Editorial Board

The U.K. Gives Google a Sweetheart Tax Deal

The paltry settlement isn't even the worst of it.

Search for "back taxes."

Photograph: Aidan Crawley/Bloomberg

In its recent tax dispute with Google, the U.K. government had an opportunity to make a principled stand for fairness and transparency. It failed.

Under the terms of a recently struck deal, Google will pay the U.K. government 130 million pounds ($185 million) in back taxes for the past 10 years. Critics have focused mainly on the paltry size of the settlement, which under any accounting amounts to far less than the U.K.’s standard 20 percent corporate tax rate, but the deal’s flaws are more profound: It reflects the deep-seated problems of the system of international corporate taxation, which is opaque, complex and increasingly unfair.

How the government arrived at its figure is something akin to a state secret, though members of the British parliament are trying to find out. Accountants and tax experts have been scratching their heads trying to understand how Google’s economic activity in the U.K., based mainly around advertising, was calculated. But this is more than a public-relations problem for Google and the government; it also sets a bad precedent. Who’s to say whether other companies (Facebook is now under the microscope) may want to cut similar deals?

There is hope that things will be clearer moving forward. A new law seeks to prevent companies from diverting profits to countries with lower taxes such as Ireland (where Google’s European headquarters are). Companies are now subject to a 25 percent tax on artificially diverted profits.

At the same time, this is an issue that goes beyond the U.K. and Google. France is pursuing a much larger settlement with Google over back taxes, and Italy has recently settled a tax deal with Apple for $350 million -- a third of what Italy said it was owed. The European Commission has clawed back taxes from Fiat and Starbucks, and is investigating others, on the grounds that special deals struck in low-tax jurisdictions amount to state aid. The EU’s competition commissioner has said that tax rulings that “artificially reduce a company’s tax burden” are illegal. Could the Google deal fall into the category?

That’s part of the problem with backroom deals and clawbacks generally: They lack transparency -- an essential requirement of fair taxation. There is no shortage of proposals, including a new framework from the Organization for Economic Cooperation and Development, on how to make the international tax system clearer and fairer. Some are better than others. They all share one feature, however: They depend on national governments to lead the way. The UK.’s deal with Google is an example of how not to do it.