As the Guardian (and almost every other paper) reports this morning, the Public Accounts Committee has issued its report on the latest Google hearings.
Margaret Hodge was explicit:
Google generates enormous profits in the UK. But despite an $18 billion turnover between 2006 and 2011 it paid the equivalent of just $16 million in taxes to the UK government.
Google brazenly argued before this committee that its tax arrangements in the UK are defensible and lawful. It claimed that its advertising sales take place in Ireland, not in the UK.
This argument is deeply unconvincing and has been undermined by information from whistleblowers, including ex-employees of Google, who told us that UK based staff are engaged in selling. The staff in Ireland simply process the bills. Google also conceded at this second hearing that its engineers in the UK are contributing to product development.
The company's highly contrived tax arrangement has no purpose other than to enable the company to avoid UK corporation tax.
Google's reputation has been damaged by these revelations of aggressive tax avoidance. That damage will not be repaired until the company arranges to pay its fair share of tax in the country where it earns the profits from the business it conducts.
As usual, Margaret is exactly right - which is precisely why the tax profession hate her so profoundly.
But then, she was also right about them:
This committee has vigorously condemned the activities of the big UK accountancy firms in helping their clients find loopholes in legislation and establish highly artificial tax structures. These firms must recognize that the public mood on tax avoidance has changed and that the time has come for them to advise their clients responsibly.
As is very obvious, such responsibility os not on their agendas at present.
But in case anyone thought she'd found a silver lining Margaret Hodge also had harsh words about HMRC:
HMRC has not been sufficiently challenging of multinationals' manifestly artificial tax structures. We accept that HMRC is limited by resources but it is extraordinary that it has not been more challenging of Google's corporate arrangements given the overwhelming disparity between where profit is generated and where tax is paid. Inconsistencies between the form of the company's structure and the substance of its activities only came to light through the efforts of investigative journalists and whistleblowers. Any common sense reading of HMRC's own guidance and tests suggests HMRC should vigorously question Google's claim that it is acting lawfully. In contrast to evidence given to us previously, Google has also conceded that its engineers in the UK are contributing to product development and creating economic value in the UK. We note that HMRC has never challenged an internet-based company in the Courts on the question of its permanent establishment.
I think she will be just one of millions sharing those sentiments.
So, what's to be done? The recommendations are clear, and I endorse them:
- Public confidence in Google will only be restored when it establishes a corporate structure that ensures Google pays tax where it generates profit. This should be addressed as a matter of urgency by Google and other companies with a similar corporate structure-the Committee will continue to pursue this issue over the course of the Parliament.
- HMRC needs to be much more effective in challenging the artificial corporate structures created by multinationals with no other purpose than to avoid tax. HMRC should now fully investigate Google in the light of the evidence provided by whistleblowers.
- HMRC and HM Treasury should 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, and use that to information to collect a fair share of tax from profits generated in each country. This data should include full information from companies' based in tax havens.
- The professional bodies of the accountancy profession should emphasise the importance to accountancy firms of behaving responsibly in selling tax advice to clients, and in reaching audit judgements on the substance of their clients' UK operations and structures.
The profession and business may hate it - but this cannot be ignored. And nor is the issue going away.
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The whole “we complied” with the law mask is gradually slipping. What the whistleblowers alleged is fraud and the PAC are right to call for a full inquiry by HMRC. Note that in their statement Google claimed they complied with the law, welcomed the reform of international tax rules BUT NOT the inquiry demanded by HMRC! If they complied with the law they should be welcoming the inquiry as an opportunity to prove it and repair their tarnished reputation.
Sadly, asking HMRC to conduct the inquiry is like asking a student that failed an examination to re-mark his or her paper! They’ll cover up their failings exposed by Reuters and whistleblowers and hide it all behind taxpayer confidentiality as usual. But well done Margaret Hodge and the PAC.
HMRC needs the funding as well as the will to perform its duties and while Osborne’s in charge it won’t get it. I’m not hearing reassuring noises from Labour about this either. Austerity’s a great excuse for not giving HMRC what it needs to do its job properly and grateful Googles, Amazons and Starbucks etc will no doubt find a way to reward parsimonious ex-chancellors with consultancies and directorships. Follow the money and there’s your answer for everything we’re seeing. Hodge’s committee have done admirable work but lamenting a situation doesn’t address it.
