U.K.'s Tax Deal With Google Wasn't Just About Offshore Havens

There may be even less than meets the eye to the U.K.’s controversial tax agreement with Google.

QuickTake Profit Shifting

After years of global public outrage and U.K. Parliament hearings over Google’s shifting of billions in profits into a Bermuda mailbox, U.K. tax authorities reached a 130 million pound ($185.5 million) settlement with the company. When the deal became public last month, Chancellor of the Exchequer George Osborne called it a victory. Politicians on both ends of the spectrum grumbled, with some calling the payment trivial.

As it turns out, a chunk of the settlement had nothing to do with the diversion of profits into island tax havens, according to company filings: At least 33 million pounds of the deal are to settle a six-year-old audit over how Google accounted for the stock-based compensation it provides U.K. employees, according to disclosures made public Wednesday by Google’s U.K. subsidiary.

“If true, this is truly shameful behavior by the Chancellor. He dressed this deal up as a ‘major victory’, when in reality it was a defeat,” John McDonnell, finance spokesman for the opposition Labour Party, said Thursday in response to the Bloomberg News report. The Google deal may represent “the start of an ‘opt-in’ policy from the government on corporation tax,” he added, reiterating his call for the government to publish details of the agreement.

A U.K. Treasury spokesman said: “The fact that HMRC has secured additional tax reflects the significant investment we’ve made in HMRC and the actions we’ve taken to ensure multinationals pay tax where it is due.”

Google, a unit of Alphabet Inc., declined to comment on the U.K. deal. The U.K. tax authority, Her Majesty’s Revenue & Customs, said the successful conclusion of the agency’s inquiries “secured a substantial result, which means that Google will pay the full tax due in law on profits that belong in the U.K.”

Dutch Sandwich

Google’s tax settlement with the U.K. government has re-ignited political controversy in Britain over strategies used by multinationals including Google, Apple Inc., Starbucks Corp. and Amazon.com Inc. to pay lower taxes.

In the wake of the settlement news, two U.K. Parliament committees have announced investigations into the fairness of Google’s settlement and the U.K. corporate tax code. The U.K.’s independent National Audit Office, too, has said it will examine the deal. And the European Union will conduct a preliminary inquiry into whether the Google arrangement constitutes illegal "state aid" under EU rules.

European regulators have already found in separate inquiries that Apple, Starbucks, Amazon and Fiat may have received illegal state aid in the form of tax deals with Ireland, the Netherlands and Luxembourg.

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

Offshore Profits

The newly available financial report from Google’s main U.K. subsidiary makes clear that a significant portion of the recent settlement addresses a probe by U.K. tax authorities into how the company accounts for grants of stocks and options to employees.

In 2010, the HMRC started reviewing how Google accounts for its "share based compensation," examining the company’s accounts as far back as 2005, according to filings. In 2012, the company first provided for the possible payment of 24 million pounds in connection with this audit, along with 3.6 million pounds in interest.

The filing made public Wednesday disclosed that 33 million pounds, a provision related to the compensation audit, was included in the 130 million pound U.K. settlement.

Google’s tax settlement has prompted political debate in Britain over whether the country’s corporate tax code itself needs a radical overhaul, with politicians on the left and right criticizing the deal. McDonnell, the Labour finance spokesman and its shadow chancellor of the exchequer, previously called the amount Google is paying “derisory” and “trivial” and told BBC Radio that Google had struck a “sweetheart deal” with government, a charge the HMRC and government have denied.

"We honestly have no idea if this is a reasonable amount of payment," said Alex Cobham, director of research for the Tax Justice Network. "It’s further proof of the need for transparency."

No. 2 Market

The U.K. is Google’s second-biggest market, after the U.S. Nevertheless, the company doesn’t report much income there. In 2013, Google reported $5.6 billion of U.K. sales (about 3.4 billion pounds). It reported 21 million pounds of income tax on 70.8 million pounds of U.K. pretax income, a contrast with the thick profit margins reported by its parent company.

It would be “silly” to argue that the deal looked proportionate to Google’s sales and presence in the U.K., Anna Soubry, the government’s business minister and a member of the same Conservative Party as Prime Minister David Cameron and Osborne, told the BBC.

Other European countries, including France and Italy, have ongoing probes into Google’s taxes. Reports that these countries were seeking larger tax settlements than what the U.K. achieved -- despite the fact that Google’s revenues in these places are smaller -- have increased pressure on U.K. government officials.