The Guardian has reported, following the Reuters report to which I referred this morning, that:
Google and its auditor Ernst & Young will be recalled to parliament to restate their evidence on the internet search giant's tax position following an investigation into Google's advertising sales practices.
Let's be clear what this is about, because it is very simple. Google has said to the PAC and to HMRC that it makes no sales in the UK. As a result all its UK source revenue is booked in Ireland and is taxed there, and not in this country. Hundreds of millions of UK tax have been avoided in my estimation as a result.
And as Tom Bergin of Reuters has found, and as the Guardian reports:
Google employs "a couple of hundred" staff at its European headquarters in Dublin whose job it was to sell to UK clients, but 700 in marketing and advising on its products in the UK.
The profiles of around 150 London-based employees on the LinkedIn networking website said they were involved in formulating sales strategy, managing sales teams, closing deals or other sales work.
Google's own corporate website was found to be calling for London-based staff whose duties would include "negotiating deals", closing "strategic and revenue deals" and achieving "quarterly sales quotas".
So the suggestion is that Google has not told the truth. Either it is selling in the UK, or not, and this is not a matter of what the contracts say, it is a matter of fact. Reuters are challenging Google's version of those facts.
But let's also be clear what is at stake here.
First it's Google's reputation, and cash, obviously.
Secondly it's Ernst & Young's reputation. If they signed this arrangement off as auditors and it's wrong they are seriously at risk from claim, but more important, from reputational damage. Remember Andersens?
And yet neither of those are the big deal. The big deal is with HMRC. Google is dealt with the by Large Business Office of HMRC, which has customer relationship managers for each taxpayer who (with their staff) are meant to crawl all over the business of each taxpayer they are responsible for to make sure the right tax is paid. It so happens that the LBO is also the division that has rather cosy relationships with business within HMRC, following the lead given by Dave Hartnett on this issue in 2006. The aim is not to confront these taxpayers, but to work with them to negotiate their tax liabilities. If, however, it's shown that despite this HMRC did not realise what was happening right under their noses, and despite their level of access to the business, then quite candidly the whole of the LBO business model that HMRC has pursued is holed below the waterline.
It's not hard to work out if someone is selling or not. It's not hard if you're HMRC to get evidence (just ask for email files - and then you'll find out: better still, look at staff structures and pay rewards for selling, plus team meeting records - which are always candid on such issues since few front line staff understand tax nuance as is obvious from what Tom Bergin has found on Linkedin). And if they did none of that? Then, I think, the future direction of HMRC is in doubt, heads should roll, the organisation should be shaken up from top to bottom and the relationship with business would have to change.
Right now memos will be being written in HMRC asking for ministerial support to limit the damage from the fall out from all this. There will be panic in the upper echelons of the organisation, and rightly so. And this time, if Google are selling here, then ministers have a duty to withhold their support. This time HMRC will have to carry the can.
Are the days of the cosy relationship over?
They're not if Google are right. But that's a slender hope based on the evidence now coming out.
Watch this space.
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When looking at this whole issue, its worth understanding some history and background. The current system of tax treaties and international structuring arose from a desire by many national governments to try and maximize the tax revenue they collect. They did this by recognizing that there are constant situations where an international corporation may be obligated to pay tax on the same revenue but numerous times. Of course this would result in no net revenue and the corporation going bankrupt. Therefore in order to attract the good or service to their jurisdiction; try to get as much tax revenue as possible; and try to encourage the corporation to set up some of its physical structure and work force in their jurisdictions, countries like the UK and US set up tax treaties between themselves and other countries (such as Ireland). It is key to understanding this underlying motivation for the current system. This system arose not out of some noble desire to relieve taxpayers of the “unfairness” of double taxation or even at the bequest of the lobbyists of those taxpayers. It came out of a logical self-interest of various governments.
With this background in mind, let’s look at the Google situation.
-Many US politicians and citizens want Google to pay US tax on its WORLDWIDE income, including income earned from UK customers. They argue that while this may not be legally correct, it is MORALLY correct because a) Google was founded, IPOed and has its headquarters in the US; AND b) The citizens of the US are suffering in a financial downturn and “deserve” this money;
-Many UK politicians and citizens want Google to pay UK tax on the revenue generated from UK customers. They argue that while this may not be legally correct, it is MORALLY correct because a) Google is deriving income from UK tax resident individuals and corporations; AND b) The citizens of the UK are suffering in a financial downturn and “deserve” this money;
-You could insert “Starbucks” for “Google” in this fact situation. Both companies want to maximize their net revenues (“gross revenues” minus “expenses including tax” equals “net revenue”). Both companies used the tax treaty network and international structuring regime to minimize their global tax burden. As part of this structure they may have to set up operations in places like Ireland; or assigned intellectual property rights to places like the Netherlands. However there are important differences between the two companies;
-Starbucks needs to respond to this “Moral but not legal” obligation demand because a) it has physical facilities in the UK which could be picketed or damaged reducing sales; and b) There are many UK competitors who could service UK customer needs and decrease gross revenues. As a result, it is logical that they may consider paying more tax than legally obligated in order to maintain gross revenues and thereby maximize net revenue.
