point quite simply overlooked by many campaigners. Elections, claims and, indeed, judgements are invariably required.
Legislators legislate
Parliament has the ultimate responsibility to legislate. There are ways in which the tax provisions could be simplified. However, we are naïve in the extreme if we think it is straightforward to enact a national tax regime for multi-national companies. Even multi-nationals need to be protected from double taxation (the same income taxed twice in different places) and there are many provisions to prevent cost and value shifting. Indeed, there are moral issues about depriving Ireland (say) of its tax revenue from Google, when they have been attracted there by a transparent and public lower rate of tax. If a UK subsidiary pays a US parent (or a Bermudan subsidiary) for the use of the brand, what is a fair price?
HMRC investigated for six years
We do not know the actual, precise amount of tax liability, if any, in dispute between Google and HMRC. It is possible that Google and their advisors believe this to be Y and HMRC believe it to be 4Y. So, HMRC could seek to impose 4Y. And Google could stand firm on the grounds that their interpretation of the law produces Y. HMRC could go to court. They might win. They might lose. It will cost millions of pounds in direct costs and even more in opportunity cost. So, a deal is done at 2Y. Except it is not a deal, but an agreement that 2Y is the amount of tax that is due.
So, we should not join with the so-called tax justice campaigners who display a false morality about tax. The campaigners seem to think that they should be the arbiters of Google’s and other companies tax liabilities. I prefer the law to determine the liability.
And yet, my sympathy for Google is limited.
First, let’s spell out the roots of the accounting problem.
The core of the issue lies in what sales and what costs should be booked in the UK. Only then can the level of profits be determined and appropriately taxed.
If I buy a product from the US, the income and costs will be recorded by that company in the US. If that US company sells so much in the UK that they set up a subsidiary to sell those products here then the sales and costs will be accounted for and taxed in the UK (with relief given in the US for double taxation).
Problem 1. Google (and others similarly) do not officially ‘reside’ in the UK, but Dublin, or Bermuda, the Netherlands or Switzerland, where depending on the precise corporate structure corporate tax rates are lower.
Problem 2. Google sell internet advertising, but almost certainly there will be payments between subsidiaries which have the effect of transferring costs and revenues. So for example, London may charge Dublin for, say, ‘sales and marketing services’ so that the income in Google UK more closely matches it costs (employees, rent etc), and hence reducing the profits in Dublin which are then subjected to the (lower) rate of corporate tax. It also seems likely that a subsidiary in Bermuda (even lower tax) makes charges to Ireland for the use of intellectual property. There are existing rules about ‘transfer pricing’ (effectively it must be an ‘arms-length’ transaction) but what precisely would be a fair or reasonable price?.
Other issues might involve inter-company loans, charges for use of the brand and (probably not in Google’s case) payment for raw materials. The pricing of these transactions is complex and can generate very different outcomes.
In essence a low corporate tax regime should encourage investment, employment and transparency. Google should not be targeted or demonised for meeting its obligations, nor HMRC for agreeing past and (more importantly) future arrangements.
Yet, at the same time, Google is being disingenuous. There is, without doubt, substantial economic activity in the UK by Google and it is not unreasonable for a corporate tax liability to arise. The OECD is encouraging national governments to change the tax arrangements of multi-nationals so as to reflect this economic activity. In reality this cannot be achieved by individual nations.
So, the deal with HMRC is central. Confidentiality in taxpayer affairs quite reasonably prevents disclosure of the arrangements for the past. However, assuming HMRC will seek to apply consistent principles to others for the future payment of tax, it is not unreasonable to disclose those principles. It is not good enough for Google to say they will book more sales to the UK (perhaps more costs too, so there will still be no profits) nor for HMRC to hide behind confidentiality when what is needed is not details about an individual company, but details of the principles which will be adopted going forward.
Google should not be demonised. They pay a lot of tax and arrange their affairs accordingly and legally. However, it is reasonable for there to be a tax regime which does bear some relationship to economic activity. What that regime is to be, we should be told.
And, maybe, just maybe, what is at fault is the whole approach to corporate taxation. To introduce a new tax allowance or restriction is easier than to remove one – long-term consequence, less certainty and more complexity in the tax code. If a company employs more people due to it competitive advantage there are tax gains for government, economic growth, more employment and so on. Maybe we should abolish Corporation Tax and all its associated reliefs and allowances. Make the profits, invest the profits, remove the profits (duly taxed as income in the hands of the recipient), improve employment, pay and so on. Just a thought.
This article was originally published by The Centre for Enterprise, Markets and Ethics and can be found here.