HMRC finds the resources to target hair dressers and cleaners so lack of resources is not the real problem here. In fact Lin Homer keeps saying they have enough resources to do the job!
She’s wrong
And she’s been wrong in the last few jobs she’s had
HMRC always target small business becasue HMRC ‘expect’ small business to be evading tax – hiding/not recording sales, inflating costs etc.
It’s quite right and proper they do that, but whether they allocate too much resource to that as opposed to resource at large busienss quite frankly isn’t clear to me 🙂
Which is probably why she was awarded the job she now has 🙂
Hodge; “So, Osborne, who’s going to be in charge of HMRC?”
Osborne; “Homer”.
Hodge; “D’oh!”
From HMRC’s explanation of corporation tax:
” Non-resident trading companies which do not have a branch in the UK, but have UK customers, will therefore pay tax on the profits arising from those customers in the country where the company is resident, according to the tax law in that country. The profits will not be taxed in the UK. This is not tax avoidance: it is simply the way that corporation tax works.
Most major economies operate corporation tax in the same way as the UK, so UK-resident companies are treated in a similar way in other countries. In other words, UK companies do not pay corporation tax to another country on the profits from sales in that country, unless they trade through a branch based there. Instead, they pay corporation tax in the UK”
Don’t make a fool of yourself Tim
The avoidance is in creating a structure where it is claimed there is no UK branch – and you know it
EU law specifically states that you can sell into any EU country from a corporate base in just one of them. This just isn’t avoidance.
EU law says nothing about permanent establishment abuse – although the EU does say it should be tackled
The claim is Google is not selling from one country to another
Maybe you haven’t kept up Tim?
Yes your quite correct Tim it’s not tax avoidance. Since it’s not selling from Ireland into the UK, but rather blatantly selling from the UK into the UK while claiming the opposite, then it’s tax evasion.
Thank you for pointing that out.
Now do you agree that given this apparent tax evasion which the non-partisan committee has pointed out, that HMRC should launch an investigation and prosecute if/when enough hard evidence is gathered?
I don’t think it’s evasion until proven
On transfer pricing …
It seems to me that Google’s business plan was to make sales out of Ireland and hence, under current tax laws, have profit attributed to that Irish sales operation. I don’t have a problem with that – If a business wishes to locate in Ireland and run it’s business form there fine by me.
What is now emerging is that in practice, that is not what is happening in the Google business and UK staff are intrinsically involved in the sales process. What that suggests is that their business model and tax model are at odds with each other so the whole transfer pricing model they are operating just isn’t fit for purpose.
I am guessing the business model is actually quite complex and staff in various locations work as teams in the sales/business processes – that suggests a profit split method might be much more appropiate than trying to identify specific transactions and apply prices to them (which is what I would guess they have tried to do).
Time for HMRC to throw some resource at this and nail it down properly.
I advocate profit split
I bet it is not being used here
You hit the nail on the head, Verth. That was precisely what the PAC found out; not due to any work by HMRC but by investigative journalism (Tom Bergin of Reuters) and whistleblowers (eg Barney Jones). Therefore, it is nothing to do with international treaties and does not even require complex accounting principles. The simple issue is whether there has been a fraud. The tax statutes and treaties do not apply in vacuum; they apply against the background of the criminal law of the law including the common law offence of cheating the public revenue. When HMRC takes a matter to a tax tribunal rather than the criminal court (in the exercise of their care and management discretion) the presumption is that the criminal law does not apply so the judges are restricted to the words of the statutes and accounting principles. But here you have a whistleblower providing plenty of evidence indicating that sales recorded in tax returns as having been made in Ireland actually took place in fact in the UK; that raises an issue of fraud and a criminal investigation is required to establish whether the criminal law (not the taxing statutes and accounting rules) has been breached.
I personally doubt that there’s fraud. As Pellinor notes below it may well be Google have cocked up their implementation and what happens in practice isn’t what they intended, but that doesn’t imply fraud. Assuming that sales are being made in teh UK, it is more likely it’s bad internal communication that has led to wrong information being provided to HMRC – the guys that explained the business model to HMRC may well have done so in good faith, not realising that practice on the ground was different from what they were explaining to HMRC.
