I have posted twice already on the Public Accounts Committee (PAC) hearing on Google today, once to anticipate it, and again to summarise some details of what was discussed. This blog is different: it's a reflection.
What did we learn form today's PAC hearing, since these hearings have no become so pivotal in forming opinion on tax avoidance in the UK, and elsewhere.
The first, and perhaps over-riding impression, is that the law is an ass. When the permanent secretary of H M Revenue & Customs can say "We understand more fully what the public think surprising" then there is something wrong with the law. Margaret Hodge is hated by the tax profession for supposedly getting tax wrong. But she doesn't. What she has helped expose is that the law on how multinational corporations are taxed is absurdly inappropriate and can lead to situations where something that is very obviously one thing can be taxed as another. So, in this case what is glaringly obviously a UK business making sales in the UK to UK customers is not taxed here. If that is not a farce then nothing is.
Second, what we leaned is that Google, Ernst & Young and H M Revenue & Customs are all willing to us any amount of sophistry to deny that all are taking part in a giant game to pretend tat this is acceptable, when it clearly is not. The language all used did in various ways ask us to suspend our disbelief, and we will not. Astonishingly Google went furthest in doing so. They admitted their customers think they're being sold to by a UK workforce who think they are selling to them and yet Google say that's not true, and there is no sale. The result is that they say they are selling into the UK and not in the UK and as such there is no permanent establishment in this country - which is the core of what this is about (although HMRC and Ernst & Young tried to pretend it was more complicated than that). But all this is, candidly so obviously an act of deception on Google's part it is absurd. I could understand Google doing that, but this is the company that says it "does no evil" proving that Schmidt's "we're capitalists" clearly excuses evil after all.
Third, Ernst & Young did themselves and the profession no good at all. They talked "hypothetically" and so looked shifty from the start and if the impression left at the end was that they would do whatever was needed to get round the tax rules whilst working within their own ethical codes, which presumably say that is OK, then they'd do it. It's not that their evidence was right or wrong. Most of the time it was just evasive. That confirmed all most would need to know about the complicity in these structures.
Fourth, H M Revenue & Customs were as shifty. It's no good saying "we get our judgements right" (when within seconds the evidence put up in support of that claim could be, and was, shot down by a committee member) or that this is an international issue on which work was being done, or even claiming that the public just have to understand that what is inexplicable is right. That's not only unacceptable, it's absurd. Lin Homer should have been saying that the result was wrong. It was legal, but wrong. And that as a result all effort was being put into international reform but if that failed (as is entirely possible) domestic measures would be taken to challenge the issue. Instead we got no such thing at all. We were asked to believe they were using best efforts, but we can see all too obviously based on the evidence that they don't. If she doesn't know that she should not be in the job. And if she does not realise excusing the inexcusable undermines tax collection elsewhere then she knows nothing of the psychology of tax. This was the most lame performance. The only shame was that the committee were tired by then and did not challenge her on what will happen when the international efforts do fail.
Fifth, we were left with the distinct impression that HMRC is not willing to challenge Google. They claimed they won 86% of all cases they take. They failed to mention how few there are and that they only take ones they can win.
So, what impression were we left with?
Candidly, of a company that does not tell the truth because it asks us to believe what is not credible. And of gullible auditors. But most of all of a tax authority that does not want to take on Google, that is not angry that t cannot collect tax and isnot demanding the tolls to let it do so and of an authority that will make excuses for inaction on its part.
In short, we have a tax system where those in authority admit they cannot or will not challenge those who are more than willing to abuse the rules that are obviously wholly unfit for purpose, and who do so with the active connivance of the tax profession.
You could say that did not change much, but I think it did. It showed that the truth no longer matters to these people: all of them showed that.
And that is profoundly worrying. Because tax is based on relationships of trust and very obviously big business is not now being taxed on that basis: it is being taxed on the basis of collective deception, and that strikes at the very heart of the system.
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One of the problems in this area is there is inconsistency between indirect tax and direct tax on the issue of where supplies are made and from which establishment of a business.
UK VAT place of supply rules determine that sales for example of goods from an Amazon UK warehouse are liable to UK VAT – which is of course paid by the UK customer – being merely collected by Amazon on behalf of HMRC. These VAT rules are dependent on EU VAT legislation. Until the direct taxation legislation becomes consistent with the indirect legislation on the definition of place of supply and place of “belonging” it will be very difficult to deal with the problem of UK trading activities generating minimal UK corporation tax. It does however seem that HMRC seems quite happy with this inconsistent approach to the same businesses.
The sting is in your last sentence
Does not such ‘sophistry’ permeate all kinds of international corporate activity? See reports of current enquiries into price fixing in the energy and commodity markets, and, as The Guardian puts it:
“Oil firms have always been keen to highlight how the vast bulk of forecourt petrol prices is made up of taxes but motorists have questioned how BP and Shell make vast profits every year while claiming to be making next to nothing from petrol sales.
“Equally, fuel poverty campaigners have questioned how companies such as Centrica, the owner of British Gas, can rake in profits of £2.7bn at a group level, including £600m from its retail business, yet claim to be operating on small profit margins in domestic supplies.”
Cameron’s response is little more than pious invocations of motherhood and apple pie – ‘After the commission’s raids, David Cameron said that anyone found guilty of wrongdoing would feel the “full force of the law”.’ There seems little reason to believe that in any of these fields our government wants to bring egregious corporate behaviour into the realm of legal ‘wrongdoing’ or to dig very deeply to uncover those cases where it already is. If things continue like this people will increasingly turn to people and actions outside mainstream political debate and systems – Nigel Farage may be only the beginning, heaven help us.
Schmidt’s “we’re capitalists” clearly excuses evil after all. No he left out the word “Crony”.
The people running these giant concerns have no time for ethics. They’re as far away from Adam Smith’s “Theory of Moral Sentiments” as you can get!
As you know I am not one of your left wing chums. But I can’t disagree with any of your comments except that the whole of the tax profession is not against Margaret Hodge. In terms of numbers, although not of influence as the big 4 dominate, the Accountancy profession is made up of larger numbers of smaller firms who along with their clients are dismayed at the favourable tax treatment of larger and international businesses over smaller UK ones.
AS a fellow member of the Institute of Chartered Accountants in England & Wales you know that the Institute’s Charter enshrines we act in the Public Interest and comply with a Code of Ethics. Why don’t you lead a campaign in your own back yard as it were, which I and other could join?
I am finite
I can’t take that on
You might – and I’ll publicise it
I watched the PAC hearing and it was very revealing about processes and ethics of business and accounting professionals, and the HMRC. It seems that multinationals and the big four are highly adept at regulatory arbitrage, and routinely do this in many areas – from financial innovation, to audit, and taxation – and make a lot of money from it at the loss of governments and taxpayers. Young smart graduates should be given a health warning when they join these top firms – their ethics and values will be compromised, and they will be participating in white collar crime, often without even realizing it. Their high salaries and promotion prospects are a disguise for purchasing their silence and full cooperation. The problem is young people also need jobs, and with property prices as they are today, jobs which pay well.
You define the creeping impact of corruption