-Google is different in that a) it does not have or need physical facilities in the UK to deliver its service; b) With all due respect to other search engines, it is not really realistically worried today about losing customers to its competitors. Therefore, the current controversy is unlikely to significantly reduce people from using its products and services. As a result, it is logical that they will not consider paying more tax than legally obligated;
The end result is that the UK push to have Google pay more UK tax is probably doomed to failure UNLESS the UK can show that Google did not properly operate the tax structure they set up. As Richard points out, whether the Reuter uncovered “UK sales team” is sufficient to undermine the Google tax structure is a legal question, not one that will be settled in Parliament or the courts of public opinion.
You are right – people do want Google taxed in the US on worldwide income – and I agree it should be once source tax is taken into account
After that all your arguments fail completely
Do you think Google has no physical resources here? Where do its thousands of people work? Get real
As I’d also say about the court of public opinion…..which you seriously underestimate
Google’s already having major problems in Europe. It may think it’s a natural monopoly. I think that very unlikely for long
Just think how much better off we would all be with all those relatively mobile Google jobs (and income tax) gone from the UK as Google seeks to reduce its permanent establishment exposure.
The rest of us can pick up the tax tab and benefits costs safe in the knowledge that Google are now legit.
Perhaps Starbucks can close too and we can have 700 empty premises in our town centres where their 8,500 ex-staff loiter outside in the hope that a few turn into soup kitchens or charity shops. That will be real success and that’s why we need to be uncompromising on big business based on the hard and diligently researched evidence produced on this very site. Let’s not have the economic tail wagging the tax dog.
One person at home can be a PE
All the tax follows
You may be right in your assertion that my arguments fail completely. However it would be helpful if you showed us all the logic that led you to state this conclusion.
PS Sorry for late response but reply notices had gone into spam folder. Will watch closer in future.
I have. repeatedly
I’ve written a whole ebook on it
In which case I don’t think I need to write another one here
Dear Richard, I am not asking you to write a whole e-book. I am simply asking you outline the failure in my logic of these following points:
-Starbucks needs to respond to this “Moral but not legal” obligation demand because a) it has physical facilities in the UK which could be picketed or damaged reducing sales; and b) There are many UK competitors who could service UK customer needs and decrease gross revenues. As a result, it is logical that they may consider paying more tax than legally obligated in order to maintain gross revenues and thereby maximize net revenue.
-Google is different in that a) it does not have or need physical facilities in the UK to deliver its service; b) With all due respect to other search engines, it is not really realistically worried today about losing customers to its competitors. Therefore, the current controversy is unlikely to significantly reduce people from using its products and services. As a result, it is logical that they will not consider paying more tax than legally obligated;
-With regards to Google already having employees in the UK, I would venture to say that given modern technology and the fact that in a modern B2B world (i.e. Google Ads), most sales are no longer done with face to face meetings, that Google could well be in a position to continue to maintain its UK customer base without having UK based employees. This is just a business reality that Starbucks does not have as an option.
We await your thoughtful response.
Your claim is just wrong
Google has got extensive physical facilities in the UK
And it has them because it is very definitely worried about losing customers
And yes – sales are done face to face. You clearly have no idea how business works still. It’s no an automated world
Since all your assumptions are wrong, so are all your conclusions
I don’t have to be especially thoughtful. All I have to do is observe the facts
I think David’s point is that Google don’t need anyone in London; they could all sit in Reykjavik enjoying fresh air, good seafood and access to the main data cables running between Europe & America, settling deals via videoconference. And as long as consumers see Google as ‘free’ and facing no realistic alternative, they’ll keep using it – unlike Starbucks, where they notice every transaction because it costs – and there are loads of very viable alternative domestic suppliers too.
Once all Google’s employees are genuinely and incontrovertibly outside the UK, you;ll really struggle to find any nexus of tax under current systems.
Absolute nonsense
They are sales people – 700 of them
Shall we deal in reality here?
But isn’t the reality that EU law says that Google can sell to any EU country from just one EU country – i.e. Sell to the whole EU from Ireland and that it doesn’t matter under EU law where the people are etc, but merely where the invoices come from?
Doesn’t EU law override UK law in this matter?
Note: I’m not supporting either side in this argument – just stating what I think to be the current position. Whether EU law needs changing is another matter.
They can sell from where they like
But they can’t break national tax laws
Totally different issues
I’m sure the staff in the LBO knew what was going on, no doubt senior management there told the staff everything was OK with the arrangement.
I’d be interested to know how many staff and management in the LBO have subsequently moved to their “customers” after leaving HMRC.
That is an excellent question! I have no idea how you would find out. Although it would be amusing if the gamekeeper turned poacher then turned gamekeeper again. Oh the irony.
