• Tech giant defends its controversial U.K. tax settlement
  • Tax structure is `not aggressive,' executive testifies

Google’s top global tax executive told U.K. lawmakers that a new U.K. tax provision dubbed “the Google Tax” will not actually apply to the U.S. technology giant.

QuickTake Profit Shifting

The law, officially the Diverted Profits Tax, was introduced last year amid concerns that Google parent Alphabet Inc. and other global tech companies were using their complex corporate structures to shift profits to offshore tax havens. It allows the government to charge a 25 percent tax -- five percent above the standard U.K. corporate rate -- on any profits it decides have been improperly moved out of the U.K.

But Tom Hutchinson, Google’s vice president for finance, told a Parliamentary committee investigating Google’s controversial 130 million-pound ($188 million) settlement with the U.K. tax authority, that the new law was not applied to Google’s past profits nor, under the terms of the settlement, will it apply going forward.

“Because of our agreement with the HMRC we are paying the right amount of tax, so we are not having to pay anything else,” Hutchinson said, referring to Her Majesty’s Revenue and Customs office.

Televised Hearing

Lawmakers used a televised hearing Thursday to attack Google and question the settlement, which was reached in January and covered taxes going back to 2005. The deal was heralded as a “victory” by Chancellor of the Exchequer George Osborne but denounced as “derisory” by critics.

Matt Brittin, Google’s president of Europe, Middle East and Africa operations who also testified at the hearing before Parliament’s Public Accounts Committee, denied reports that the tax settlement means the company only pays a 3 percent tax rate in the U.K. 

“I understand why constituents are concerned when they see reports saying we’re paying 3 percent tax, but it’s not true, Brittin said. “We’re paying 20 percent tax like everyone else.”

The settlement has ignited allegations that British tax law remains too lax for multinational companies such as Google, Apple Inc., Starbucks Corp. and Amazon.com Inc., in spite of a much-vaunted drive by Osborne to crack down on tax avoidance. London Mayor Boris Johnson, a potential rival for Osborne in the race to succeed Prime Minister David Cameron, said it was "absurd" to attack Google over the settlement because "you might as well blame a shark for eating seals." The rules are the problem, he said.

‘Not Aggressive’

Globally, Google has avoided billions of dollars in taxes by using strategies known as "the Double Irish" and "Dutch Sandwich," shifting most of its international profits ultimately into a mailbox subsidiary in Bermuda, Bloomberg News reported in 2010.

In Thursday’s hearings, Hutchinson said these arrangements had no effect on the tax Google paid on its activity in the U.K. and that its shifting of profits to Bermuda was primarily designed to minimize U.S. taxes.

"Under the rules in the U.S., this structure makes sense," he said. "I don’t think this is an aggressive structure."

Hutchinson said his team seeks to manage the company’s tax affairs as “efficiently” as possible. Google paid 19 percent on its profits around the world, “a fair amount of tax to pay,” he said.

Google has consistently kept its foreign tax rate in the single digits. Over the past three years, for example, the company reported an effective tax rate of 6.6 percent on its non-US profits, according to its annual securities filings. The company has accumulated $47 billion in offshore earnings, mostly credited to its Bermuda subsidiary, as of the end of 2014, company filings show.

‘Tin Ears’

As the hearing got under way, Meg Hillier, the chairwoman of the Public Accounts Committee, asked Brittin whether he understood public anger over the settlement and suggested he had “tin ears.”

“Lots of people hate you because of this, they’re very angry because of this,” Richard Bacon, a lawmaker from Cameron’s Conservative Party, told Brittin. “Why don’t you face up to it?”

Brittin confirmed the company made U.K. profits of 106 million pounds on sales of 1.2 billion pounds in the 18 months through June last year, with the country accounting for about a tenth of sales to customers. While Google supports a simplification of international tax rules, there had been no political involvement in the U.K. settlement and no “sweetheart deal,” he said.

No Penalties

In 2013 hearings on Google’s U.K. tax arrangements, the Public Accounts Committee had interviewed whistle-blowers who claimed that Google under-reported its U.K. revenue by crediting many of its sales to customers in the U.K. to its Irish subsidiary. The standard corporate tax rate in Ireland is 12.5 percent and through other strategies Google was able to largely escape paying even that amount.

In Thursday’s hearing, Hutchinson and Brittin said that during its six-year audit, HMRC scrutinized the connection between Google’s Irish and U.K. subsidiaries. The British tax authorities examined Google’s contracts and invoices and even visited its Irish operation several times as part of its investigation, Brittin said.

Jim Harra, director general of business tax at HMRC, told the committee his agency had also investigated whether Google’s Irish subsidiary could be deemed to have a “permanent establishment” in the U.K. Foreign companies with that status are subject to U.K. tax on their British activities. HMRC concluded that Google’s Irish subsidiary didn’t have a “permanent establishment,” Harra said.

‘Not Working’

The settlement took Google’s total U.K. tax bill to 196.4 million pounds. While the company had been charged interest on the back tax, it was not charged a penalty,

Despite more than two-and-a-half hours of testimony from Google and HMRC officials, the hearing shed little new information on exactly how the government determined 130 million was the right amount for Google to pay in back taxes.

Harra defended verdict, saying: “Of the tax and interest a very substantial part of it arises from our investigation.”

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