Google's tax not Google tax

10 March 2016

The public interest in the taxation of multinationals shows no sign of abating. Google and HMRC appearing together before the Public Accounts Committee (PAC) last month is a significant event in itself, although there is doubt over whether the public really gained anything meaningful from the grilling. Recent research by HMRC indicates that most people think that avoidance is much more widespread than the actual data shows.

In advance of the PAC hearing, HMRC issued a statement setting out its approach to large corporates, which is clearly written and largely uncontentious for those who are familiar with how HMRC deals with the UK’s largest tax payers. So, why do the public remain unconvinced about the tax system? Is it really still riddled with loopholes?

Never let the truth stand in the way of a good story

It was widely reported, and even stated in parliament, that Google’s £130m additional tax payment to close a long-running enquiry represented an effective tax rate of 3 per cent. This rate has been derived on an invalid legal basis, or to use HMRC’s own words, ‘This calculation does not reflect how tax law works’. Both Google and HMRC say that the outstanding issues were resolved and taxed at the normal statutory rates. Nonetheless, the infamous 3 per cent will undoubtedly be etched on most people’s memory for some time and reinforces the prevailing view.

..unless you can’t think of anything better

The truth is that the UK’s largest tax companies are often under HMRC enquiry. From the government’s risk perspective, this must be a sensible approach towards protecting the public purse. Large companies are complex by their very nature. The real debate should be about whether the international tax system is fit for purpose.

We may not be where we want to be….

It is easy to understand why the public view is that the major multinationals do nothing but avoid tax. The G20/OECD Base Erosion and Profit Shifting (BEPS) project that completed last year is only just starting to be implemented. The UK is a BEPS supporter and as such an early adopter, but to really make the international tax system work tax jurisdictions and authorities will need to cooperate like never before.

…but we are not where we were.

Most of the so-called sweetheart deals recently reported actually date back some years. The structures put in place a decade ago used features in tax systems that are not present now. There have been a series of law changes over this period, and in 2015 the UK introduced diverted profits tax (DPT) aimed at contrived behaviour by multinationals, at a penal rate of 25 per cent.

DPT is designed to encourage companies to restructure, so more corporation tax is paid, rather than risk paying the higher rate of DPT. Although nicknamed Google tax, the DPT has not been paid by Google. If it works as intended, it may not be paid by many other companies either, although given the public’s misconceptions about the prevalence of avoidance, HMRC may be tempted to make an example of some.

If you would like to discuss any of these topics, please contact Rebecca Reading.

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