Google’s low tax rate stretches our patience, and Osborne’s crowing stretches credulity
First, the case for the defence. It is not true that Google pays
UK
corporation tax at a rate of only 3%. That is not possible. Corporation tax, currently 20%, is the same for all companies.
Nor is it true that Google paid no tax at all before the settlement earlier this month with HM Revenue & Customs. Google UK’s accounts show a £20m tax payment in 2013, for example. The bill for back taxes of £130m, covering the past 10 years, arises from an audit by HMRC that was started in 2009. And, finally, the company’s statement that it “complies with the law” is 100% accurate. It now has a stamp of approval from HMRC to demonstrate as much.
So should we all just calm down? Absolutely not. What the Google affair reveals is the gaping holes in the tax system and the opportunities for companies, especially digital operators, to shift revenues and royalties – and thus profits – around the globe to their enormous advantage. The tax authorities are feeble policeman, using bicycles to pursue Ferraris. And HMRC’s own feebleness – or unwillingness – when it comes to testing the limits of tax principles conceived in another age is another factor.
Andrew Tyrie, chairman of the Treasury select committee, used a different analogy when announcing an inquiry into
UK
tax policy. He said: “The complexity of tax law is turning what should be a straightforward principle – that everybody should pay the correct amount of tax – in to a piece of elastic.” He’s right.
Google’s elastic works this way. The company earns revenues from
UK
advertisers of about £4bn. If one applies a 25% profit margin – which is roughly what the company achieves globally – it makes a
UK
profit, as most people would think of the term, of about £1bn.
But that’s before the adjustments. First, there is a payment to Google US for using the software that powers the search engine. Second, most of the revenue from
UK
advertisers is booked in
Ireland
because, you see, one of Google UK’s core activities is “the provision of marketing services to Google Ireland Limited”.
In this way, a theoretical annual
UK
tax bill of about £200m magically drops to about £30m. That is why 3% – £30m from a notional profit of £1bn – is as good an estimate as any of Google’s effective tax rate.
Transfers to the US parent are understandable, it should be said. The software was invented in the US and the
UK
expects royalties to flow homewards when a British company sells oversees. But the lack of transparency is infuriating. How can HMRC determine a fair rate for US payments?
As for Google’s Irish manoeuvre, it looks like a contortion. Yes, the EU single market rules allow companies to structure themselves this way. And, yes, HMRC agreed that Google does not have a “permanent establishment” in the
UK
. But, come on, the tech giant has 2,300 employees in the
UK
, and they earned an average of £160,000 each last year. It has three shiny offices in
London
and is planning a new one, longer than the Shard is high, at King’s Cross. To the rest of the taxpaying public, that’s a permanent presence.
Intriguingly, even HMRC, before it accepted the Irish shuffle, seems to have wrung one small concession from Google. It wanted a portion of the profit to be shifted to the
UK
to reflect the UK’s status as Google’s second-biggest market. But what was this sum, and how was it calculated? And what profit margin does HMRC judge fair when Google
UK
provides its “marketing services” to Google Ireland? All is clouded in the fog of “taxpayer confidentiality”.
It is ridiculous, therefore, for George Osborne to claim “a major success” if he can’t provide the supporting arithmetic and the methodology.
If the chancellor meant to say “this was the best we could do”, he should explain what he intends to do about the footloose digital companies, armed as they are with skilled tax advisers, who have the potential to undermine the UK’s tax base.
Attempting to spin this out of a political hole – and from the rich men’s club in
Davos
, for heaven’s sake – insults the intelligence of other taxpayers.Green should be the new black
That the government should step in with £250m to help ailing
Aberdeen
, the centre of Britain’s oil and gas industry, seems right given the billions in tax revenues ministers have extracted from the North Sea over several decades. And though it might seem counterintuitive to come to the rescue of a city built on fossil fuels – given the threat of global warming – it also makes sense for
Britain
to keep producing its own oil and gas until it can find ways of doing without them.
But the reality is that the £250m “city deal” from David Cameron, topped up with £254m from Scottish first minister Nicola Sturgeon – will do little to stem the crisis that has left oil workers in the city using food banks.
Around 70,000 redundancies have already been made across the British oil and gas industry, and more will follow, given that the price of oil has fallen from $115 a barrel to $30 in a little over 18 months. North Sea exploration and development drilling has dropped to a trickle, leaving rigs and other equipment laid up or moved elsewhere.
The danger is that the North Sea becomes the Dead Sea, with business not returning even though there is plenty of oil and gas still under the waves. Some of the government cash will be used to find ways to extract small reserves profitably, before platforms and pipelines are abandoned.
The oil price collapse has thrown
Aberdeen
into turmoil, but its decline has long been in sight. Ministers should have made the North Sea’s twilight years productive but transitional.
A lot will depend on tax rates, which are already being cut. International companies make up the bulk of the North Sea operators, and they will stick around only if it is worth their while. This inevitably sticks in the craw of environmentalists, who see ministers rushing to the aid of Big Oil while slashing support for wind and solar energy, as well as ending carbon, capture and storage projects.
Ultimately the future of Britain’s energy should be green, not black. We need to find a new
Aberdeen
where low-carbon technologies are celebrated – and financed properly.Overloaded at Sky?
There is no doubt that Sky needs a strong deputy chairman after the reappointment of James Murdoch as chairman four years after he was forced to quit the job during the phone-hacking scandal. Investors who own the 41% of the shares not owned by 21st Century Fox, which Murdoch runs and which is 40% controlled by his father Rupert, will want to know their interests are being protected in the boardroom.
Martin Gilbert, Sky’s choice for the job, has substantial experience and he is chief executive of Aberdeen Asset Management, the fund management group that has in the past voted against Murdoch’s election to the BSkyB board. But herein lies a problem: Gilbert is under big pressure to improve things at his own company. Clients are withdrawing cash and its shares have fallen from 435p a year ago to 246p. Not an obviously good time to be taking on another company’s battles.
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