Corporate tax settlements Contents

Conclusions and recommendations

1.The lack of transparency about tax settlements makes it impossible to judge whether HMRC has settled this case for the right amount of tax. Taxpayers’ legal right to confidentiality means that HMRC cannot explain how it has arrived at this or other settlements, or demonstrate that the rules have been applied correctly. In most cases corporation tax settlements only come to light because companies make a public statement or are required to disclose information about them in their financial statements. As a result, we only ever see partial information. More details of tax settlements can be made available if companies agree to the information being released. While Google provided some information it was insufficient to understand the basis for settlement and how it was reached. Google would not commit to providing further information at the evidence session. Tax settlements are not precise or scientific: judgement is needed to agree how much value is created by Google’s activities in the UK, for example. The small amount of tax paid in proportion to the scale of Google’s UK activities means that there are legitimate questions about this settlement; we still do not know if Google paid the right amount of tax. The public is highly sceptical about whether large businesses pay the corporation tax they should in the UK, and HMRC must address this if it is to protect the integrity of the tax system.

Recommendation: HMRC should consult widely, including with other tax authorities, on the case for changing the rules that protect corporate taxpayer confidentiality to make the tax affairs of multinational companies open to public scrutiny. As the previous Committee recommended in 2013, HMRC and HM Treasury should push for an international commitment to improve tax transparency. HMRC should be prepared to go it alone if necessary to provide the means for Parliament and interested parties to judge whether tax settlements reached are reasonable.

2.It has taken far too long to reach this settlement. HMRC does not know how much its own six year investigation of Google’s tax affairs cost, but admitted that it had been “a very expensive and resource-intensive process.”3 HMRC claims it brings in £75 for every £1 spent on investigating large businesses: a ratio of 75:1. We doubt that this six year investigation met that standard. HMRC’s investigations into transfer pricing arrangements take 22 months on average. HMRC attributed the time taken in this case to: HMRC needing to examine the relatively novel issues arising from it being a digital company; and changes in Google’s UK business that meant HMRC had to review each year under investigation to see what had changed. HMRC told us that “ideally corporates would take a lower-risk approach to their tax planning and would deal with us in real time, and we would not have to do six-year audits into tax”.4

Recommendation: HMRC should devote sufficient resources, and seek new powers if required, to ensure tax investigations are completed in a timely manner. HMRC needs to be clearer about the costs and benefits of its investigations. It should also seek the power to impose penalties on companies which do not cooperate fully with its investigations when tax is in dispute.

3.It is difficult for HMRC to penalise multinational companies for tax avoidance due to the scope for different interpretations of complex tax rules. Google was not required to pay any penalty as part of the settlement. HMRC told us that the current penalty legislation does not work in relation to large businesses in the way that it should. In order to attach a penalty HMRC has to demonstrate firstly, that the tax return was wrong—which it clearly was in this case—and secondly, that insufficient care was taken in producing the self-assessment, which is very difficult to establish given the complexity of tax law on transfer pricing. We are concerned that this offers large businesses an advantage not enjoyed by the average taxpayer, who is less likely to be able to use interpretation of complex tax rules as an excuse for getting things wrong. HMRC has published draft legislation in the Finance Bill 2016 to remove the reasonable care defence from large businesses that are habitually aggressive tax planners and habitually understate their profits as a result. This is a step in the right direction, but as this is only draft legislation there is a long way to go before we can judge how effective this will be in practice.

Recommendation: We welcome HMRC’s plans to strengthen the penalty regime so that it can penalise habitually aggressive tax planners. We expect HMRC to implement these changes as soon as possible and enforce them rigorously.

4.The international tax rules are not working, such that HMRC seems unable to collect a fair share of corporation tax from global companies with activities in the UK. Multinational firms such as Google have made a choice to avoid tax, despite any claims they make to the contrary. Google told us that international tax rules are complex and that it just follows them. This is disingenuous. There is nothing in the rules that says you must set up two companies in Ireland and send large royalty payments, via the Netherlands, to a company that is tax resident in Bermuda. Multinational companies seem to be able to control how much corporation tax they pay in each country by the way they structure their business and allocate profits between their overseas entities. The fact that companies can do this within the rules shows that the corporation tax system is in urgent need of reform. We welcome the ongoing work by the OECD which is taking a fundamental look at how tax avoidance by multinationals can be addressed through international cooperation. Google’s business model is not novel. Many multinational companies are internet based companies making online sales and the tax system needs to catch up.

Recommendation: HMRC should lead the way in pressing for changes in international tax rules to prevent aggressive avoidance by multinational companies. We urge HMRC to work with other tax authorities to ensure that changes to international tax rules take into account the way in which internet based companies operate.

5.We are concerned that HMRC appears to have settled for less corporation tax from Google than other countries are willing to accept. It is reported that the French and Italian tax authorities have ongoing investigations into Google, and that the amount of tax they believe is due is much larger than the £130 million settlement agreed with HMRC. Although we cannot verify those claims, it does appear that other tax authorities have been more challenging in their assessment of Google’s tax position. HMRC told us that it could re-open the investigation into Google if new evidence comes to light from investigations by other tax authorities. HMRC also said that it collaborates with other tax authorities and has a good understanding of what they are doing.

Recommendation: We expect HMRC to monitor the outcome of other tax authorities’ investigations into Google, and re-open its settlement with Google if relevant new evidence becomes available. HMRC should also examine the approach adopted by other tax authorities to see what lessons it can learn, should they succeed in securing larger tax settlements from Google.

© Parliamentary copyright 2015

Prepared 23 February 2016