Hodge plied Brittin with questions about the early days of Google and whether processes took place in the UK or in Ireland.
“When we came into Europe, we set up Dublin as our European headquarters,” said Brittin, adding that Google Ireland owns the company’s intellectual property, and saying that as far as UK activity was concerned, Google only employed people to promote. In the November hearing, Brittin told the PAC that no sales or transactions took place in the UK.
“We have a whistleblower who showed us his monthly payslip,” Hodge revealed, claiming that it shows a “modest basic salary” with a commission structure in place based on hitting sales targets.
“If sales activity is taking place in the UK, you have been misleading parliament and the UK tax authority,” said Hodge, referring to the different tax consequences of activity taking place in Ireland rather than in the UK.
“You are a company that says you do no evil, but I think you do do evil in that you use smoke and mirrors to avoid paying tax,” said Hodge, describing Google’s behaviour as “devious, calculated and, in my view, unethical”.
Brittin disputed the way Hodge presented details contained in a Reuters report that showed Google employed staff in sales roles in the UK despite Brittin telling the PAC in November that UK staff were not involved in “selling and closing deals” but merely in “promoting”.
“Reuters took three words and then looked at some job titles and LinkedIn profiles. I’m afraid that isn’t what’s required to get a full picture,” said Brittin. “And they’ve since printed a correction.”
“Job titles, currencies used and so on are irrelevant to the determination of whether a permanent establishment exists or not; it’s about what those people are doing, what’s actually occurring,” reinforced John Dixon, Ernst & Young’s head of tax in the UK, who also acknowledged the grey area between sales and procurement.
Hodge tried to establish concrete reference points, but differences of opinion over defining terms like sales and promotion muddied the waters.
“We hire people with sales skills, but no one in the UK can execute a transaction; no money changes hands. The rights to what we sell are owned by Google Ireland. Trades have not been completed with Google UK at any point,” said Brittin.
Brittin and Dixon were also questioned about transfers made by Google from Ireland to Bermuda.
“For certain types of royalties paid by an Irish company to a company outside the EU, there is no withholding tax. And the same is true within the EU,” explained Dixon.
Conservative PAC member Guto Bebb asked whether the structure established by Google was designed purely to minimise taxes.
“It certainly has the effect of minimising taxes,” said Dixon, who added that there are always other factors to consider when taking such decisions.
“It’s also about centralising risk, centralising management and so on. But there is a tax advantage,” he said.
Reform international rules
The witnesses saw no need to try and disguise the fact that Google’s structuring enables it to reduce its tax liabilities, because they maintain that such activity is permitted – and certain activities encouraged – by international tax rules.
Roger Carr, president of the Confederation of British Industry, is among those to have called for less moralising from politicians. He says tax evasion is a legal matter.
“Tax evasion is about the law and about right and wrong in the eyes of the law. It’s not about black and white moral judgments in the eyes of God,” said Carr at an Oxford Business School event this week.
He is not alone.
Rory Meakin, head of tax policy at the TaxPayers’ Alliance, criticised the approach of the PAC in an opinion piece in City AM, saying the PAC offered as much to the debate on tax avoidance as a hot air balloon offers transport: “No clear direction, not a lot of movement, but a lot of hot air”.
“Instead of a critical dissection of how the system works and an examination of what might be done to fix any problems, the committee’s chair Margaret Hodge railed angrily against companies like Google operating under the law as it stands, rather than by using her understanding of common sense,” said Meakin.
Meakin was echoing comments made by Matthew Sinclair, chief executive of the TaxPayers’ Alliance, who has urged UK politicians to “stop pontificating about individual cases and actually do something to reform the system which they designed and have been tinkering with ever since”.
And Martin Hearson, of the London School of Economics and former tax policy adviser for tax justice campaign group, ActionAid, agrees.
“Why is the PAC determined to catch Google out for breaking international tax rules?” he asked, via Twitter. “What’s fishy is the rules and the extent to which they can be bent.”
While Guillermo Teijeiro, international tax expert and founding partner at Teijeiro & Ballone Abogados, based in Argentina, compares international tax rules with Swiss cheese because of the abundance of loopholes.
“More political outcries on recalcitrant corporate tax evaders, or how to blame taxpayers for the gruyere international tax system,” said Teijeiro, in reaction to a US Senate hearing on offshore profit shifting, which is examining evidence from Apple chief executive officer Tim Cook.
Frederic Gourlot, tax manager at a leading multinational electric utility company, says domestic strategies targeting tax evasion and tax avoidance “often result in an increasing complexity and uncertainty for businesses, and to some extent in punitive tax legislations”.
The way forward
Clearly a consensus is developing that the solution lies in a revision of international tax rules. Eric Schmidt, Google’s executive chairman, has defended the company on these grounds previously.
Eric Schmidt met with UK Prime Minister David Cameron on Monday, while the opposition Labour party published a corporate tax policy review paper over the weekend.
Opposition Labour Party leader Ed Miliband used the paper to call for corporate tax reform and country-by-country reporting. He said politicians have a responsibility to rewrite tax laws, and in doing so to think about “the kind of society we want to create and what the responsibilities of a company like Google are”.
The implications of tax rules that allow companies to mitigate their tax liability to levels Hodge would describe as flying in the face of common sense, are substantial and far-reaching, claims Miliband.
“I don’t think they [Google] are living up to their responsibilities at the moment,” said Miliband. “It is part of a culture of irresponsibility. If everyone approaches their tax affairs as some of these companies have approached their tax affairs, we wouldn’t have a health service, we wouldn’t have an education system.”
Schmidt said the UK has the perfect opportunity to take the lead in shaping this complex debate at the G8 summit next month.
