Google’s tax affairs will be scrutinised by MPs on Thursday as the internet search engine company answers questions about its £130m settlement with HM Revenue Customs. The California-based company will be represented by the head of its European operations, Matt Brittin, and its head of international tax, Tom Hutchinson. They will be joined in front of the public accounts committee by HMRC’s chief executive, Lin Homer, who can also expect a tough hearing over the deal, which has been criticised by politicians, trade unions, tax campaigners and business leaders including Rupert Murdoch.
Here are some of the questions that Google should answer, followed by profiles of the key figures attending the hearing.
Why does the company continue to go out of its way to route UK sales through Ireland?
Google will doubtless claim its structure is a simple one. All international sales – not just the group’s £5bn of UK sales – are made by one company: Google Ireland.
Witnesses for Google may tell MPs that HMRC inspectors have now taken a very close look at the activities of Google UK, and are fully satisfied that the British unit plays only a supporting role, helping push UK advertisers towards Ireland.
The latest £130m settlement of the search group’s UK taxes over 10 years has finally put the matter to rest, Google may argue. It has provided an agreed method for pricing the worth of Google UK’s supporting role. The settlement effectively means the UK unit will charge Ireland slightly more for its services and, therefore, pay a modest amount of more tax to HMRC.
Google will not want to be reminded that tax experts around the world regard its Irish arrangements as a glaring example of an artificial structure designed to avoid having a taxable presence – that is, in tax jargon, a “permanent establishment” – in many markets where it is active.
In October last year, leaders from 60 countries, representing 90% of the world’s economy, agreed an OECD package of reform for international tax, including a crackdown on artificial structures used by multinationals to dodge permanent establishment.
What impact has the chancellor’s diverted profits tax (DPT) had on Google’s arrangements?
George Osborne unwisely suggested his new DPT, which came into force last April, had played an important role in securing a tax settlement with Google. That claim quickly backfired. Not only was the settlement dismissed by most observers as a paltry sum, but the DPT appears to have been barely, if at all, relevant.
Before the public accounts committee, Google may nevertheless pay lip service to the chancellor’s tough new tax and how it has influenced the search group’s behaviours. In truth, however, the DPT has fallen well short. Osborne promised it would stop company’s routing sales and profits overseas. It has failed.
From Google’s perspective, this kind of tax crackdown – that is only later revealed as a toothless political gesture – is very helpful indeed. Witnesses from the search firm, of course, are unlikely to put it in those terms.
Why do ‘expert’ sales staff in Ireland earn less than half that of marketing support staff in the UK?
In the past Google have tried to portray Ireland as a hub of sales experts, able to close deals with advertisers in a way that the UK support team couldn’t possibly manage. After much scrutiny, that story looks hard to sustain – and the public accounts committee has raised this issue before.
In reality many workers at Google Ireland are shipped in from around Europe for their language skills. A significant number spend their days in a contact centre, answering routine email queries from advertisers in their home countries. It is not an expert role in either sales or IT.
More recently Google has conceded that much of the sales negotiations between Google Ireland and advertisers is automated.
Google’s effective global tax rate was 17% last year yet the tax rates in its two largest markets – the US and the UK – were 35% and 20%. Why is Google not paying its fair share?
The company’s tax rate has been consistently below rates set by governments in its major markets for many years. That may also be true for other multinationals, but the tax gap for Google – now under a new parent company called Alphabet Inc – is especially large.
Google will doubtless repeat its mantra about always paying the correct amount of tax due in the countries where it operates. But that is unlikely to wash – the overall group tax rate tells a different story.
Witnesses will feel even less comfortable if MPs press them on Google’s use of a controversial tax strategy known as the “Double Irish”. It is through this scheme that the company’s international operations are able to arrive at their ultra-low tax rates.
As said before, Google Ireland takes all the search group’s international sales. But this company’s profits are miniscule. That’s because it is charged colossal royalty fees – payments for the right to use Google-developed technology and the brand – that end up in a second Irish company, Google Ireland Holding (GIH).
This second company may be registered to an office in Dublin, but it has a second address in Bermuda and is managed by directors living in California. As far as Irish tax officials are concerned the business is not taxable in Ireland. The company is not thought to pay tax anywhere in the world.