And as Pellinor also notes, it is far from clear at this stage whether or not the whistleblowers and press have misinterpreeted what is actually happening. It is not celar that sales are being made by UK staff or , as Pellinor points out they are acting similar to estate agents.
A more in depth investigation is required to nail it down.
Agreed
“it is more likely it’s bad internal communication that has led to wrong information being provided to HMRC — the guys that explained the business model to HMRC may well have done so in good faith, not realising that practice on the ground was different from what they were explaining to HMRC.”
I wonder if HMRC accepts this as an excuse from the small guy.
I think Nero is making the same point I made yesterday – what sort of investigation will HMRC carry out. Civil or Criminal? To determine whether there was fraud or merely neglect or mistake you have to conduct a criminal investigation even if you decide to deal with any fraud found under the civil fraud procedure. But in exercising their care and management powers HMRC have laid down as policy that companies within the Large Business Service do not engage in fraud. So it will invariably carry out a civil investigation (to see whether there is neglect or mistake) and we will never know whether there was fraud. That’s the problem with our ligh touch, collaborative strategy that differes markedly from what the IRS do in the States.
Purely anecdotal, but at my work we received a promo offering discounts on buying advertising from Google (photo at https://pic.twitter.com/KGCX8rx8oT) which definitely looks like it’s Google UK who are trying to sell to us – the bottom of the letter gives a name for someone at “Small Business Marketing, Google UK Ltd”, and the terms & conditions on the back refer to Google UK not Google Ireland, which is not mentioned anywhere. To my inexpert eyes, it seems pretty clear which company is trying to sell us advertising.
Are they trying to sell you advertising, or are they trying to get you to buy it? There’s a big difference for tax purposes, even if it looks quite similar on the ground.
It’s like estate agents: when you buy a house they work very hard to get you to buy the one they have available, but they don’t sell it to you: you actually buy it from the current owner, even though you never meet them and may not even have any idea who they are.
Estate agents look very much like property dealers – they even talk about having a big stock of houses available for sale – but that doesn’t make them principals, and they certainly don’t get taxed on the sale of the property.
Nonsense
PAC has said – and the evidence is there for them – that Google UK is principal
PAC has said it, based on whistleblowers who may or may not appreciate the nuances of tax law as it relates to PEs. That doesn’t make it true, not by a long stretch.
I’m quite happy to believe that Google may have cocked up the implementation, and that what happens in practice isn’t what they intended to happen. In which case that’s good news for the Treasury, bad news for Google, and evidence that HMRC needs more resources to check this sort of stuff properly.
But then Google may have got it right, and the whistleblowers may be wrong. For example, the whistleblowers may be getting bonuses based on “sales” in the same way that estate agents do: that is, despite the fact that they’re not actually selling.
Until it gets looked into fully, I couldn’t call it one way or the other.
Which is why I say I have no evidence of Google doing anything wrong but I want it looked at
I read yesterday about how Amazon is being forced to apply and collect sales tax in US states on a ‘click’ basis. I just wonder whether the technology behind this could be enhanced to cover use of such as Google’s services.
That would be possible….
We already do this. VAT on online sales (except, bizarrely, electronic services like ebooks) is paid at the rate of the country of destination. Here the US is catching up with the EU system.
Under the palce of supply rules, VAT on goods sold to consumers is paid at the rate in the consumer’s country. VAT on services to consumers is at the rate of the supplier’s country.
The anomaly is just that electronic goods like e-books are treated as services. I’d say they’re intangible goods and should be treated as goods, but that’s a policy decision for the EU, and I can see why they take the view that they’re services (the dividing line is clearer, for one thing).
One question with Google is whether advertising services provided by a US company, under a contract between an Irish one and a UK client, and intended to be seen by UK audiences, should be regarded as provided (for direct tax purposes as well as VAT) in Ireland or in the UK (or indeed in the US). This is another policy decision. At present for VAT they’re where the customer is (ie the UK), but for direct tax they’re where the contract is signed (Ireland, apparently).
Should there be different rules for VAT and direct tax? It might be a lot easier all round if they were the same, but then I can see quite a few complications.
