Google: Still searching for an answer

Today saw the latest phase of the Google saga, with Google and HMRC appearing before the Public Accounts Committee (PAC) again.

It is clear that the PAC is asking more informed questions each time tax is on the agenda, and we learnt some things from this hearing.

However, there was more evidence about where PAC scrutiny is and isn't effective than real new information about Google. 

The hearing follows in the wake of HMRC having reached agreement with Google over additional taxes to pay for historic periods, resulting in Google paying £130 million.

The PAC hearing was split into two sessions. Firstly Matt Brittin, president of Google EMEA and Tom Hutchinson, vice president, Google Inc, faced questions. Then outgoing chief executive of HMRC, Dame Lin Homer, Jim Harra, Director General Business Tax, and Edward Troup, Tax Assurance Commissioner were in the spotlight.

It would have been interesting to see Google and HMRC at the table together, but at least Google gave permission to HMRC to breach the usual rules on taxpayer confidentiality, in order to provide certain information.

We actually learnt very little from HMRC, with the focus being on their systems and processes. These were quite adeptly dealt with by Jim Harra and Edward Troup.

  

Google didn’t give us much more either. The only real news was:

• The payment of £130 million includes £18 million of interest, no penalties, and therefore £112 million of tax.
• There were additional amount of tax paid by Google, outside of this settlement relating for example to an enquiry into share based payments.
• The timing of the £130 million was driven by the filing of Google’s accounts, and wasn’t timed in conjunction with George Osborne’s ability to talk about it at Davos. (I’m not sure I had even thought it was)
• Google did not give HMRC permission to break taxpayer confidentiality to brief Ministers in advance of the announcement.The Bermuda structure does not impact on the taxes paid in the UK (This is open to argument, as without Bermuda in their structure, Google might be ambivalent about UK tax, as they would get a credit in the USA)
• A big part of the HMRC enquiry was into whether there was/is a permanent establishment in the UK.
• The HMRC enquiry focused on the basis for the transfer pricing, and having agreed the transfer pricing methodology, £130 million was the number that came out of the calculation. There was no “horse trading” around the ultimate tax number.
• Google has a worldwide effective tax rate of 19%, which Google think is “fair”, although clearly that is lower than the US tax rate.

The least convincing statement from Google was probably that the rationale for being based in Ireland is to access local linguistic skills. I’m sure that the decision to set up in Ireland would have included an assessment of whether sufficient linguistic skills would be available, but it seems unlikely that it was the main driver.

So perhaps the main thing we can learn from this morning is that the PAC, valuable though it is, isn’t necessarily the best way to get to the bottom of Google’s tax affairs.

Clearly there is a need for public scrutiny, and it is incumbent on HMRC to engender trust that the tax affairs of large multinationals are being put under appropriate scrutiny. The PAC was thorough in questioning HMRC on process, and Dame Lin Homer was keen to emphasis that all taxpayers are treated equally.

However, it is unclear to me how the sort of challenges that the PAC put to Google are part of that restoring of trust. Least of all after HMRC have spent six years investigating Google, with between 10 and 30 people working on it.

Some are describing the PAC’s questioning of Google as “grandstanding”, “unhelpful”, “negative” and “rude”. Whether or not that is fair, there is a perception that the PAC is pointing the finger at Google for what may be seen as failings in international tax law, the time taken by HMRC to complete an enquiry, or commercial decisions that the PAC members just don’t like.

We are still hearing revenues and profits mixed up, and tax rates on revenue of 3% being quoted.

What percentage chance is there that an hour in front of the PAC is going to uncover something nefarious in Google, which a six year HRMC investigation missed? I suspect that is where the 3% is more accurate.

As Jolyon Maugham put it on Twitter, “PAC hearings are not a great way of delivering scrutiny. More an opportunity to vent public frustration at Google, domestic tax law and HMRC”.