GIH is an “unlimited” Irish company, which means it is not required to file accounts so there is very little public information available on its activities. One of the Google witnesses, Hutchinson, is a tax expert and director of GIH. It will be interesting to see if he can shed some light on the company
It is in GIH that Google’s estimated $43bn (£30bn) cash pile is believed to rest. Google have told investors and the US tax authorities these parked funds are the proceeds from its non-US business, and have already been taxed.
MPs may want to inquire what proportion of this sum is income ultimately originating from the UK. The answer could be about 17%.
Is it fair for Google to use its lobbying and investment muscle to put pressure on politicians?
Google is planning £1bn designer offices in London, near King’s Cross station. The proposal was stalled last year, however, reportedly after the architect’s drawings were judged to have been too “boring”. They are now being updated and will go ahead in a revised form.
Some MPs may be tempted to explore whether such investments might have left HMRC well disposed toward Google in tax settlement discussions. But any such questioning is certain to be met with loud indignation. That would be wholly inappropriate, unprofessional and illegal.
Nevertheless, without referencing specific investments or specific tax issues, Google is likely to be happy to entertain suggestions that the most accommodating tax jurisdictions often attract the most investment from multinational businesses.
Google witnesses may be less inclined to discuss the group’s direct engagement with politics and lobbying. The group prefers to cast itself as a passive recipient of tax law, not a political animal actively working to shape policy to its commercial advantage.
The key figures at the hearing
The outgoing chief executive of HMRC has crossed swords with the public accounts committee before over Google. Three years ago, she bristled at suggestions her tax inspectors had not been tough enough when scrutinising the group’s tax UK arrangements. “We see – but understand more fully – some of the information that might seem to the general public to be surprising,” she told MPs in 2013.
Now, having reviewed all the evidence gathered by inspectors during a six-year investigation, as well as whistleblower testimony passed on by the public accounts committee, Homer’s team has once again found in Google’s favour. The routing of UK sales through Ireland is quite proper, and should not even subject to the new diverted profits tax. As in previous appearances, she is expected to dodge questions specific to Google and the £130m settlement last month of its UK taxes over 10 years.
Meg Hillier MP
Taking over as chair of the public accounts committee last year, the Labour MP was quick to insist she wanted to focus on different areas to her predecessor Margaret Hodge. Hodge had controversially focused on tax avoidance, in particular by big corporations – a topic that some parliamentarians considered to be outside the proper business of the committee.
“I’m not planning to redo everything the last PAC did,” Hillier told reporters. “Things do move on.” Areas such as big public expenditure – more traditional ground for the committee – are likely to come into focus. However, the recent furore around Google’s tax settlement has seen Hillier and PAC regain their appetite to scrutinise the subject of corporate tax deals.
Now described as president of Google’s European operations, Brittin is appearing to answer questions about the group’s tax affairs for the third time. A former management consultant and commercial director at Trinity Mirror, he has been at Google since 2007. Despite his big international title, he is not a director of either Google UK or Google Ireland, and he lives with his family in London.
During his two appearances, Brittin repeated and repeated that UK sales staff were not “closing sales” with British advertisers. MPs presented him with copious evidence which, they said, plainly suggested otherwise. On the defensive, Brittin said he could see how the public, some Google customers – even Google staff – might feel sales were closed in the UK. But, he said, that was a mistaken belief.
That was too much for Hodge, the then PAC chair. She told Brittin his company’s behaviour on tax was “devious, calculated and unethical”. She added: “You are a company that says you ‘do no evil’. And I think that you do do evil.”
Google’s director of international tax will have travelled the furthest to appear before MPs on Thursday. He lives a 15 minute drive from the group’s Googleplex HQ in California. He defended the group’s tax structures six years ago, telling Bloomberg: “We have an obligation to our shareholders to set up a tax efficient structure.”
As a life-long tax planner, he is unlikely to retreat from this position. He knows more than almost anyone about the darkest corners of Google’s tax architecture, including Google Ireland Holdings, where he has been a director for many years. It will be a surprise if he give away must about this controversial non-resident unlimited Irish company. That company files no accounts, pays no tax, and is believed to have around $43bn in its coffers.