Why the taxman should beware Google geeks bearing gifts

Why the taxman should beware Google geeks bearing gifts

 

A BEAMING smile covered the face of Google’s famously prickly chairman Eric Schmidt. The internet giant’s party at the Davos economic forum had been a triumph. Billionaires and business potentates had come to pay homage — and quaff champagne and martinis. Guests included the Mittals, the Indian industrialists, and City grandee Sir Roger Carr.

As the 1970s chart-toppers Chic wrapped up their set, some partygoers took to the stage to boogie with lead guitarist Nile Rodgers. When it comes to star wattage, nothing shines quite like a disco legend.

It was little surprise that the Google chief was in jubilant mood. One of his underlings, European boss Matt Brittin, had just cut a deal with HM Revenue & Customs, which Schmidt hoped would draw a line under the controversy surrounding the company’s opaque tax arrangements.

HMRC had scrutinised its accounts back to 2005, and believed that it was owed a large chunk of cash. To settle the dispute, the Silicon Valley multinational agreed to write a cheque for £130m to cover a decade’s worth of back taxes and, crucially, pledged to pay more to the UK taxman in the future. A case that had been hanging over Google for years had been closed.

Both Google and the Treasury were quick to trumpet the agreement, which came to light as the Davos conference came to an end late on Friday.

Brittin said the deal with the taxman reflected the “size and scope of our UK business”, and was in tune with the new rules governing the international tax system that were agreed by the G20.

But critics, including a number of Conservative MPs, branded the settlement a whitewash. The £130m represents a mere 0.44% of the search giant’s overseas cash hoard. The handout to the UK taxman was so negligible that Google’s new parent company, Alphabet, did not even bother to lodge a filing with America’s Nasdaq exchange.

After years of gaming the international tax system, Google has amassed a gigantic $42bn ( £29.4bn) stash overseas. A sizeable chunk of that bounty will have derived from clients in the UK, which is its second-largest market after America.

The deal with HMRC will largely leave intact the complex arrangements that Google put in place to minimise its payments to tax authorities here and elsewhere

The company’s reputation has long been shredded by the pitiful amounts of corporation tax handed over in large economies. In 2013, for example, it paid just £20.4m of corporation tax in Britain — despite generating $5.6bn of sales here.

Google minimises the reported profits by booking revenues from advertising sold to UK clients through its international headquarters in Ireland. The Dublin office then sends licensing fees via a sister company in Amsterdam to an offshoot in Bermuda, where profits are left untaxed. In 2013, these payments amounted to €10bn (£7.6bn).

This arrangement — known as a double Irish with a Dutch sandwich — saw Google branded “evil” by Margaret Hodge, the Labour MP who was head of the powerful Commons public accounts committee. But despite such fierce criticism, the combative Schmidt declared himself “proud” of the complex corporate structures his company had created to avoid corporation tax.

Under the deal cut last week with HMRC, Google will retrospectively pay more tax for the past 10 years. Its corporation tax bill for the 18 months to the end of last June will increase by £13.8m to £46.2m. Google declined to explain the reason for this particular increase. However, accounts for its main British subsidiary — Google UK Ltd — revealed a £24m provision relating to the treatment of share awards to employees from 2005 to 2011.

In future, Google said last week, it would adopt a “new approach” to how it calculates its dues to HMRC. It would pay an extra chunk of tax “based on revenue from UK-based advertisers”.

Tax experts said the move was unlikely to lead to a substantial rise in its tax bill, and had probably been foisted on Google as a result of rules brought in by the chancellor last year to stop companies artificially diverting profits overseas. The arrangement, dubbed the Google tax, slaps a 25% charge on profits deemed to have been moved offshore improperly, instead of the standard corporation tax rate of 20%.

“The diverted profit tax created a natural incentive for companies to restructure themselves, and bring more of their activities into the UK tax net,” said one senior adviser. “Google may have wanted to do this so that they avoid the penal [25%] rate.”

In other words, Google may have jumped before it was hit with a bigger bill.

The settlement will leave the company free to operate much as it did in the past. HMRC has deemed Google’s UK office a branch of its Irish operation. Despite employing more than 2,000 people, the London office has not been designated a “permanent establishment”.

The distinction is crucial to the amount of tax that Google has to pay. If it were considered a permanent establishment, Google UK would be expected to report significantly higher profits here, and therefore pay more corporation tax to HMRC.

The G20 shake-up of the international tax system was partly designed to place curbs on the misuse of the branch structures constructed by Google and other tech companies, such as Facebook.

The French authorities are pursuing Google for €1bn in back taxes. Having grown tired of seeing revenues disappear off to the Caribbean, they argue that it has created a permanent establishment in Paris. For HMRC, it is a case of plus ca change, plus c’est la même chose.

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