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However, Google UK posted only £395m in revenue and paid £6m in UK taxes in 2011.In a completely legal tax structure, if you buy an ad from Google, the contract isn’t with the UK office, but with Google Ireland which has a corporation tax rate of 12.5% compared to the UK’s, which recently fell to 24%.

That means Google UK posts a relatively small profit, and often a loss, keeping its tax bill down. Google UK has failed to post any profit in the past three years, losing £24m in 2011, £27m in 2010 and £9.7m in 2009. In 2011, its tax bill was less than £1m, and in 2009 it was £2.9m.

Google's Tax Graph.

With heavy public sector cuts and outrage over tax avoidance schemes, Google’s skimpy tax bill is starting to grate.

MPs are demanding answers and an online petition has gained more than 46,000 signatures.John Mann MP, a member of the Treasury Select Committee, said it was likely a Google executive would be called before MPs, and told The Independent:”Whether it is illegal or immoral, the British taxpayer loses out.”

Google’s tax structure

Tax campaigner Richard Murphy points out that Google pays “pretty much the full tax rate that you’d expect” in its home country. “Outside the US, Google pays almost no tax,” he said.

“We’re talking single digits and low single digits most of the time, over the last several years.”There are two ways Google does this. First, non-US sales are predominately routed via Ireland, which has a lower tax rate and an “extremely relaxed” approach to taxation, Murphy explained.

Second, its IP is held in Bermuda and licensed to other Google arms – meaning more money is pumped into the tax haven.”It’s no doubt that what Google is doing is legal,” Murphy noted.

“Those who are arguing against this are saying that for a company that says ‘don’t be evil’ – and therefore implicitly recognises from the outset that it has moral choices to make in the way it conducts its business – in this case it’s got this moral choice wrong.

”What can be done?

In theory, negative public sentiment could push Google to alter its tax structure, said Murphy. “Sentiment is clearly moving on this issue. Tax avoidance was once seen as smart. For a company completely dependent on consumer goodwill, it is a major issue,” he said. “If they were a chip manufacturer that nobody has ever heard of, this would have no impact at all.”

It’s not yet clear what MPs will demand, but there are efforts to make global companies better spread their tax burden. One idea currently being examined is the Common Consolidated Corporate Tax Base for Europe.

 

It’s essentially an algorithm that takes into account where the sales are actually made, where staff are based, and where physical assets such as offices and equipment are, and divvies up taxes based on that.

Heather Self, a lawyer for Pinsent Masons, said the idea has been talked about for years, and while it has “a bit more momentum” it remains several years in the future – and some countries won’t be keen to sign up. However, it might be the only way to prevent global internet firms, that can trade from almost anywhere, choosing the region with the lightest possible tax regime.

Internet firms

It’s not only Google that uses such tax tactics. Amazon is officially based in Luxembourg, while Facebook is also based in Ireland.

Self said customers are often unaware where an internet company is actually based. “People assume the transaction is happening in the UK just because they placed the initial phone call to somebody in the UK, but actually legally the contract is being made with an Irish company,” she said. “It’s the Irish company that’s taking the credit risk and the other risks associated with the transaction, it’s setting the prices and setting what the terms are.”

To some extent, tax laws have not caught up with the global nature of electronic trading

While MPs might not like the tax implications, she noted that it’s a “fundamental part of the EU” that any firm is “absolutely entitled” to set up operations whereever it chooses, provided it genuinely operates from the country. “If Google Ireland is where senior people are, and UK is only people taking phone calls, then arguably, most of the profit is being made in Ireland and not the UK.”

Self points out that it’s much easier for internet firms to shift sales to more tax-friendly places. “The difficulty with the internet is that the transactions are so much more mobile. It’s so much easier to decide you’ll base yourself somewhere different,” she said. “To some extent, tax laws have not caught up with the global nature of electronic trading.”

Google’s response

In a speech made at last year’s Edinburgh Television Festival, executive chairman Eric Schmidt said Google was making the right business decision. “We could pay more tax but we would have to do so voluntarily.

It’s called paying the legally minimum amount of tax required,” he said.A Google spokesperson added: “We comply with all the tax rules in the UK.

We make a big contribution to the UK economy by employing over a thousand people, helping hundreds of thousands of businesses to grow online and investing millions supporting new tech businesses in East London.”

 

Source: PC PRO