Taxing times for Google and others

I am going to break off from the EU exit series for a couple of days to deal with taxation, as there is an ill informed topical debate underway about it. I am publishing this blog for tomorrow early this week-end as some Sunday journalists may find it helpful.

There are two major judgements involved with reaching a fair tax settlement for successful multinationals. The first is where was the profit made, given that they incur costs and earn revenues in various countries. Some of them, for example, chose to establish their headquarters – and therefore incur substantial costs – in Ireland as Google has. They go there partly because Ireland has a much lower rate of Corporation Tax than other European countries. The UK cannot complain about that, as the UK’s own company tax strategy is to cut our rate so we attract headquarters and other cost bases from higher tax countries. We want the employment and investment, and would like companies to export from the UK around the rest of their group. When the company earns revenue in the UK it can of course offset the UK costs against the revenue, but it can also claim that some part of the costs it incurs elsewehere, as in Ireland with its headquarters, can also properly be taken off its UK revenues before striking a profit. The amount is a judgement which its own accountants, managers, auditors and the competing tax authorities all have to consider.

The second related issue is transfer pricing. Where a good or service produced by a multinational incurs production costs in more than one country the company is allowed to set transfer prices for the semi finished good or contribution to the service from country A into country B where the good or service is finished or delivered. Again a judgement is involved, as these are often just internal prices. In my simple model where just two countries are involved both countries tax authorities have an interest. Each will want the highest possible transfer price for their part of the work and the lowest for the other country’s, to maximise their part of the total profit so they can tax it. A company would like the profit to be highest in the lowest tax country, but all reputable companies will want to strike a fair price as they understand the morality of doing so. They also understand that to be able to persuade the tax inspectors in both countries concerned the fairest price should have the most chance of meeting with approval. In practice many countries may be involved where activity happens in plenty of places and contributes to the final good or service.

Google’s view of these issues – and its other judgements on where profit was made – led to a very low tax assessment in the UK from 2005 onwards which the then Inland Revenue accepted. In 2009 HMRC initiated an enquiry to see if it could challenge the way the UK profit was calculated. This enquiry was clearly a complex one, as it has only just resulted in the Revenue making a new determination of Google’s tax and Goggle having to pay considerably more as a result. This was not some political fix between a Conservative Chancellor and his big business pals. Ministers do not get involved in individual company tax calculations, do not see the details of a company’s tax submission or the Revenue response and are not allowed to interfere in an enquiry. Ministers do have to debate celebrated cases if the media and opposition pick up on them, but not on a basis of study of the individual tax account. Ministers do have to form tax policy, uphold or amend the law as necessary and be prepared to defend the results of tax law. The Revenue advises Ministers in general terms on what change is needed or how to defend against criticisms in the light of their detailed experience of the current law in individual cases.

What conclusions do I draw from this saga? Firstly, I support tax competition between countries and do not blame Ireland for setting a lower rate and for attracting headquarters and other costs as a result. Our taxation of a multinational that does have an Irish headquarters has to allow for the legitimate activity that such a location decision requires. It will mean some of the tax we would like to place on profits from UK revenue will pass to the Irish authorities or is not a profit at all. The Chancellor is right to respond to this part of the problem by lowering our rate so we can attract more taxable activity from other higher tax jurisdictions.

Secondly various loopholes in rules over where revenue and profits can be booked needed to be closed. This Chancellor has closed 40 such loopholes which allowed companies legitimately to avoid tax in the last decade which they cannot do now. The Chancellor has sought to deal with the overall problem through his attack on the diversion of profits by multinationals. He was right to take action to tackle profit diversion and if he needs to take further action I am sure he will next budget. Each budget sees the Revenue put forward proposals to deal with the latest legal schemes to divert profits to lower tax jurisdictions or to reduce reported profits by taking advantage of legal tax abatements.

Some on the left seem to think large multinationals are the super rich and all we have to do is to demand more money from them. We live under a rule of law in a competitive world. Those who want multinationals to pay more tax need to come forward with thought through amendments to our tax law which would achieve their aim without losing us the jobs and business. This argument is mainly about where profits are booked and which country therefore gets the tax, so where we seek change it is to repatriate profits from neighbours. In part it is also about tax taking a larger share of revenues. In some cases that may be a good idea, but we need to remember that company revenues are also needed to reward employees and to invest in the future. Multinationals, like many individuals, wish to minimise their tax bills by all legal means.

Let me conclude by dealing with conspiracy theories before they are written. I have no personal financial interests in Google or any of the other majors under scrutiny for paying too little tax. I have not even met the management of Google. Before writing this article and before appearing on Any Questions where I thought the issue might emerge I contacted Google so I could understand in general terms the way their tax bills since 2005 were first agreed and then subject to revision. I do have an interest in more healthy business and jobs in the UK, and understand that striking the right tax balance is not easy. This Chancellor has succeeded in getting more tax out of these companies than his Labour predecessors without so far losing business and profit to other countries as a result of his corporate tax policy. That is a win.