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PAC examines Google settlement

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On 11 February, the Public Accounts Committee held its latest evidence session into corporate tax deals, preceded by public statements from both Google and HMRC defending their respective positions. The context of the session was the announcement in January that Google had agreed to pay £130m in back taxes for the ten-year period between 2005 and 2015, following an HMRC investigation lasting six years. The investigation covered the transfer pricing methodology of payments to Google UK in respect of UK sales invoiced by Google Ireland, and included payments relating to 2004 when Google Ireland was first set up. It led to Google changing its treatment of share-based remuneration in the UK company from 2012, resulting in a further tax payment. The investigation also concluded that Google did not have a permanent establishment in the UK. Overall, Google paid £196.4m in tax over the ten-year period, including £18m in interest.

Representing Google were Matt Brittin, head of Google Europe, Middle East and Africa, and Tom Hutchinson, finance vice-president of Google Inc. They informed the committee that the UK company, which accounts for 10% of global sales, has made profits of £106m over the last 18 months on revenues of £1.18bn. Google worldwide pays tax at an average rate of 19%, mainly in the US.

The committee tried without success to establish a top-line figure on which the UK settlement was based. It also failed to obtain a satisfactory answer from Mr Brittin on the amount of his personal remuneration.

HMRC was represented by Dame Lin Homer, HMRC chief executive, Jim Harra, HMRC director of general business tax, and Edward Troup, HMRC tax assurance commissioner. Mr Harra reiterated HMRC’s position that the settlement had secured the right amount of tax on the UK’s share of Google’s profit for the period – albeit under the law as it stands and given the inexact nature of the transfer pricing methodologies used by tax authorities.

The committee was concerned that the tax system should be fair for businesses of all sizes and that taxpayers should have confidence in that system. Dame Lin Homer confirmed that HMRC conducts enquiries into the self-assessments of two-thirds of all large businesses and around 12% of small businesses. Asked why no penalties had been charged in respect of the Google settlement, Mr Harra explained that the current rules would have required HMRC to show that Google had taken insufficient care over its tax affairs. He acknowledged that current penalty legislation ‘does not work in relation to large businesses in the way that it should’. New measures in Finance Bill 2016 are set to remove the reasonable care defence where large companies pursuing ‘habitually aggressive’ tax strategies are put in special measures and will also require large businesses to publish details of their tax strategies.

Would he place Google in the ‘habitually aggressive’ bracket? Mr Harra would not be drawn, but suggested that time will tell whether new rules are able to affect how the company acts in the future. Dame Lin thought that the OECD’s BEPS project and introduction of the diverted profits tax were ‘changing behaviour’ among multinationals.

How might the outcome of Google’s negotiations with tax authorities in Italy and France affect the UK settlement? The introduction of country-by-country reporting of information and the common reporting standard will open up the field for tax authorities. ‘If we found that there was material information unknown to us’, predicted Dame Lin Homer, ‘we would be able to go back and revisit’.

Commenting on the hearing, George Bull, senior tax partner at RSM, said: ‘The hearing exposed how little some Committee members knew about the practical application of tax laws enacted by Parliament, and the grandstanding and bear-baiting stood in the way of getting clear answers to some very legitimate questions … One issue which received scant recognition was the probability that increased tax liabilities for a company in one country might well result in lower taxes being paid elsewhere. Unless the fundamental structure of corporation taxes worldwide is to be changed, debates such as this present the spectacle of individual countries – France and Italy were also mentioned during the hearing – scrambling for larger slices of the same cake.’

Bull added: ‘Fundamentally, the Public Accounts Committee has to decide whether to accept that the Google tax settlement has been arrived at after a thorough and professional review by HMRC which has considered all the facts and applied the law correctly. If they do not, then they have three choices: change the way HMRC is organised; increase the resources available to HMRC; or reassess the situation when legal changes currently in the pipeline have taken effect.’

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