Thursday 13 June 2013

Google Viewed Through a PRISM

Hot on the heels of revelations about PRISM, and the alleged roles played by various social media companies and the like in aiding the NSA to monitor communications, it seems that Google (the company that doesn't want to be evil) has yet another PR battle to fight.

The Public Accounts Committee (PAC) has stated that HMRC should "fully investigate" Google, after information from whistleblowers "undermined" the firm's defence of its tax arrangements (wherein Google claims that advertising sales take place in low-tax Ireland, not the UK).

Seemingly ex-employees of Google have claimed that UK-based staff are engaged in selling.

PAC also gave HMRC a kick, and said that it was "extraordinary" that HMRC did not challenge Google over "the complete mismatch between the company's supposed structure and the substance of its activities".

That might be all very well in hindsight, if the allegations from the ex employees are true. However, unless HMRC had good cause at the time to believe that Google's accounts and explanations were a sham they had no reason to conduct what would amount to a quasi fraud investigation.

Here are PAC's conclusions and recommendations:
"1.  The UK is a key market for Google but the enormous profit derived is out of reach of the UK's tax system. Google generated US $18 billion revenue from the UK between 2006 and 2011. Information on the UK profits derived from this revenue is not available but the company paid the equivalent of just US $16 million of UK corporation taxes in the same period. Google defends its tax position by claiming that its sales of advertising space to UK clients take place in Ireland—an argument which we find deeply unconvincing on the basis of evidence that, despite sales being billed from Ireland, most sales revenue is generated by staff in the UK. It is quite clear to us that sales to UK clients are the primary purpose, responsibility and result of its UK operation, and that the processing of sales through Google Ireland has no purpose other than to avoid UK corporation tax. This elaborate corporate construct has damaged Google's reputation in the UK and undermined confidence in the effectiveness of HMRC. 

Recommendation: Public confidence in Google will only be restored when it establishes a corporate structure that ensures Google pays tax where it generates profit. This should be addressed as a matter of urgency by Google and other companies with a similar corporate structure—the Committee will continue to pursue this issue over the course of the Parliament.
2.  HMRC has not been sufficiently challenging of multinationals' manifestly artificial tax structures. We accept that HMRC is limited by resources but it is extraordinary that it has not been more challenging of Google's corporate arrangements given the overwhelming disparity between where profit is generated and where tax is paid. Inconsistencies between the form of the company's structure and the substance of its activities only came to light through the efforts of investigative journalists and whistleblowers. Any common sense reading of HMRC's own guidance and tests suggests HMRC should vigorously question Google's claim that it is acting lawfully. In contrast to evidence given to us previously, Google has also conceded that its engineers in the UK are contributing to product development and creating economic value in the UK We note that HMRC has never challenged an internet-based company in the Courts on the question of its permanent establishment. 

Recommendation: HMRC needs to be much more effective in challenging the artificial corporate structures created by multinationals with no other purpose than to avoid tax. HMRC should now fully investigate Google in the light of the evidence provided by whistleblowers.
3.  International tax rules are complicated and have not kept pace with the way businesses operate globally and through the internet. While we are concerned about HMRC's effectiveness in tackling tax avoidance, we also acknowledge that it has to operate within the constraints of complicated UK tax laws and international tax treaties. As we have reported before, it is far too easy for companies to exploit the rules and set up structures in low-tax jurisdictions, rather than pay tax where they actually conduct their business and sell their goods and services. We are also particularly concerned about the out-of-date tax frameworks covering international internet based commerce which rely on a fully automated process. We expect the UK government to take a leading role in modernising international tax law and welcome the government's emphasis on tackling aggressive tax avoidance under the UK's presidency of the G8. 

Recommendation: HMRC and HM Treasury should push for an international commitment to improve tax transparency, including by developing specific proposals to improve the quality and credibility of public information about companies' tax affairs, and use that to information to collect a fair share of tax from profits generated in each country. This data should include full information from companies' based in tax havens.
4.  The reputation of the big accountancy firms in the UK has suffered from their substantial role in advising their clients on corporate structures and tax planning which serve only to help them avoid UK taxes. In becoming more involved in constructing complex tax arrangements for their clients, the big accountancy firms are increasingly seen as being part of the problem of corporate tax avoidance, rather than the solution. In providing tax advice and reaching audit judgements on their clients' UK operations and structures, the big accountancy firms need to focus on the substance of the enterprise, rather than on artificial structures which serve only to avoid tax. The worldwide concerns about artificial tax arrangements will not go away and the big accountancy firms have the opportunity to play a leading role in promoting and enabling transparency in their clients' tax structures and payments. 

Recommendations: We expect the big accountancy firms to recognise that the public mood on tax avoidance has changed. They should provide responsible advice to ensure that corporate arrangements reflect the substance of transactions and operations in the UK and enable their clients to be more transparent about where they make profits and pay tax.
The professional bodies of the accountancy profession should emphasise the importance to accountancy firms of behaving responsibly in selling tax advice to clients, and in reaching audit judgements on the substance of their clients' UK operations and structures."
As per the BBC PAC said the only way for Google to repair its damaged reputation was for it to pay "its fair share of tax in the country where it earns the profits from the business it conducts".

There's that phrase "fair share" again!

Politicians create the laws and tax structure that companies and HMRC have to operate in. "Fairness" is an emotive word that has no bearing in the world of debits and credits. Where the politicians deem that something is "unfair" (a bit rich coming from a body of people who themselves make use of accountants and tax structures to reduce their tax burden) then they need to look to the laws themselves, not the companies or HMRC that have to operate within the tax/legal framework created by the politicians.

Tax does have to be taxing.

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