Reality is that if Google thinks those 700 employees expose it to significant tax then their jobs will disappear from London very quickly. Google may have to pay up for the time they’ve been in London, but don’t think that they’ll roll over and offer to stay in what they perceive as a hostile environment any longer than they have to – _that_ is fantasy thinking, unless and until Parliament changes our tax laws (and treaties).
And how are they going to sell in their second biggest market in that case?
And since the PE rules are OECD based how many other countries will follow the UK’s lead?
And haven’t you noticed what the OPECD and G8 are doing?
“IF” ( and I capitalized it as a big “IF”) Google’s UK staff activities have been found to have undermined the basis for its legal tax avoidance structure, then it will sit down and ask the following business questions:
1) Can these activities viably be done remotely without a drop in gross revenues?
1) Will the relocation of these jobs to another jurisdiction cause more of a drop in gross revenues than the increase in tax to be paid in the future?
The answer by Google of these two questions will determine if Richard or Guest are ultimately proven right.
Only a fool would think Google can sell remotely
Davey
If Starbucks left, there would still be a demand for coffee. Small coffee shops owned and run by British people would take up the slack. Or do you not approve of British people running businesses?
Furthermore Google have people here for a reason. They earn profits for Google.
Spot on James
Weirdly narrow minded view being displayed by many here today
I wonder how many are paid to promote them?
Absolutely correct, James. The demand for coffee is immutable. I also didn’t realise the none of the 8,500 people were British so thanks for pointing that out.
Oh, I like irony
Whitbread & Costa will take up any vacant premises they just announced 12000 new jobs in their 5 year expansion plan
The whole large business strategy is rotten and must be proved. Having a random look at this stage, I can see that all the big issues, ranging from the victimisation of the whistleblowing that exposed the sweetheart deals to this Google let off, goes back to the LBS – large biz strategy. HMT always get told how much is recovered to persuade them to back the strategy but nobody bothers to assess what wasn’t brought in! This is what needs to be determined by an independent inquiry.
The more we learn about Google the more I come to believe that a simple four letter word covers its “tax arrangements” and that is a “sham”. On paper the “tax arrangements” are being implemented based on something that exists on paper alone and not on the commercial reality of its business operation.
I don’t imagine for one minute that it is alone though, I believe that there are many other multi nationals operating their own tax shams.
Sadly, evidence is amounting which appears to indicate that a two tier “tax system” operates now in the UK. A light touch approach for “Big Business” (and I suspect the managers and owners of “big business” too) and the proper enforcement one for the rest.
HMRC have rather niaively believed that “Big Business” would not stoop to tax evasion. However, shouldn’t someone remind them of the recent scandals at too big too fail banks! This is by no means unique to the financial sector and I’m sure readers will be able to cite other examples of corruption in big businesses in other sectors.
Why should we assume that “Big Business” wouldn’t pay lip service to the rules in order to dodge tax?
The truth is that HMRC does not currently have the resources to go after big business, because some years ago the neo liberal narrative decreed that it is low risk and hence only light touch regulation is appropriate!
I think as yet we cannot say sham – and I would not
But it is certainly a giant game of cat and mouse
And the question is whether they have followed the rules
OK that’s a fair point, I have been too hasty to judge based on the evidence available. It will be interesting though to see what turns up next!
Richard, remember we have a unique legal interpretation of “sham” in England arising from Lord Diplock’s orbiter statement in the Snook case. Despite being made in the context of a non-tax case the tax avoidance industry has, not for the first time – elevated it to a definitive interpretation. In the US, sham retains its ordinary meaning and this would be sham. The tax returns filed does not seem to reflect the reality. That’s got to be sham.
That’s why I was careful!
‘But they can’t break national tax laws’
But doesn’t EU law re Single Market etc override UK law?
Perhaps ‘Monk’ could comment?
One is commercial law
The other tax law
They are different
And do not conflict
Google can of course trade from Ireland. That Irish company is liable to tax in the UK f it trades here
There is no override here. Tax fraud is a criminal offence under both the common law (cheating the public revenue) and in statute (Fraud Act). If you send in a tax return with figures claiming that sales done in the UK were made in Ireland the issue is simply the domestic matter of fraud under UK law. EU law allows use to use international structures etc but it doesn’t permit you to defraud the UK Exchequer. So in this context it’s irrelevant. Multinationals, just like domestic concerns, are bound to obey the criminal law of the land.
Couple of points:
– why would a company registered in Ireland send in a tax return to HMRC?
– doesn’t the Single Market legislation allow a company to be set up just in one EU country and sell products to all other EU states, in which case tax is due in the state where the company is registered?
I’m not saying what it should be or what is right or wrong about this, but trying to understand the current position.
a) Because it trades in the UK
b) No
Google are freeloaders (like many large cos) They want the protection of the UK state for themselves and their staff but don’t want to pay for it.
Their philosophy of “You can make money without doing evil.” sounds great but is fatuous when they don’t want to pay their fair share and are busy sucking up to the chinese government.