The ebook is changing later this year – or next, one of the two
Destination based sales has to be the future for CT
On a unitary basis of course
Yes, though I’m slightly worried that they’re shifting the line too far the other way. By making all electronic services provided where the customer is they add a lot of complication – the one-stop-shop should alleviate some of that, but it won’t eliminate it.
Destination-based sales for CT would also be a complication for my SME customers who are trying to reach out to the EU. The marginal cost of taking on your first customer in say France is already very high, but at least the PE concept gives some leeway on the tax side. Taking away that de minimis may well mean expanding internationally becomes unviable.
Pascal Saint-Amans seems to disagree with regard to unitary taxation or formulary apportionment:
“…[This] would require that all jurisdictions across the world – and we have 190-plus states, plus jurisdictions which are tax-sovereign – to agree on criteria and trust each other enough to rely on the information on the consolidated accounts which will held in the headquarters of the group.
“I just don’t see this happening any time soon.”
But he would: the OECD has a vested interest in arm’s length pricing
It doesn’t mean he’s right
“Destination based sale has to be the future of CT”. Well I guess that means for the UK, as I understand we are a net importer, we may be better off. However, would the Chinese or Germans really agree to this as significant net exporters? If they don’t agree, and we adopt unilaterally, there has to be double tax as there will be two different systems trying to tax the same income (our new system based on destination and their current system based on source).
@Carol, never of course! I was wondering the other day how we have the evasion, (lawful) avoidance and mitigation triad in tax (especially for big corps and the wealthy) but not in social security. In the good old days, the common law offence of cheating the public revenue applied to what we now call avoidance, which is purely a legal fiction constructed to sustain the lucrative tax avoidance industry.
How could a company like Google “cock up” the mainstay of their tax structure and then lie to Parliament about it? The whole scheme only worked if you booked the sales in Ireland and we know the figures for UK revenue and UK tax so it cannot be an isolated example. Mind you, 60-70% of the revenues routed through Ireland involved the UK staff in question who outnumber their Irish counterparts greatly. Anyone that reads the Reuters report and the PAC report and listens to Barney Jones will not be in any doubt that there is a massive fraud here. Let’s call a spade a spade for once!
The PAC has struck for common sense
Tax law is not always commonsensical
The need for reform is proven
Point I was making was that in a large organisation the posibility for mis-communication is greater than in a smaller company, so it’s more likely to be a possibility.
The typcial reason the small guy can’t use that ‘excuse’ is becasue it’s simply not possible to say that you’ve mis-communicated with yourself – At the other extreme where there’s a one man band – And it’s quite difficult to argue that in any small business – But I have come across it even in a 2 man company where one guy didn’t share with the other what he was doing, so it is possible even in a 2 man company/business. A pretty unhappy state of affairs which quickly led to the break up of said company and them parting ways.
And if they have cocked up, then that doesn’t necesarily mean they was lying to parliament – It means they were saying to parliament what they thought the true state of affairs was – that isn’t lying if you’re basing you information on mis-information. May be semantic but that’s my view.
I’m not really defending them by the way. If they’ve made incorrect statements based on misinformation then it’s pretty shoddy to say the least. One would hope they’d checked their facts before making statements to parliament, but if they haven’t checked properly and it turns out that UK are involved in sales so they’ve given incorrect facts to parliament then they deserve to have the book thrown at them.
I think you may be closer to the truth than most
But then a good reason for not doing tax abuse is that it’s usually impossible to work the schemes on the ground
@Verth, I’m not sure I will personally be too keen to excuse a company like Google for ‘shoddiness’ given that we’ve always been told that their advisers are wizards that can do anything and do it perfectly legally when we complain about their abuses; nor is size an excuse, if you think about it.
This is also a cultural problem. It took the Americans to convince some of us that our bankers can actually commit fraud. I see the same reluctance to use the ‘F’ word on tax evasion dressed up as tax avoidance; so we keep generating adjectives like ‘aggressive’, ‘egregious’ etc to avoid calling it evasion!
I’ve just done an interview for Radio Sheffield on Google tax avoidance. Will post Listen Again link tomorrow.
