HMRC should lead way in reform of International tax rules

24 February 2016

The Public Accounts Committee report concludes it is not possible to judge whether a £130 million tax settlement agreed between Google and HMRC is fair to taxpayers.

The Committee's report is informed by an evidence session on 11 February in which the Committee heard from senior officials at Google and HMRC.

It finds the sum paid by Google "seems disproportionately small when compared with the size of Google's business in the UK, reinforcing our concerns that the rules governing where corporation tax is paid by multinational companies do not produce a fair outcome".

In its recommendations to Government the Committee calls on HMRC to "lead the way in pressing for changes in international tax rules to prevent aggressive avoidance by multinational companies".

HMRC should consult for rule changes

It says HMRC should consult widely on the case for changing rules that protect corporate taxpayer confidentiality "to make the tax affairs of multinational companies open to public scrutiny".

The Committee also expects HMRC to "monitor the outcome of other tax authorities' investigations into Google, and re-open its settlement with Google if relevant new evidence becomes available".

It followed Google's announcement last month that it had agreed to pay an additional £130 million in corporation tax, covering the period January 2005 to June 2015, following the conclusion of a six-year investigation by HMRC.

Chair's comment

Meg Hillier MP, Chair of the PAC, said:

"Public anger has been palpable ever since this settlement was announced and we still don't know the full details.
Whether you call it secrecy or confidentiality, this lack of transparency does nothing to build confidence that big corporations are paying their fair share of tax.
Google has been keen to parade its enthusiasm for simplicity in the tax system but the fact remains the company has chosen to set up a complicated tax strategy specifically designed to minimise its tax bill.
At the same time, HMRC itself has identified that the current penalty regime treats corporations differently from individual taxpayers.

That is why we are calling on HMRC to take a lead in reforming international tax rules. The bigger prize after a costly six-year investigation would have been to develop a new approach to the activities of internet-based companies.
We are not convinced HMRC has achieved this and it must work with overseas tax authorities if we are to see lasting and effective change in the international tax system."

On the eve of the 11 February evidence session, with Google's consent, HMRC submitted a document setting out some further facts in relation to the settlement.

HMRC did not apply penalty

We now know that much of the tax in dispute related to the application of transfer pricing rules, that £18 million of the settlement was interest on the tax due, and that HMRC did not apply a penalty.

We also know that the UK is Google's second largest market (after the US), contributing over US $7 billion in revenue in 2015, or around 10% of Google's worldwide revenue.

In its latest UK accounts, for the 18 months ending June 2015, Google reported a UK corporation tax liability of £46 million. HMRC also told us that Google's total charge for corporation tax and interest from 2005 to 2015 was £196.4 million.

Artificial tax structures serves to "avoid UK taxes"

The previous PAC's Report on Google's tax affairs in June 2013 concluded that Google used an artificial tax structure which served to avoid UK taxes rather than to reflect the substance of the way business is actually conducted.

The Committee noted that the "UK is a key market for Google but the enormous profit derived is out of reach of the UK's tax system."

It also found that to avoid UK corporation tax Google relied 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 places in the UK."

Report summary

A six year investigation by HM Revenue & Customs (HMRC) has resulted in Google paying a further £130 million to settle its corporation tax liabilities over the last 10 years.

This vindicates the previous Committee's concerns in 2012 and 2013 that Google did not appear to be paying the full tax it owed in the UK.

However, in the absence of full transparency over the details of this settlement and how it was reached we cannot judge whether it is fair to taxpayers.

The sum paid by Google seems disproportionately small when compared with the size of Google's business in the UK, reinforcing our concerns that the rules governing where corporation tax is paid by multinational companies do not produce a fair outcome.

Google's stated desire for greater tax simplicity and transparency is at odds with the complex operational structure it has created which appears to be directed at minimising its tax liabilities. Google admits that this structure will not change as a result of this settlement.

Further information

Image: PA