Conclusions and recommendations
1. The UK is a key market for Google but the
enormous profit derived is out of reach of the UK's tax system.
Google generated US $18 billion revenue from the UK between 2006
and 2011. Information on the UK profits derived from this revenue
is not available but the company paid the equivalent of just US
$16 million of UK corporation taxes in the same period. Google
defends its tax position by claiming that its sales of advertising
space to UK clients take place in Irelandan argument which
we find deeply unconvincing on the basis of evidence that, despite
sales being billed from Ireland, most sales revenue is generated
by staff in the UK. It is quite clear to us that sales to UK
clients are the primary purpose, responsibility and result of
its UK operation, and that the processing of sales through Google
Ireland has no purpose other than to avoid UK corporation tax.
This elaborate corporate construct has damaged Google's reputation
in the UK and undermined confidence in the effectiveness of HMRC.
Recommendation: 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 structurethe Committee will continue
to pursue this issue over the course of the Parliament.
2. 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.
Recommendation: 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.
3. International tax rules are complicated
and have not kept pace with the way businesses operate globally
and through the internet.
While we are concerned about HMRC's effectiveness in tackling
tax avoidance, we also acknowledge that it has to operate within
the constraints of complicated UK tax laws and international tax
treaties. As we have reported before, it is far too easy for
companies to exploit the rules and set up structures in low-tax
jurisdictions, rather than pay tax where they actually conduct
their business and sell their goods and services. We are also
particularly concerned about the out-of-date tax frameworks covering
international internet based commerce which rely on a fully automated
process. We expect the UK government to take a leading role in
modernising international tax law and welcome the government's
emphasis on tackling aggressive tax avoidance under the UK's presidency
of the G8.
Recommendation: 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.
4. The reputation of the big accountancy firms
in the UK has suffered from their substantial role in advising
their clients on corporate structures and tax planning which serve
only to help them avoid UK taxes.
In becoming more involved in constructing complex tax arrangements
for their clients, the big accountancy firms are increasingly
seen as being part of the problem of corporate tax avoidance,
rather than the solution. In providing tax advice and reaching
audit judgements on their clients' UK operations and structures,
the big accountancy firms need to focus on the substance of the
enterprise, rather than on artificial structures which serve only
to avoid tax. The worldwide concerns about artificial tax arrangements
will not go away and the big accountancy firms have the opportunity
to play a leading role in promoting and enabling transparency
in their clients' tax structures and payments.
Recommendations: We expect the big accountancy
firms to recognise that the public mood on tax avoidance has changed.
They should provide responsible advice to ensure that corporate
arrangements reflect the substance of transactions and operations
in the UK and enable their clients to be more transparent about
where they make profits and pay tax.
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.