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 Some Questions about Google’s UK Tax Settlement of £130 million (23 January 2016)
Prem Sikka

  BBC  has reported that Google (now part of Alphabet Inc (GOOGL.O), has agreed a £130m UK tax deal with HMRC.

A Google spokesperson  said, “We have agreed with HMRC a new approach for our UK taxes and will pay £130m, covering taxes since 2005”.  “We will now pay tax based on revenue from UK-based advertisers, which reflects the size and scope of our UK business.

Google has been the subject of critical hearings by the UK House of Commons Public Accounts Committee for its avoiding taxes. Its tax affairs have also come under scrutiny in Australia, US and elsewhere. The company used complex corporate structures, royalty programmes, transfer pricing and other practices to shift profits from the UK to low-tax jurisdictions, most notably Ireland and Bermuda. All these practices are legal but are considered to be aggressive and not necessarily within the spirit of the law and public expectations.

The £130 million settlement is not what it seems. There is no breakdown explaining how much of its covers back taxes, interest on the delayed payments or any penalties. There are no detailed calculations.

The 10K returns filed by Google with the US Securities Exchange Commission show that for the period 2005-2014, the company declared that it had UK sales of around $35.5bn (£24bn if translated at £1 = $1.5).  The most recent return (page 83 of the 2014 filing) states that the sales arise from “billing addresses” in “United Kingdom”.  So is this income taxable in the UK? Google books most of these sales in Ireland and Bermuda and claims that they are outside the scope of UK corporate taxes. Its chairman has defended the practices by saying “I am very proud of the structure that we set up ...  It’s called capitalism”.   HMRC has not mounted any legal challenge to Google’s arrangements.

But taxes are levied on profits. How much profit did it make in the UK? Due to complex corporate structures and transfer pricing practices, its UK profits cannot easily be determined. So instead, we need to look at its profit margin. Informed view is that Google’s gross profit margin is around 62% or has been as high as 75%. Part of the gross profit margin needs to cover business costs. Informed industry view is that Google’s net profit margin may be around 30%. If so, the sales of £24bn would generate UK profit of £7.2 bn.

Google also has a company in the UK; Google UK Limited which is owned by an entity registered in the US tax haven of Delaware. The accounts for the period 2005-2013 (2014 not yet available) show total sales of £2.3 billion. In principle, this amount could be added to the £24 billion above, but it is not clear whether any of this has been included in the data reported in the US. I have assumed that it is. If not, the UK sales could be £26.3bn.

The UK company accounts show that for the period 2005-2013, it claims to have paid or set aside profits of around £70 million to pay UK corporate taxes. The 2014 accounts are not shown at Companies House website. If we assume that the £130 million related entirely to UK taxes then  that would make a total settlement of £200 million. So Google’s settlement is £200 million corporate tax on UK profits of £7.2 billion. That is a rate of 2.77%, way below the headline rate for any of the years. Of course, all the numbers are subject to the assumptions as outlined above because Google's legally compliant accounts are not that helpful.

I have explained the basis of my calculations, but some will no doubt disagree.  Suppose Google’s UK profits were only half of my estimate, or just £3.6bn. Even then the effective tax rate is around 5.55%, way below the headline rate and certainly much lower than anything paid by small businesses. Of course, Google and HMRC can resolve the arguments by publishing the data for their settlement.

The settlement seems to be a sweetheart deal by HMRC to collect something rather than what may be owed.  There are a number of questions that need to be addressed:

  1. HMRC and the government should publish details of the entire settlement as it sets possible precedents for dealing with other high-tech companies.
  2. Google was the subject of parliamentary hearings and everyone deserves to see details of the settlement. HM Treasury has already publicly commented on the deal, so it cannot hide behind the usual excuse that it cannot comment on an individual taxpayer’s affairs.
  3. There should be a National Audit Office (NAO) inquiry about what Google has been permitted to settle for a rate of 2.77% when the headline rates during the period were much higher. After the Vodafone settlement, the NAO investigated and reported that HMRC did not follow many of the proper procedures.
  4. What role did firms selling tax avoidance schemes play in this settlement?
  5. What costs did HMRC incur in reaching the settlement with Google? How much of the costs have been or will be recovered from Google.
  6. How has Google changed its corporate structures and accounting practices? What undertakings, if any, has Google given to HMRC? Details should be provided.

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