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MPs demand UK rates revamp after Google's 'extraordinary tax mismatch'

Report: 'Highly contrived' structure has damaged HMRC's reputation

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British MPs have demanded that the government act to revamp the tax structure after damning revelations about Google's corporate payments structure in the country.

The Public Accounts Committee said in a report that Google had damaged both its own and HMRC's reputation with its "highly contrived" tax arrangements, which had seen it aggressively avoid tax to the extent of paying just $16m in five years to 2011 despite turnover of $18bn.

“Google’s reputation has been damaged by these revelations of aggressive tax avoidance. That damage will not be repaired until the company arranges to pay its fair share of tax in the country where it earns the profits from the business it conducts," committee head Margaret Hodge said.

“Confidence in HMRC has also been weakened. It is extraordinary that the department did not challenge Google over the complete mismatch between the company’s supposed structure and the substance of its activities."

The report also condemned Google's performance at evidence-gathering sessions before the committee, when the Chocolate Factory said it didn't pay taxes in Blighty because its economic activity was either taking place in Ireland (sales) or the US (development).

“Google brazenly argued before this committee that its tax arrangements in the UK are defensible and lawful. It claimed that its advertising sales take place in Ireland, not in the UK," Hodge said.

“This argument is deeply unconvincing and has been undermined by information from whistleblowers, including ex-employees of Google, who told us that UK-based staff are engaged in selling. The staff in Ireland simply process the bills. Google also conceded at this second hearing that its engineers in the UK are contributing to product development.

“The company’s highly contrived tax arrangement has no purpose other than to enable the company to avoid UK corporation tax," she claimed.

Google stuck to its usual guns in the fight, saying it had obeyed the rules and that it's the politicians who make them.

"It's clear from this report that the Public Accounts Committee wants to see international companies paying more tax where their customers are located, but that's not how the rules operate today," the firm said.

"We welcome the call to make the current system simpler and more transparent."

HMRC lacks 'common sense'

The committee's report questioned HMRC's efforts in chasing big multinational web firms for taxes, noting that it had "never challenged an internet-based company in the courts on the question of its permanent establishment".

"Inconsistencies between the form of the company’s structure and the substance of its activities only came to light through the efforts of investigative journalists and whistleblowers," MPs pointed out.

"Any common sense reading of HMRC’s own guidance and tests suggests HMRC should vigorously question Google’s claim that it is acting lawfully."

They also called on the government's tax officials to "fully investigate" Google using the evidence brought to light by the whistleblowers.

While the committee said it wasn't singling out Google, Amazon or Starbucks, which were all called before it for evidence when the weight of public opinion over corporate taxes in light of austerity measures got too much, the Chocolate Factory has perhaps had the roughest ride.

The firm gave evidence once in November last year and was then called back last month when whistleblowers' documents appeared to discredit veep Matt Brittin's claims that Google UK staff weren't engaged in sales.

MPs also heard from Google's auditor and one of the Big Four accountancy firms Ernst & Young twice. In the report, they said that these firms needed to "recognise that public mood on tax avoidance had changed".

"The professional bodies of the accountancy profession should emphasise the importance to accountancy firms of behaving responsibly in selling tax advice to clients, and in reaching audit judgements on the substance of their clients’ UK operations and structures," they said.

Ernst & Young managing partner for tax in the UK John Dixon, who gave evidence before the committee, said in a canned statement on the report that the UK tax code had to be simplified and companies needed to be more transparent. However, he denied that his firm helped multinationals to legally dodge taxes.

"We do not promote artificial tax structures," he said. "We do not offer advice on tax evasion, non-disclosure or artificial schemes and would always refuse to act for companies requesting advice in this area.

"What we do is offer legitimate tax planning to clients, which is disclosed to HMRC and other regulatory authorities." ®

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