Google tax: Do taxpayers want confidence or confidentiality?

Google
Donald-Drysdale By Donald Drysdale for ICAS

12 February 2016

Donald Drysdale wonders whether greater transparency is needed in administering UK taxes.

Public Accounts Committee hearing

The UK tax affairs of technology giant Google were the subject of scrutiny at a hearing of the House of Commons Public Accounts Committee yesterday.

Witnesses from Google and HMRC appeared before the Committee in consecutive sessions led by Committee Chair Meg Hillier MP.  Being held to account in the first session was Matt Brittin, President of Google Europe, Middle East and Africa, accompanied by Tom Hutchinson, Vice President of Google Inc with responsibility for the group’s global tax affairs.

Subsequently, outgoing HMRC Chief Executive and Permanent Secretary Dame Lin Homer appeared with Jim Harra, HMRC’s Director General Business Tax, and Edward Troup, HMRC’s Tax Assurance Commissioner. These three together make up half the team of six Commissioners of HMRC, who share overall responsibility for collecting UK taxes and handling taxpayers’ affairs with confidentiality and impartially.

Key points of focus

The Committee’s deliberations centred around HMRC’s six-year enquiry into Google’s tax returns covering the ten years from 2005 to 2015. This involved detailed investigation of the transfer pricing of cross border transactions within a large and growing multinational operation, whose business is constantly changing as a result of the development of new services based on leading edge technology.

It was never going to be simple. Google were condemned for setting up elaborate structures to avoid tax. They insisted that their arrangements (including transactions channelled variously through Ireland, the Netherlands and Bermuda) were intended primarily to avoid high corporate tax rates that would otherwise arise on repatriating profits to the US. They said that Ireland had given them not only low tax but also low property costs, high speed trans-Atlantic internet and (less convincingly) a multilingual workforce. They also claimed that their complex group structure had no impact in reducing UK tax.

HMRC were criticised for taking six years to complete their enquiries. They explained that they had needed to acquire a detailed understanding of how Google’s structure impacted on the group’s UK operations. They accepted that profitability was due in large part to the group’s engineering of new technologies in the US.  They also looked at the use of the Irish base for booking and invoicing sales to customers in the UK.

The Committee questioned figures for sales, profits and taxes paid, but no clear picture emerged. Google claimed to have paid tax worldwide at 19%, approximating to the UK corporation tax rate of 20%, and agreed to provide further details to the Committee. They explained away reports that they had paid UK tax at only 3%, pointing out that these were based on sales to UK customers rather than economic activities in the UK.

In spite of much press speculation that HMRC might have wrongly concluded that Google were not carrying on business through a permanent establishment in the UK, Google claimed that, had they done so, it would have made no difference to the overall measure of their UK taxable profits.

In advance of the hearing, HMRC had tried to add clarity by publishing a Factsheet on HMRC and multinational corporations. This was criticised by the Committee Chair, who found a transfer pricing example about a car manufacturer of little relevance in the context of an internet business.

The performers

This was Google’s third appearance before the Committee in four years, and of course the HMRC protagonists are regulars there. Among the Committee members, some were abrasive and other more quietly constructive, but none seemed to appreciate (or perhaps conveniently overlooked) that shortcomings in UK tax laws are ultimately the responsibility of government and therefore MPs.

The Google executives were on the defensive – Brittin even stretching credibility by claiming that he didn’t know how much he is paid. It was clearly an uphill struggle trying to defend such a complex international business structure, but of course this had been driven by convoluted tax laws, and they had the good sense to call for tax simplification.

Homer faced criticism for general failings in HMRC’s service standards (she’s accustomed to this at the Committee), but with her colleagues presented a picture of a tax administration calmly succeeding in a difficult role.

A view from ICAS

ICAS has called for six principles to be observed in building effective solutions to the problems of tax avoidance and determining the right amount of tax to pay.

  1. Tax law must work properly. The UK needs simpler, better tax legislation because it is the law passed by Parliament which the Courts must apply and which determines the tax revenues that HMRC must collect. For taxpayers to pay the right tax at the right time requires clear and unambiguous drafting of Parliament's intentions. Yesterday’s hearing illustrated the difficulties involved in administering a tax code running to more than 17,000 pages of complex legislation which few (even MPs) understand.
  2. Corporate social responsibility demands that high standards of behaviour are required all round – from CAs, ITPs, tax advisers, tax administrations, businesses and individuals. As Google and some other multinationals are finding out, reputational damage can occur, particularly where it appears that tax is viewed simply as a cost that needs to be minimised.
  3. Better information is needed. In recent public debates about Google’s tax deal there has been a shortage of properly informed comment, and this extends to other discussions about tax avoidance generally. The public deserves to be better informed, and given clear explanations of business tax complexities and current tax practices.
  4. Tax policy needs clarity. Governments need to be clear on the underlying principles which govern their approach to tax policy. They also need to be clear on which taxpayers benefit from their tax policies and why – for example, on whether particular tax reliefs are intended to support business investment or employment creation.
  5. As the Committee Chair suggested to Google yesterday, businesses ought to be transparent. Even without mandation, they should consider providing accessible and coherent narrative explanations of their overall tax contributions (not limited to corporation tax) in response to the demand for greater transparency in corporate reporting.
  6. Although not a topic at yesterday’s hearing, criminal tax evasion needs greater focus. Public debate on tax avoidance tends to vilify those operating in a lawful fashion, whilst ignoring the systematic criminality of those in the black economy.

Google's remarks to the Committee suggested that their tax strategy in the UK is changing, seemingly as a result of external factors such as the OECD’s BEPS project and the UK’s Diverted Profits Tax. This is welcome, and it is to be hoped that other multinationals will follow suit.

But is a greater shift needed?

The hearing emphasised how the UK’s strict rules of confidentiality, imposed on HMRC to protect taxpayers, prevent anyone – even a Commons Select Committee – from finding out whether a settlement such as that agreed with Google is fair to the public purse.

Is it perhaps time to review this principle of confidentiality, to see whether public confidence can be boosted by greater transparency? Share your views by leaving a comment below.

Article supplied by Taxing Words Ltd

Image credit: nito / Shutterstock.com

Topics

  • Tax

Previous Page