Not sure that you are right about why some of the tax profession don’t like Margaret Hodge. My take is that they get annoyed with her as they simply think that most of the positions she takes are incorrect and that really annoys them as they are trained have an excellent grasp of the detail and facts and so it’s simply not in their nature to play fast and loose with the facts. After all as a client you want them to be very particular when they are doing your tax compliance.
So, they are not shaking in their boots about the reduction in their work (and fees) that may occur as a result of the tax avoidance debate. It’s a pretty small part of the business these days. They are too commercial to be worried about that and realise this debate is creating a whole heap of new work. Most are in the business of making money rather than because they have a great love of designing esoteric tax schemes. I wouldn’t anticipate a massive exodus of tax people from the Big 4 if I were you.
Is she wrong?
Or she’s pointing out change is necessary – and that’s what really upset them
Don’t think so. Change is very good for their business. In fact it’s the life blood of it. So I can’t see why they would be upset simply because of change. They make money from all the advice that change entails. And a wholesale change of the tax system would be the biggest earner ever. It’s almost inconceivable how much advice would be required on any transition between systems.
i think mary is right, change it tax rules create huge amounts of work for the industry and more advisory work.
i think the main issue wiht Margaret is that (sort of understandably given the way the media works today) she boils everything down to a 5 second soundbite to get the issue in the papers which often misrepresents the totality of the position
most people on here I think are agreed that there needs to be a proper hmrc investigation of google to find out what really happened – margaret has said they are deliberately avoiding tax and “being evil” ie she appears to be judge and jury without all the facts that an investigation would uncover.
I think I have previously pointed out the disparity between the VAT treatment of place of supply rules (mentioned by Pellinor) and those for where profits are “earned”, but HMRC are either unwilling or unable to align these rules (VAT legislation is based on EU VAT directives). However it is also the case that the Large Business Service does not seem to pursue potential missing tax with the same vigour as in the SME sector – possibly because it is much harder work. This is either because they do not want to “upset” their relationship with the “customers” or because they do not anticipate that any substantial amounts of additonal tax will be generated – anecdotal evidence is that if the additional tax is likely to be less than £50,000 the inquiry is not pursued.
it’s the cosiness; even Amyas Morse of all people have told the PAC in a public session that HMRC have no record of the returns from their compliance work relative to the input. the policy under Hartnett was to take compliance to the boardroom whereby he and his acolytes decide what tax should be paid with the companies top dogs.
the Oxford University Centre for Business Taxation provided the intellectual cover for this dodgy tactics including by their 2007 conference titled ‘Beyond Boundaries’, which all but argued that the law should be got rid of in favour of deals.
http://www.sbs.ox.ac.uk/centres/tax/Documents/BeyondBoundaries.pdf
this is a taster from the introduction:
It is the task of the law to draw boundaries. The need for practical solutions and applications of rules demands that our legislation and courts give binary answers on questions regarding legal definition, status, and liability. The complex facts that arise in reality rarely lend themselves to straightforward yes and no answers. In drawing such boundaries, therefore, pragmatic decisions have to be made and hard cases have to be dealt with. Tax law is no different from any other area of law in this respect, except that the resources available to test the boundaries are often very great, given the large amounts of money involved. The most obvious issues arise over the geographical boundaries which, under our current tax law, determine the allocation of revenue between different jurisdictions. But there is another set of boundaries that is of major significance in any discussion of taxation: this consists of the boundary between illegal evasion and ‘legal’ avoidance and the boundary between what is sometimes termed ‘acceptable’ and ‘unacceptable’ avoidance.
The Centre for Business Taxation (CBT) organized a conference in the summer of 2007 entitled ‘Corporation Tax: Battling with the Boundaries’, with a view to discussing both sets of boundaries. … It will be noted, however, that we have not entitled this volume ‘Battling with the Boundaries’ but rather ‘Beyond Boundaries’. We do not deny the continuing importance of the boundaries we have outlined, but we consider whether the time has come to go beyond the concerns about line-drawing. A precise boundary is clearly impossible and even undesirable, given that any such boundary would be an instant target for tax ‘planning’ activity. Could it be that what matters now is not whether the boundary lines are clear but how we deal with the inevitable lack of clarity? As Liptak points out in his chapter, ‘uncertainty is a reality’. What we need to do is to manage that uncertainty within a
legitimate and practical framework with minimal interference with commercial or family arrangements but giving revenue authorities (and thus the generality of taxpayers) defences against the more excessive activities of the tax avoidance industry.
