A political furore has broken out over a deal struck between the American tech giant, Google, and Britain’s tax authority, HMRC.
Google has agreed to pay £130m in taxes owed since 2005 and to pay more in future. George Osborne, the Chancellor, said the deal was ‘a major success of our tax policy’. But many others have rubbished it as ‘derisory’. The row has reignited the debate about whether the multinational companies, and especially the tech giants, are running rings round national governments to minimise the tax they pay, and about what might be done to stop them. It’s also raised the issue of whether the behind-the-scenes relationship between politicians and hugely wealthy and powerful corporations is all too cosy and secret.
The tax affairs of multinational corporations have long been controversial. Huge global companies, like Starbucks and Amazon, have been accused of generating substantial profits in one country and then using complex accounting devices to have them taxed elsewhere, in countries where business taxes are lower or in tax havens where they can effectively dodge paying taxes altogether. It is claimed that not only does this deprive the original country of tax revenue to which it’s entitled, but it allows the companies to lower their prices and so drive smaller, local competitors out of business. The big companies simply say they are following the letter of the law.
It is now the giant tech companies of the new digital age that are most in the spotlight. Facebook has been vilified for paying a mere £4,327 in corporation tax in Britain in 2014. Microsoft is in an intense dispute with the French tax authorities over what it owes. And Apple is locked in a fierce battle with the European Commission which could lead the European authorities to demand billions of dollars from the company. Apple has an overseas cash pot estimated at £200bn.
The taxation of international companies is an immensely complex issue that has been made even more complex in the digital age. The basic rules were drawn up back in 1928 when it was agreed that profits should be taxed where they were created not where the sales were made. In the digital age this is a difficult matter to determine, never mind agree upon. Add to that the clever devices tax lawyers think up to shift money about (itself made instant by the very same digital technology) and the companies find themselves with the whip hand.
Google’s agreement with HMRC was heralded as a success largely on the grounds that future tax bills would be based on revenue generated in Britain, a departure from the 1928 rules and one likely to advantage Britain. But it’s the £130m figure that has caused the storm. It has been estimated that this amounts to a mere 3% tax rate, though that calculation must be treated with caution. But the fact that Google paid only £20.5m in tax in Britain in 2013 (based on its profits) while generating $5.6bn in revenue here is evidence enough to persuade many people that Google has got off far too lightly. The Tax Justice Network, which campaigns for fairer taxation especially by companies, reckons Google ought to be forking out about £200m a year in British tax.
Elsewhere it seems to be different. Both the French and Italian tax authorities seem to be holding out for a tougher deal and this has merely added insult to injury and to the accusation that the British government is a soft touch. Luke Johnson, founder of PizzaExpress and who now runs an investment firm, said: ‘This cosy deal with HMRC is a sham and an insult to all those honest UK businesses that cannot manipulate international tax systems to their advantage like Google does. The deals other European governments are doing with Google shows how incompetent our officials have been.’ Even Rupert Murdoch got it in on the criticism, tweeting: ‘Need strong laws to pay like the rest of us. Tech tax breaks facilitated by politicians easily awed by Valley ambassadors like Google chairman Schmidt eg posh boys in Downing Street’.
The EU Competition Commissioner, Margrethe Vestager, said on the Today programme on Thursday, that if anyone wanted to make a complaint about the deal, she’d be happy to investigate it. Whereupon the SNP wrote her a letter asking her to do just that.
Meanwhile Google itself has responded by arguing in a letter to the Financial Times, that it in all the hullabaloo too little has been said about how international tax rules actually work, notably that profits are taxed where those profits are originally generated and not where the revenues are made. Peter Barron, Google’s head of communications, added: ‘Governments make tax law, the tax authorities independently enforce the law, and Google complies with the law’.
So the salient point may be how those laws are made. In this regard, one of David Cameron’s own closest former advisors, Steve Hilton, warned that the chief problem here may be how big companies and politicians relate to each other and how the lobbying system works. He told me: ‘There is a growing sense that companies that are so big and dominant – not just in the marketplace but in the way they relate to governments, their lobbying efforts and so on – that they really are above the law.’
Since 2010 British ministers have met Google seventy-three times, that’s a rate of about once a month. David Cameron saw them six times, George Osborne five and even the Cabinet Secretary, Sir Jeremy Heywood, has had ‘general’ discussions with the company on ‘policy issues’. Whether such discussions involved tax policy is unknown: there are plenty of other things they might want to talk about.
Some argue that the only way to overcome the suspicion that individual governments respond to lobbying on tax affairs is for international tax rules to be redrawn. One step towards doing this was made this week when thirty-one countries in the OECD agreed to share tax information with each other and require multinational companies to tell the country they operate in what they make in that country and what they pay. Ms Vestager hoped this would lead to a situation where companies would pay taxes in the countries where they made their profits.
But that is some way down the road. And in any case the agreement does not provide for the details of tax agreements to be made public. This lack of transparency is the real problem, according to the system’s critics. John Christensen of the Tax Justice Network said of the Google deal: ‘there’s no way of knowing if it’s a good deal or a bad deal for the people of Britain’ because the details aren’t known. Making such corporate tax deals public is a huge step (and one that individuals would certainly resist) but it may be the only way to restore public trust in the integrity of the tax system which, according to Dame Margaret Hodge, the former chair of the public accounts committee, has been hugely damaged by the seeming ability of the big tech companies to write their own tax bills.
Until an international agreement on new tax rules can be made (and no one thinks that is going to happen soon), it will be up to individual countries to fight for what tax they can get. And in doing so they are bound to face not only the resistance of the companies, but also retaliation from other countries. The Senate finance committee of the US Congress is taking a very close look at how European authorities are treating American companies such as Google and Apple and have threatened to impose double taxation on European countries. This could hit British firms, for example in the pharmaceutical industry.
John Gapper, the FT columnist, concludes: ‘It is clear where this ends. When the global tax consensus cannot hold, it is every nation for itself. This is what they tried to remedy in 1928 but the goodwill is fading fast’.
If it’s to be every nation for itself, then the lobbying, the backroom deals and the lack of transparency look set to get worse, not better.
What’s your view of Google’s deal with HMRC and the government’s defence of it? And what should we do next?
Let us know.
