The UK government is facing scrutiny for what appears to be a particularly favourable tax deal made with Google. Chancellor of the Exchequer George Osborne initially called the £130m settlement a victory. But, after looking at the company’s £3.9bn in UK revenues for the 10-year period, it’s clear the three-percent rate is far short of the norm.
The discrepancy was highlighted by the French government’s pursuit of Google for three times the amount, which, considering Google’s UK arm generates about three times as much revenue as its French equivalent and employs four times as many people, is telling. If the Commission finds reason to believe the agreement undermines EU state aid rules, authorities could force Google to pay more.
Since the deal was finalised, HMRC (the UK tax authority) has been thrust into the firing line for accepting such a meagre sum. The authorities have saved Google tens of millions of pounds, say critics, and allowed the company to pocket almost all of its £4.6bn in UK sales. Tech companies have been able to function within European nations without permanent residency – this is the taxation loophole EU authorities have recently been attempting to crack down on. After six years of investigating the tech company’s tax affairs, HMRC has agreed that Google does not have permanent residence in the UK, meaning it will be able to book sales through an Irish subsidiary and divert profits to Bermuda. The decision will also have huge implications for the future, and limit taxation on Google and other such tech companies.
Since the deal was finalised, HMRC (the UK tax authority) has been thrust into the firing line for accepting such a meagre sum
Defending the deal, the company’s European public affairs chief Peter Baron wrote: “After a six-year audit we are paying the full amount of tax that HM Revenue and Customs agrees we should pay…Governments make tax law and tax authorities independently enforce the law, and Google complies with the law.”
Tech tax trickery
Many tech companies, such as Google, Apple, Facebook and Amazon, have been taking advantage of tax systems not equipped to fit internet companies into territorial boundaries. Their ability to shift intellectual property and revenue around at will gives them the capacity to use complicated but perfectly legal tax strategies. For years, these companies have employed thousands of workers in the UK, and have been booking revenues from British customers through subsidiaries in other countries for a much lower tax bill.
Last year, the UK introduced a diverted profits tax, aimed at large multinational corporations that would essentially force them to radically restructure their European business and pay more tax. Many tech companies have since feared the implications it could bring. Last May, Amazon became the first internet firm to abandon the tax planning strategy, ending its practice of booking UK sales in Luxemburg.
As many European countries struggle to stabilise their economies, the EU is cracking down on tax avoidance. European regulators are already making significant efforts to close loopholes, putting constraints on companies’ ability to avoid taxes on their activities in Europe. In a European Commission press release, Pierre Moscovini, commissioner for taxation and customs, said: “The fight against corporate tax avoidance is one of our top priorities, because we all pay the price.”
The Google deal detracts somewhat from the progress made to clamp down on aggressive tax avoidance recently, and now similar settlements between the UK and other tech companies are likely to follow. After HMRC claimed that Google did not have ‘permanent residence’, the company was not obliged to change its business structure in any shape or form. Unlike in France, the tax position has been set rigid for future tax settlements.
Don’t criticise me, sweetheart
Although there’s not any substantial evidence to support the claim, it’s no shock that critics have dubbed the settlement a ‘sweetheart deal’. After the tax deal was arranged, individuals such as Vince Cable and Rupert Murdoch criticised Prime Minister David Cameron and Osborne for getting too close to Google, and allowing them to exert too much influence on public affairs.
According to The Guardian, Cable said their cosy relationship with Google’s executive chairman, Eric Schmidt, “probably made it very difficult for HMRC to be aggressive in its tax settlement with the company”. Murdoch accused the “posh boys in Downing Street” of being in awe of Google. Labour leader Jeremy Corbyn asked David Cameron if ordinary people can pay the same tax rate as Google.
The lack of transparency has fuelled critics. Crawford Spence, professor of accounting at Warwick Business School told The Guardian: “This sort of ad hoc, under-the-counter deals between the government and large companies tend to undermine wider initiatives that seek to harmonise tax practices at the global level.”
Murdoch accused the “posh boys in Downing Street” of being in awe of Google. Labour leader Jeremy Corbyn asked David Cameron if ordinary people can pay the same tax rate as Google
Having looked at the allegations, the European Competition Commissioner said she was willing to investigate Google’s tax arrangements, should it come to that. She said: “So-called sweetheart deals between member states and companies are unfair and could amount to illegal state aid. We should be in union where everyone has a fair chance of making it.”
Sweetheart deals have been rather popular in Europe. The unethical ‘sweetening’ of a settlement has seen governments go easy on multinational taxation policy. The EU has already issued a ruling that the Netherlands and Luxembourg have acted illegally by granting sweetheart deals to reduce companies’ tax bills. Ireland has also come under intensive investigation for its preferential tax deals with Apple.
Investigations prior to Google’s deal have in the past three months clawed back €1.25bn from multinationals across the EU. On January 27, 31 countries signed an international agreement designed to stop multinational companies using complex tax avoiding arrangements, which will mean sharing tax information. Although critics argue that this isn’t enough, it is still a step towards making multinational companies more accountable for their tax arrangements.