If HMRC has no record of the returns from its compliance work how can Lin Homer quote figures to the PAC? And why object to a conference that argues we have to cope with uncertainty? We might disagree on how to do it but can we not discuss how?
The conference (which was sponsored by the Hundred Group that have done extremely well under the collaborative, light touch approach) failed to address the main reason for the uncertainly — unrestrained tax avoidance by the biggest corporations the wealthiest individuals while HMRC refused to take test cases in courts so that the law can be established. In fact, a theme of the conference is that the courts can be relegated for cosy deals the way HMRC under Hartnett did from 2006.
The recent PAC report found that HMRC have never taken a case to court to let the judges establish what constitutes ‘a permanent establishment’ for companies like Amazon and Google. Given the enormous tax stake, isn’t that a scandal? Yet that is what the collaborative approach by HMRC demands; what the Hundred Group prefers; and what the Oxford Centre facilitates with their proposal to resolve matters outside the courts.
The big companies take HMRC to court when it suits them. Vodafone challenged the legality of the old CFC law enacted during Nigel Lawson’s chancellorship on the grounds that it breached EU law. For years they were happy to litigate until they lost in the Court of Appeal in 2009 and the court refused them permission to appeal to the Supreme Court. Did they challenge the assessment HMRC made in court? No, they struck a sweetheart deal instead. In fact, once Vodafone lost in 2009, Dave Hartnett launched a new approach for settling historic CFC and transfer pricing disputes under which the sweetheart deals with Vodafone, HSBC and other companies were struck. You would have thought that having won a 10 year battle to establish the legality of the CFC legislation that HMRC would insist on their historic assessments and let the courts establish the application of the law to companies structures but Hartnett chose to settle. What’s more, the CFC legislation was then changed by a working group of HMT (basically Big 4 accounting firm’s secondees) and tax bosses of companies like Vodafone and HSBC to suit the companies’ existing structures.
Insiders knew that with the legality of the CFC legislation under EU law established the companies faced a huge tax bill but thanks to Hartnett they settled for a fraction of what they owed and got the law changed for the future! So going back to the point about how to resolve uncertainty, the CFC legislation came into force in 1983 and was repealed last year but there is no case law on how it should apply in practice because the companies refused to take a case to court and HMRC were happy to do deals. So, on what legal did Hartnett strike these multibillion pounds deals done? That is the collaborative approach in action — no law, no courts, no HMRC’s lawyers; just Hartnett and one or two acolytes and his present employers in Deloitte and HSBC. Mind you, £4.2 was recovered from Vodafone and 3 other companies alone. HMRC account for this as a net gain but how much did not lose in the process?
I very much doubt that any substantial amount of action will be taken against Google:
“So what specifically does Google provide to the government? “Highly offensive information” it appears.
That metadata includes which version of the operating system, browser and Java software are being used on millions of devices around the world, information that U.S. spy agencies could use to infiltrate those computers or phones and spy on their users.
“It’s highly offensive information,” said Glenn Chisholm, the former chief information officer for Telstra Corp (TLS)., one of Australia’s largest telecommunications companies, contrasting it to defensive information used to protect computers rather than infiltrate them”
http://www.zerohedge.com/news/2013-06-14/thousands-firms-trade-confidential-data-us-government-exchange-classified-intelligen
Are you attending the ICAEW Hardman Symposium on “Towards a Better International Tax System” in July?
Date?
R
UKUncut talking Google tax avoidance on Radio Sheffield. 1:49:38. http://www.bbc.co.uk/programmes/p01952gd
David, this is excellent! Very powerful points made in the limited time available. Well done.
Agreed
Just saw a tribunal decision finding againts an avoidance scheme enetered into by P&O. Great words from the tribunal.
It said this was a scheme purely designed for avoidance which depended on the ‘alchemy’ of turning share capital into distributable reserves almost overnight. The Tribunal described this as a trick written into the ‘script of the charade’.
That sort of sums up nicely the essence of unacceptable tax avoidance – tricks, scipts and charade 🙂
makes my point regarding fraud/cheating the public revenue 🙂