On February 9, 2015 the UK HM Revenue & Customs (HMRC) responded to the recent media coverage of the tax affairs of multinational corporations and particularly on the conclusion of HMRC’s enquiry into Google. The response consists out of the publication of what the HMRC calls a Factsheet on HMRC and multinational corporations.

 

The Public Accounts Committee is taking evidence on this issue on February 11 in Parliament. In their response the HMRC states that head of this hearing, it is setting out some facts to help dispel myths which have arisen about how HMRC ensures compliance among multinationals.

 

In its response the HMRC discusses a.o. the following subjects:

·        Recent successes

·        Recent changes

·        HMRC’s approach to multinational corporations

·        Transparency

·        Myths

o      ‘Sweetheart deal’

o      The Google enquiry

o      Ministerial involvement

o      Permanent establishment

 

With respect to the Google case in the response a.o. the following is stated:

“The Google enquiry

On 22 January 2016, Google announced that it had reached agreement with HMRC to pay an additional amount of £130 million in corporation tax and interest, as a result of HMRC’s investigation which started in 2010. This sum is over and above the tax that they have paid for past years (or would pay for the current period were it not for HMRC’s enquiry). The current tax charge that Google took in its accounts increased significantly from 2012, when the company first disclosed that it was under enquiry and made a provision for additional tax.

 

Some commentators have applied Google’s group profit margin to its sales to UK customers and estimated that Google’s UK corporation tax is equivalent to an effective tax rate of around 3% on the group’s profit’s arising in the UK.

 

This calculation does not reflect how tax law works.

 

Under international tax rules, Corporation Tax applies to profits created from economic activities carried on in the UK, not to profits from sales to customers in the UK. Many elements contribute to a multinational business’s economic activity and thus generate the profits, including the work that staff do, the technology driving and used by the business, intellectual property and other assets as well as where those assets are developed and actively managed.

 

Example Imagine that a UK car manufacturer builds its vehicles in the UK, but half of its profits come from sales in the United States. Under Corporation Tax rules, the manufacturing profits would be taxed in the UK, the place of the economic activity, not the USA, where the consumers are.

 

In accordance with our published guidelines on resolving disputes, HMRChas taxed all of Google’s profits chargeable to tax in the UK for the period in question, at the full statutory rate of tax.

There has been media speculation about what other European tax authorities are doing regarding Google. We can’t comment on enquiries carried out in other countries, or on media speculation about them. So far, there has been no public confirmation that other countries have concluded enquiries with Google, either by agreement or by litigation. HMRC is satisfied that our enquiry has secured all the tax that is due in the UK.

 

Ministerial involvement

HMRC is responsible for the conduct of enquiries. Government Ministers are not informed of the progress of enquiries and play no part in agreeing the amount of tax to be paid by any taxpayer. This is an important separation between policy, for which Ministers are accountable, and the administration of that policy, which is the responsibility of the Commissioners of Revenue and Customs.

 

We only informed Ministers of the outcome of the Google enquiry after it was concluded, and we only told them information that was in the public domain or that Google intended to make public.

 

Permanent establishment

The definition of a permanent establishment is set by international treaty law. These rules are complex, but they set out the level and type of activity that a company resident in Country A would need to undertake in Country B in order for Country B to have taxing rights over profits arising from that activity.

 

Some media reports have suggested that HMRC did not look into Google’s assertion that its Irish company did not have a permanent establishment in the UK.

 

Although we cannot go into details of the enquiry into Google (see the Transparency section for the legislative reasons), it is wrong to suggest thatHMRC does not take into account all relevant factors when making sure multinationals pay the tax due under the law.

 

The conclusion of HMRC’s enquiries means that Google is paying the full tax due in law on profits that are chargeable to tax in the UK.”

 

The full Factsheet as issued by the HMRC on February 9, 2016 can be found here.

 

 

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