Corporate tax settlements Contents

1HM Revenue & Customs’ investigation into Google

1.In 2012 and 2013 the previous Committee took evidence from Google on how it arranges its tax affairs.5 The Committee noted that the “UK is a key market for Google but the enormous profit derived is out of reach of the UK’s tax system.”6 It also found that to avoid UK corporation tax Google relied on “the deeply unconvincing argument that its sales to UK clients take place in Ireland, despite clear evidence that the vast majority of sales activity takes places in the UK”.7 In January 2016 Google announced that following a six year investigation it had reached a settlement with HM Revenue & Customs (HMRC) to pay £130 million in back taxes for the period January 2005 to June 2015.8

2.There has been significant criticism of this £130 million settlement from the media, the public and MPs. The amount of tax Google pays does not appear to match the scale of its business in the UK; Google earned over US$7 billion, or around 10 per cent of its global revenues, from sales to UK customers in 2015.9 On 11 February 2016 we took evidence from HMRC about the Google settlement and its approach to taxing multinational companies. We also took evidence from Google on its tax arrangements and its settlement with HMRC.

3.HMRC sought and obtained Google’s consent to provide more information about this settlement than would normally be in the public domain and provided a written statement which we received on the 10 February, the day before our evidence session. Google confirmed some of the facts of the settlement and its tax affairs. Most of these were already in the public domain due to reporting standard requirements for this information to be reported in the United Kingdom and the United States.10 Google confirmed that it recorded revenues of £1.18 billion in its UK accounts for the 18 months to June 2015. Google reported profits of £106 million on that revenue in its financial statements. Google told us that its profits for tax purposes were around £230 million, resulting in corporation tax of £46 million for the 18 months to June 2015.11

4.HMRC formally opened an investigation into Google’s tax affairs in 2010, following a risk assessment of the company. The issues at stake in the investigation were transfer pricing and the fair value of Google’s economic activity in the UK.12 Under the settlement reached as a result of this investigation Google agreed to pay an additional £130 million for the period 2005 to 2015, of which £18 million was interest.13 Google told us that it had also agreed with HMRC to apply the methodology used in this settlement to its activities in 2004, rather than open up a new investigation for that year, and had paid an additional amount for that year which was not included in the settlement figure.14 Google also told us that following HMRC’s investigation it has changed its approach to how it includes share-based compensation within its tax calculation.15 Google had previously set aside £24.1 million for HMRC’s investigation of how share-based compensation is treated for corporation tax purposes.16

5.HMRC could not tell us how much its six year investigation of Google’s tax affairs cost, but admitted that it had been “a very expensive and resource-intensive process.”17 HMRC claims it brings in £75 for every £1 spent on investigating large businesses: a 75:1 ratio.18 HMRC told us that on average a transfer pricing cases takes 22 months to conclude and attributed the time taken in this case to: the fact that relatively novel issues arose from examining a digital company; and that Google’s exponential growth in the UK and changes to its business model and customers’ behaviour over the course of the investigation meant that HMRC had to look at each year individually. HMRC noted that it had been “painstaking to get to the bottom of things”19 and that “ideally corporates would take a lower-risk approach to their tax affairs and would deal with us in real time, and we would not have to do six-year audits into tax.”20 HMRC agreed with us that a lower-risk approach would also be less damaging for large businesses’ reputations.21

6.The previous Committee highlighted the disparity in the number of specialists employed by HMRC compared to those hired by the large accountancy firms, who advise multinational companies. HMRC told us that it employs 81 transfer pricing specialists, an increase from the 65 employed when the previous Committee asked about this in 2012.22 At any one time between 10 and 30 HMRC staff worked on the Google investigation. Not all of these were transfer pricing specialists; the team also included specialists in law, economics and data analysis.23

7.HMRC confirmed that no penalty had been applied to Google, despite the settlement clearly showing that Google did not pay enough tax in the UK for a decade.24 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. HMRC noted that large businesses engaged in transfer pricing can take “a lot of expert advice and opinion” to establish they have taken a “reasonable position in relation to a complex area of law.”25 HMRC told us that it has published draft legislation in the Finance Bill 2016 to remove the reasonable care defence from large businesses. This will enable HMRC to apply penalties to large businesses that are “habitually aggressive tax planners and habitually understate their profits as a result” and have ignored warnings. HMRC only expects to apply penalties to “a very small number” of large businesses as they are already changing their behaviour.26

