Despite generating substantial profits from sales of online services to individuals and businesses in the UK, Google is perceived to be avoiding tax on these profits in the UK.
Press commentary has highlighted the use of off-shore tax vehicles to divert Google’s profits in the UK into lower taxed countries: Ireland and Luxembourg have been mentioned.
Recently, Google agreed a multi-million pound settlement with HMRC to bring all its UK liabilities up-to-date for the last ten years. To many observers this seemed to be a fraction of the amount of tax that was due, and the so-called “sweetheart deal” has been robustly denounced.
HMRC have now published their side of the story, at least as far as they are prepared or able to disclose. They said:
“The Google enquiry
On 22 January 2016, Google announced that it had reached agreement with HMRC to pay an additional amount of £130 million in corporation tax and interest, as a result of HMRC’s investigation which started in 2010. This sum is over and above the tax that they have paid for past years (or would pay for the current period were it not for HMRC’s enquiry). The current tax charge that Google took in its accounts increased significantly from 2012, when the company first disclosed that it was under enquiry and made a provision for additional tax.
Some commentators have applied Google’s group profit margin to its sales to UK customers and estimated that Google’s UK corporation tax is equivalent to an effective tax rate of around 3% on the group’s profit’s arising in the UK.
This calculation does not reflect how tax law works.
Under international tax rules, Corporation Tax applies to profits created from economic activities carried on in the UK, not to profits from sales to customers in the UK. Many elements contribute to a multinational business’s economic activity and thus generate the profits, including the work that staff do, the technology driving and used by the business, intellectual property and other assets as well as where those assets are developed and actively managed.
Example
Imagine that a UK car manufacturer builds its vehicles in the UK, but half of its profits come from sales in the United States. Under Corporation Tax rules, the manufacturing profits would be taxed in the UK, the place of the economic activity, not the USA, where the consumers are.
In accordance with our published guidelines on resolving disputes, HMRC has taxed all of Google’s profits chargeable to tax in the UK for the period in question, at the full statutory rate of tax.
There has been media speculation about what other European tax authorities are doing regarding Google. We can’t comment on enquiries carried out in other countries, or on media speculation about them. So far, there has been no public confirmation that other countries have concluded enquiries with Google, either by agreement or by litigation. HMRC is satisfied that our enquiry has secured all the tax that is due in the UK.”
The dispute seems to be over as far as HMRC and Google are concerned, but it is unlikely that the owners of UK based companies, who do pay tax on profits generated by sales in the UK, will see this as justice…