At first glance, HMRC doesn’t seem to have come out of its deal with Google too badly. It’s getting £130m in back taxes when there is no question of illegal tax evasion, and a sliver of the firm’s future UK revenues, which will increase the amount reaching the public purse. But it comes at a cost: thanks to this deal, Google will not have to pay the Google Tax.
Aside from meaning that we now have to refer to George Osborne’s much touted anti-tax-avoidance measure by the far less catchy name of the Diverted Profits Tax, this has also made a lot of people rather mad. Unsurprisingly, Margaret Hodge is one of them.
The chair of the Public Accounts Committee said the company’s motto ‘don’t be evil’ was ‘a hypocritical assertion that it may preach but which it fails to practice’ (which of course amounts to calling it evil). Shadow chancellor John McDonnell, meanwhile, called it a ‘sweetheart deal’ that was up to ten times smaller than it should have been.
He has a point. Alphabet Inc’s effective tax rate in 2014 was 19.3%, off $16.5bn (£11.6bn) in operating profits. As 10% of its revenues come from the UK, a ball park figure of around $200m or £140m a year sounds more reasonable than the £200m the Treasury will now have received over the last decade, notwithstanding the company’s rapid growth during that period. This isn’t like Amazon – there are real profits here to get taxed.
But while £130m seems paltry for a business as big as Google, there’s not much HMRC could have done about its back taxes, which came from a laxer era - everything was above board, even if the board was too low. The question of whether letting Google off the Google Tax (we’re just still going to call it that) was worth it will depend on the exact proportion of the company’s revenue HMRC will get every year from now on.
Though the specifics are as yet unknown, it is almost certain that it will pay less tax than it would have done had the Google Tax, which comes into force in April, been successfully applied. A quarter of profits on revenues booked abroad (Ireland in this case) for tax purposes will be a lot of money – it’s impossible to imagine Google making a deal that would cost close to the same amount.
HMRC presumably took the deal because it wasn’t confident of being able to apply the Google Tax successfully to Google. Tax accounting is (or can be made to be) complex, after all – otherwise we just wouldn’t see so many companies getting away with paying far less than what most people would say is their fair share. If this deal is indeed a precedent for other multinationals, it doesn’t bode well for the success of the Google Tax, or say much of HMRC’s faith in OECD and EU efforts to crack down on exactly the same problem.
From Google’s perspective, it’s unlikely many people will be convinced that it’s doing the right thing here. Its European head Matt Brittin may talk about wanting ‘to ensure we pay the right amount of tax’ like it was Google’s idea, but ultimately the right amount of tax for any company is surely zero. Corporate responsibility is all well and good, but when have you seen a CEO talking about how the firm’s rising tax rate is actually good because it’s building hospitals?
On the other hand, does Google really care if people think it’s getting away with a ‘sweetheart deal’? Honestly, are you going to use Bing today as a result of this story? Multinationals paying less in tax than everyone else is hardly new, and it will hardly change because of this.