For a tax adviser who specialises in international matters, the news that Google has agreed to pay £130m of UK corporation tax in respect of previous years is a massively interesting story on a number of levels.
Technically, the story is all about the operation of the ‘dependent agency’ test – in this case, in the context of the Irish – UK tax treaty, but a test that is common in almost all tax treaties based upon the OECD’s model treaty. The basic business model here is that Google UK is a sales operation, and sales teams wander around the UK talking to potential online advertising customers. When they are signed up they actually sign a contract with Google Ireland and the profits are booked in that Irish entity where the rate of corporation tax is 12.5%. The question therefore was whether the role of Google UK was sufficient to create a ‘dependent agency permanent establishment’ that meant some of those profits were actually UK sourced and so taxed not in Ireland but in the UK in the first instance.
My own reading of the then OECD commentary to the model treaty was that it was sufficiently clear that one had to look at where the real work was done, and who by and where the actual contract was signed was not of itself the whole story. Various cases from Canada in particular supported this view – but Google took the view that what they were doing was legal.
Of course following the release of the BEPS recommendations we know that the definition of a dependent agency PE will likely be expanded so that it is crystal clear that where activity is undertaken that is material to the completion of a sale this will create a taxable presence.
I’m not going to comment too much on what is essentially politics, but I find it interesting (in the light of the above) that whilst Google are paying back taxes of £130m, the Google Europe CEO insists that they didn’t do anything wrong. I find this hard to reconcile, implicitly the payment of back taxes is an admission that their tax returns were incorrect.
News also emerged that HMRC have in fact been looking at Google’s position since 2009. I know that tax enquiries take a long time from personal experience and the sums of tax being discussed here are significant, but I’m surprised given the wording in the OECD commentary (which is effectively hard wired in to UK tax law) that it’s taken nearly 7 years to get this far.
Whilst I acknowledge in the above paragraph that the sums involved are significant, they are not substantial in the context of the case and indeed have been likened to ‘loose change’ for Google. That is understandable in many ways but in order to assess whether this is a good or a bad deal for the taxpayer one really has to look at the true transfer pricing assessment here and much of that we are not privy to. But I concede that to the man on the Clapham omnibus it is hard to understand why billions of pounds of UK sales result only in comparably small amounts of UK corporation tax – unfortunately the CT system doesn’t work on the location of the customers but rather the location of the business. VAT is based upon the location of the customers and that is where the solution to taxing internet related business lies in the main.
Is this matter over? Probably for now, but with the European Commission challenging tax agreements reached by the tax authorities in Luxembourg and the Netherlands I am sure that HMRC will have spent a lot of time thinking about that before they concluded on a back taxes calculation with Google – because that is undoubtedly going to be looked at by someone in Brussels (or is it Strasbourg?).