No Need to Google it: the myths of the google tax deal explained

After The Commons’ Public Accounts Committee stated that HMRC’s £130 million settlement with Google for underpaid corporation tax was ‘disproportionately small’, the spotlight on Google’s relatively small corporation tax bills continue to anger politicians and the general public.

Despite the recent publicity, many are still unsure as to how Google was able to engineer such a favourable deal, given the size and success of the company. It is easy to forget that Google’s tax affairs are compliant with UK tax law and consistent with international tax agreements.

HMRC’s View
A recent HMRC policy paper, Taxing the profits of companies that are not resident in the UK,  states the following:

Having a UK website does not mean that a non-resident company has either a fixed place of business in the UK or a dependent agent in the UK. All of the trading activity could be taking place outside the UK.

 Most multinational businesses are not single companies, but a group of companies, only some of which will be operating in the UK.

 For example, sometimes a company from outside the UK sells to UK customers via the internet. Another group company in the UK provides warehousing, distribution or other services and support to the selling company. Where this takes place, the UK service company will be taxed only on the profits of its own business, i.e. the services it provides to the selling company.

 This is not tax avoidance: it is simply the way that Corporation Tax works, i.e. it applies to individual companies.

 By making this statement, HMRC have virtually conceded that there is very little they can do to prevent the tax arrangements of multinational companies such as Google, so long as the arrangements are allowed by current UK tax law.

Google and Ireland
As hinted by HMRC, the problem with Google’s products from a tax perspective is that they are not tangible – the services are all online-based, meaning they cover every country in the world. Therefore, assessing the UK profit is difficult.

In Google’s case, the UK sales are made by and recorded by its Irish subsidiary, which owns licenses to Google’s intellectual property.

The Settlement
Contrary to public opinion, the recent settlement with Google had very little to do with challenging the main element of their tax structure outlined above.

The crux of the settlement was focused on one key aspect of the relationship between Google’s UK company and Google Ireland; the amount that the UK company pays the Irish company to carry out its engineering work.

The ‘transfer pricing’ rules in the UK restrict the manipulation of pricing in order to obtain a tax advantage between entities in different countries (by, for example, charging more or less than the commercial rate to show a particular profit). The settlement has agreed to rectify this, without touching on any other aspect of the relationship with Google’s Irish company or its other subsidiaries.

So despite the uproar, the settlement is the result of one particular technicality, which explains why, in the grand scheme of things, it is far short of what most people were perhaps expecting.