8.In conducting investigations of multinational firms, HMRC told us that “ultimately what we are looking to do is tax at full value the activities carried on here and not, for example, police their global tax compliance”.27 HMRC stated that the conclusion of the enquiry in January 2016 settled the tax position as “provided for by law”. 28 HMRC and HM Treasury are working with other countries to take forward the Organisation for Economic Co-operation and Development’s (OECD’s) Action Plan on Base Erosion and Profit Shifting.29 HMRC is also working with five other tax authorities as part an ‘E6’ project to share information about digital multinationals to get a better understanding of how these companies operate in different countries. HMRC hopes this will build its understanding of the tax issues and arguments used by large businesses in other countries.30

9.HMRC maintained that under the law it is obliged to keep taxpayers’ information confidential.31 However, HMRC agreed that there was an issue with the public not having confidence in the tax system and accepted that “it is very important that every single taxpayer believes that we are treating each of them fairly and under the same rules.”32 HMRC stated that small companies are treated in the same way as large businesses, and that the same processes and rules are followed for everyone. HMRC claimed that in this settlement it received the “full tax that is due” and that of the £196.4 million charge that Google has taken for corporation tax between 2005 and 2015, £130 million was as a result of the settlement. HMRC told us that this was a “significant uplift in their liability” and that Google had acknowledged that it is going to have to pay more in the future. Google told us that the settlement includes an element of the size of sales to UK customers in each of the 10 years between 2005 and 2015 and that it would continue to pay on that basis in the future.33

10.We asked HMRC what issues were considered in reaching this settlement with Google. HMRC told us that once the facts had been established, discussions centred on: what value-added is created by activities; what remuneration those activities get on an arm’s length basis in the market; and which transfer pricing methodologies were the relevant ones to apply. Furthermore, while there is clearly a UK company to which HMRC could attach a tax charge, there was also the question of whether there was a permanent establishment of some other Google company in the UK. 34 HMRC told us that it was “confident” it had got the full tax due based on the evidence35, but it accepted that, particularly in transfer pricing cases, issues were not absolute but a matter of judgement.36 Google noted that there was a range of views that could be taken on the profit amounts shown by comparable companies and that the answer arrived at was a matter of interpretation between the company and the tax authority.37

11.The previous Committee recommended that HMRC should consider increasing transparency in large and complex cases to assure Parliament and the public that it is following due process. In response HMRC put in place a new governance structure, including the appointment of a Tax Assurance Commissioner who reports annually on the settlement of tax disputes.38 Disappointingly, the Tax Assurance Commissioner told us that “I don’t think that within the rules of confidentiality I can discuss anything to do with Google’s affairs beyond the material which we have now shared with the Committee, which they agreed that we should share.”39 HMRC recognised that transparency could be improved.40 There is a proposal in place for large businesses to publish their tax strategies, but there is more that HMRC can do. We have not, for example, seen any evidence to prove that confidentiality results in more tax being raised than would otherwise be the case.41 HMRC told us that confidentiality was the norm for tax administrations throughout the world.42

12.There are reports that the French and Italian tax authorities have ongoing investigations into the amount of tax owed by Google. The French tax authorities are reportedly seeking around £380 million in back taxes from Google.43 The Italian tax authorities are reported to have asked for £150 million in back taxes, and that Google is also suspected of evading £173 million of tax in Italy between 2009 and 2013.44 These amounts are larger than the UK tax settlement, despite the UK being the most significant market for Google outside of the US.45 We were told that some European tax jurisdictions begin their investigations with police action and the seizure of documents. For example, in 2011, French authorities raided Google’s offices in Paris.46 Google would not comment on the press reports, but told us that the UK settlement was the largest so far outside of the US.47

13.HMRC told us that it could re-open its investigation into Google if new evidence came to light from the investigations by other authorities.48 HMRC said that it collaborated regularly with other tax authorities and had a good understanding of what they were doing. While HMRC does not receive information on tax settlements outside of the UK routinely, there is sharing of information on particular taxpayers.49

12 Qq 120, 196; Transfer pricing sets the price for goods and services when companies within the same multinational group trade with each other. Tax authorities examine this issue because manipulation of the price can artificially reduce tax liabilities.

© Parliamentary copyright 2015

Prepared 23 February 2016