COMMONS

Public Accounts Committee's previous questioning of Google

Since 2012 the Public Accounts Committee has taken evidence from Google regarding their payment of corporate tax.

HMRC Annual Report 2011–12

In November 2012, the Public Accounts Committee looked at HM Revenue and Custom's (HMRC) Accounts 2011–12, and of principal concern to the inquiry was the corporation tax paid by multinational companies. As such, Google, Amazon and Starbucks were invited to give oral evidence to the Committee on Monday 12 November 2012.

The 2012 hearings showed that international companies were able to exploit national and international tax structures to minimise corporation tax on the economic activity they conducted in the UK. In the PAC report, Members considered that these companies were not paying their fair share and that this practice was widespread.

HMRC not "sufficiently aggressive"

They concluded that HMRC was not taking sufficiently aggressive action to assess and collect the appropriate amount of corporation tax from these multinationals.

Both HMRC and corporate taxpayers were failing to meet the legitimate public expectations from the tax system. In the 2012 inquiry, the Public Accounts Committee considered that the evidence received was "unconvincing, and in some cases evasive". The first two recommendations from the Committee related to multinational tax collection.

Tax Avoidance—Google

On the 16 May 2013, PAC held another inquiry ‘Tax Avoidance—Google’ and invited Google to give further oral evidence. The Committee surmised that to avoid UK corporation tax:

"Google relies on the deeply unconvincing argument that its sales to UK clients take place in Ireland, despite clear evidence that the vast majority of sales activity takes place in the UK. […] Big accountancy firms sell tax advice which promotes artificial tax structures which serve to avoid UK taxes rather than to reflect the substance of the way business is actually conducted."

HMRC was thus is hampered by the complexity of existing laws, which left so much scope for aggressive exploitation of loopholes, but it had not been sufficiently challenging of the manifestly artificial tax arrangements of multinationals. HM Treasury was recommended to take a leading role in driving international action to update tax laws and combat tax avoidance.

"Compliant with the tax law"

At the PAC hearing on Monday 12 November 2012, Google claimed that they complied with the law in the UK, and paid the tax required by every company in every country in which it operates. Google located its companies in low tax areas or tax havens. The vast majority of Google's non-USA sales were billed in Ireland. In 2011, Google Ltd recorded revenues of £396 million from Google Ireland for the services provided by its 1,300 staff, but paid corporation tax of only £6 million. Google emphasised that anyone who bought advertising in Europe was buying from Google Ireland.

The witness also asserted that nobody in Google Ltd in the UK was selling Google products. Google conceded that, of the 1,300 staff in Google Ltd in the UK, around 700 were marketing and digital consultancy staff, who were working with customers, but not in sales. As part of an Ireland-UK tax treaty, an Irish company would be subject to UK tax on its profits earned from UK activities only if it were trading in the UK through a 'permanent establishment'. If employees of the UK company had authority to conclude contracts on behalf of the Irish company, and they habitually exercised that authority, the UK company would be a 'permanent establishment' in the UK.

Whistleblowers show discrepancies

Since receiving evidence from Google, the Committee received information from whistleblowers that showed clear discrepancies with the claims made to PAC in November 2012. On 1 May 2013, Reuters published a report 'How Google clouds its tax liabilities (External link).' The report also challenged the evidence given to the Committee that Google Ltd staff were not directly engaged in sales activity with UK clients. PAC invited Google back on 16 May 2013 to discuss the information gleaned from whistleblowers and Reuters, and whether they wished to reconsider and clarify the evidence given to the Committee in November 2012. PAC also took further evidence from Google Ltd's auditors EY, and from HMRC about the tax arrangements of multinational companies in the UK.

The whistleblowers, who included ex-employees of Google Ltd, provided the Committee with details demonstrating that Google Ltd's UK staff carried out the substance of work leading to contracts with major UK clients. This included, for example, pay slips showing sales related bonus payments, and Google documentation covering the entire trading and sales process within the UK. The evidence presented to the Committee included a diagram of the sales process interaction with UK clients, all of which were executed by UK-based staff. The whistleblowers told PAC that UK staff had been set sales targets and paid commissions for the sales achieved.

Restore public confidence

PAC made a number of recommendations, firstly, that public confidence in Google would only be restored when it established a corporate structure that ensured Google paid tax where it generated profit. HMRC was told to be much more effective in challenging the artificial corporate structures created by multinationals with no other purpose than to avoid tax. HMRC was asked to fully investigate Google in the light of the evidence provided by whistleblowers.

HMRC and the Treasury were recommended to push for an international commitment to improve tax transparency, including by developing specific proposals to improve the quality and credibility of public information about companies' tax affairs. PAC recommended that big accountancy firms should recognise that the public mood on tax avoidance has changed and should provide responsible advice to reflect the substance of transactions and operations in the UK.

Recent developments

On Friday, 22 January 2016, it was reported that Google had agreed to pay £130 million in back taxes after an open audit of its accounts by the UK tax authorities. The payment covers money owed since 2005 and follows a six year inquiry by HMRC. Google is one of several multinational companies to be have been accused of avoiding tax, in spite of making billions of pounds of sales in Britain. Matt Brittin, President, Google Europe, Middle East and Africa (EMEA), told the BBC:

"Today we announced that we are going to be paying more tax in the UK. The rules are changing internationally and the UK government is taking the lead in applying those rules so we'll be changing what we are doing here. We want to ensure that we pay the right amount of tax."

In light of these developments, the Public Accounts Committee have invited Google and HMRC to give evidence on corporate tax deals. Matt Brittin, President of Google EMEA, appears for the third time in front of the Committee.

Further information

Image: iStockphoto

Corporate Tax Deals inquiry