Google hid behind the cloak of confidentiality and refused to provide any information about the deal

 

Transnational corporations have become very adept at shifting profits through complex corporate structures and avoid taxes at place of their economic activity. Tax authorities seem to be unwilling or unable to challenge their might and accept whatever crumbs are offered.

The latest example of this is the tax deal between Google and Her Majesty’s Revenue and Customs (HMRC) which enabled the company to extinguish a decade of its tax liabilities with a single payment of £130m, an effective tax rate of 3 per cent on its profits.

Last week, the House of Commons Public Accounts Committee (PAC) held a hearing with a view to learning more about the deal. It did not get very far.

What we learnt was that £130m included an interest payment of £18m on overdue tax. So the actual tax payment was only £112m. Google’s tax liability was not agreed for nearly a decade. One possible reason was that HMRC needed more information.

Well, if the information submitted was inadequate why did HMRC not penalise the company? Unlike most other taxpayers, Google did not suffer any financial penalty for submitting inadequate information.

As anticipated, Google reasserted that it has complied with tax laws. But without a legal challenge from HMRC it is hard to know whether this is true. Even if Google was legally compliant, the UK government could have changed the tax laws to capture more of Google’s UK sales and profits, which are currently being booked in Ireland.

It would be recalled that Google itself informed the world that it had reached £130m deal with HMRC. The Committee learnt that the public impression management exercise was co-ordinated with HMRC, which also told ministers about the deal.

A Google spokesperson admitted that there have been more than 20 meetings with ministers where tax matters may have been discussed, but no information was provided. The revelations should raise more questions about the cosy relationship between giant corporations, tax authorities and ministers.

Throughout the hearing, Google’s spokesperson followed a carefully rehearsed script and insisted that it was an ethical and socially responsible company. If so, why create opaque structures in Bermuda, Caymans and other places? Google told the Committee that the operations in Bermuda primarily consist of a post-box with no staff, but records billions of pounds of profits.

The complex structures are not forced upon Google. Rather the company’s board have chosen to create them in order to shift profits and avoid taxes.

Google’s directors have economic incentives to create complex corporate structures and engage in tax avoidance. Maybe this was the possible reasoning behind the Committee’s questions about the remuneration of Matt Brittin, Google Europe’s President. Google directors receive shares and share options.

Matt Brittin told the Committee that he did not know what he earned, but we do know that Google’s chief executive has been awarded $199m (£138m) worth of shares. The value of the shares and share options depends on profits. By avoiding taxes, the value of shares and options is increased and enriches directors.

This is also a high risk strategy because it increases the risk of public opprobrium and litigation by tax authorities, the consequences of which will fall on future shareholders. Indeed, a US government report identified share and share options for executives as a key factor for reckless risk-taking in the 2007-2008 banking crash. Perhaps, a future government will look at the key drivers of tax avoidance.

Google hid behind the cloak of confidentiality and refused to provide any information about the tax deal. Google was asked to embrace country-by-country reporting (CBCR) and publish the profits and taxes in each country of its operations. It gave no such commitments.

It should be noted that elements of CBCR already apply to banks under EU Capital Requirements Directive IV (CRD IV), and an example of the report published by Barclays Bank is available here (see pages 4-6).

Following the US Dodd-Frank Act 2012  and the EU Accounting (and Transparency) Directives, oil, gas and mining companies also publish country specific information. Here is an example, of the report published by Statoil (see page 27). The legislation does not apply to other sectors.

Google claimed that it wants to be a leader in transparency but would not publish information that is already published by many large companies. Its lame excuse was that the information is confidential.

HMRC also hid behind the cloak of confidentiality. The Committee could have challenged this, but did not. For example, the Intelligence and Security Committee of Parliament can hold private sessions and examine sensitive information. One assumes that other parliamentary committees also have similar powers, or can get them, and address public anxieties.

Overall, the parliamentary hearing could not secure any meaningful information about the tax deal. This may open the door for the National Audit Office to look at the deal. If the deal is one-off and is not available to others, it can be construed as state-aid and be examined by European Union.

Prem Sikka is Professor of accounting at the University of Essex

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