Risk & Economy » Tax » Google’s HMRC tax deal: one step forward, 130 million steps back

Google's HMRC tax deal: one step forward, 130 million steps back

Experts fear Google’s tax settlement with HMRC could disrupt how countries police multinationals and undermine the work of the OECD and its tax avoidance project

“GOVERNMENTS make tax law, the tax authorities enforce the law and Google complies with the law,” said a spokesperson for the tech firm as it agreed to pay HMRC £130m in back taxes following a six-year investigation by the taxman.

The deal caused a storm. Critics argue the amount squeezed out of the Silicon Valley firm is ‘derisory’, the terms of the deal are opaque and its so-called “sweetheart payment” to HMRC contradict international efforts to clamp down on tax avoidance by multinationals.

Noted tax campaigner and political economist Richard Murphy suggests the deal sets a bad precedent and undermines international collaboration on tax reform under the guise of the OECD’s Base Erosion and Profit Shifting (BEPS) action plan for modernising global tax rules.

The City University professor proposes that the Google tax settlement could “set a precedent to other companies” including tech giants Microsoft and Facebook, which are both dealing with HMRC over their own tax arrangements.

“Google seems to think that the OECD will not make any changes to its BEPS initiative,” says Murphy. “They seem to think that any future deals with HMRC will be similar to the one they’ve just made.

“If that is the case then this undermines the OECD settlement because there are a number of things inside the action plan that suggests that Google will be taxed differently in the future.”

BEPS doesn’t apply to HMRC’s settlement with Google as it looked at its books from 2005 to 2015, just months before BEPS came into force, and Jolyon Maugham QC, a tax avoidance specialist at Devereux Chambers, believes there isn’t enough evidence available for critics to make assumptions about whether the agreement undermines the OECD.

“We don’t know whether HMRC is tied into this deal prospectively, so we can’t reach any conclusions about whether the tax authority has tied its hands in relation to prospective BEPS actions,” Maugham says.

Miles Dean, founder of Milestone International Tax Consultants describes the Google situation as a “storm in a teacup” and thinks too much attention has been placed on how this could affect BEPS.

Dean argues that the government’s controversial diverted profits tax has done more damage to BEPS than the Google agreement. Dubbed the “Google tax”, it has been labelled an embarrassment by BEPS chief Pascal Saint-Amans.

“The diverted profits tax undermines BEPS because it’s as if the UK government has said ‘we’re in the BEPS process, but we’re going to steal a march on the OECD and introduce something that undermines it'”, Dean explains. “As BEPS is gaining more traction we’ll see HMRC taking a much greater interest in the roles of multinationals and their subsidiaries in the UK.”

Murphy’s views coincide with Dean on this point, and he highlights that if HMRC doesn’t clarify its stance on BEPS quickly, then its reputation as a tax authority could take a hit.

“If HMRC comes out and says that this Google deal is in the past, and now they’re going to do something completely different with multinationals in the future, the heat surrounding them will disappear. But if this is the deal that Google also have for the future, oh boy is the heat on,” says Murphy.

International action

Since George Osborne announced the ‘victory’ in striking a deal with the tech firm the international community has increased measures to tackle tax avoidance by multinationals.

The OECD has signed up 31 countries to a new tax co-operation agreement, enabling the sharing of country-by-country reports, while the European Commission is to restrict companies shifting their profits to low tax jurisdictions as part of a package of measures aimed at curbing multinational companies’ aggressive tax practices.

It calls on member states to take a stronger and more co-ordinated stance against tax avoidance and suggests that tax authorities share tax-related information on multinationals operating in the EU, as earlier agreed by 31 countries in a deal with the OECD.

Other proposals include a series of legally legally-binding measures to block the most common methods used by companies to avoid paying tax, while the EC is expected to consider imposing a so-called Common Consolidated Corporate Tax Base (CCCTB) across the EU.

The OECD’s Multilateral Competent Authority Agreement (MCAA) will help tax authorities around the world gain a greater understanding of multinationals and their complex tax arrangements. According to the OECD, the agreement also marks “an important milestone towards the implementation” of its BEPS project.

Foreign politicians have also moved quickly to share their frustration with Osborne and HMRC.

French MEP Eva Joly has said that the UK is “preparing itself to become a tax haven” for multinationals and that she wants to see George Osborne and head of Google Europe Matt Brittin explain themselves in front of the European Parliamentary Committee.

The EU’s competition commissioner Margrethe Vestager has also hinted at a potential investigation into Google’s tax dealings, while the European Commission has launched an anti-tax avoidance package that aims to take a “coordinated stance against companies that seek to avoid paying tax.”

Google’s arrangement with HMRC initially looked like it damaged the credibility of the OECD and its BEPS initiative. And while the flurry of activity by EU policymakers is not directly connected to the deal, it has clearly injected new vigour into international efforts to tackle tax avoidance.

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