Prior to the session the HMRC issued a statement saying that the UK is actively engaged in the G20-OECD BEPS project and is pursuing the modernisation of international tax rules and making it clear that the HMRC does not do “sweetheart deals” with companies. The amount agreed upon with Google followed an investigation into its corporate tax affairs that began in 2010. Responding to criticism the HMRC said “some commentators have applied Google’s group profit margin to its sales to UK customers and estimated that Google’s UK corporation tax is equivalent to an effective tax rate of around 3% on the group’s profit’s arising in the UK. This calculation does not reflect how tax law works.
“In accordance with our published guidelines on resolving disputes, HMRC has taxed all of Google’s profits chargeable to tax in the UK for the period in question, at the full statutory rate of tax.”
Brittin still came under fire for the £130m figure at the hearing. Google chose to announce the amount publicly he said because the outcome of the settlement of the process with the HMRC was going to be filed in its accounts and therefore was going to become public, “We alerted you, and we alerted the Treasury and the Opposition, that this was going to become public, given the intense interest there had been in multinational affairs and in our affairs as well,” he said.
The committee pressed Brittin indicating that £130m did not seem to be a large amount of money to pay for tax considering the size of the Google UK business. However, the Google executives suggested, as the HMRC had done, that some of the demands of politicians and others were based on a misunderstanding of the tax system.
Brittin said the heart of how corporate tax works is looking at where value is created. “If you are a company in the UK selling cosmetics you might go to an event that Google runs, saying “Here’s how to use our services”. You might speak to somebody in Dublin who can guide you in using our services; but the value for you is created when somebody in Japan searches on their phone for cosmetics and connects with you, and you sell cosmetics.
“If you think about that, most of the value is created by the product search, which is developed and built in the US. Some of the value is created by the marketing person and the activity that has alerted you to this opportunity, some by the person in Dublin who guides you, but most of the value is created by the search, and that was something which was founded and created in the US—20,000 engineers-plus in the US and 1,000 in the UK. I would like that 1,000 to be bigger and bigger, and as that gets bigger the proportion of our profits that we earn in the UK will become bigger, but the rules require you to pay your taxes based on the economic value creation.”
The HMRC were questioned on why it took six years for a deal to be reached with Google. Jim Harra Director General Business Tax at the HMRC said that technology companies like Google had created challenges for the tax authorities, “First of all, it is a new area of the economy. There are a number of tax authorities, in a co-ordinated way, looking at this and sharing intelligence and ideas, and we are a member of an international project of six tax authorities looking at digital giants in particular; so we were sharing lots of information during that time.
“Also, it is the nature, I think, of digital companies like Google, that their scale, their business model and the way they and their customers behave change all the time. Mr Brittin mentioned, for example, the exponential growth in the size of the UK operation. That means we cannot just look at one year and then apply what we learned that year—extrapolate that—to other years. We have got to look at each year individually and look at how things change during that period. So it was a very resource-intensive and long inquiry, and painstaking, to get to the bottom of things.”
Lin Homer, head of the HMRC, said that following the Committee’s earlier investigation in 2012 a Tax Assurance Commissioner was appointed to challenge the decision making on cases. Edward Troup, the Commissioner, also gave evidence to the committee.
The Public Accounts Committee’s report on corporate tax deals will be published in a few weeks time.