HM Revenue and Customs (HMRC) has reportedly ruled that the highly controversial and very complex tax arrangements are within the boundaries of UK law. The ruling will see the multinational firm only required to pay a fraction of the tax that would otherwise have been due.
The ruling, which followed an investigation over the course of six years and has not previously been published, means that the American search giant is not required to pay tax on proceeds from the sale of advertising in the UK. This decision clears up some of the confusion around the fact that Google is only paying an additional £130 million in tax for the past ten years, which represents a very small percentage of its actual UK-generated earnings.
While it has been decided that the company’s tax practices are legal, many critics still label them tax avoidance and the agreement reached between Google and HMRC has been heavily criticised. The arrangement means that Google pays an effective tax rate of only 3% on the millions of pounds of income it generates in the UK.
The main tactic used to minimise Google’s tax bill involves taking steps to register the bulk of its UK profits in Ireland. A separate company based in Ireland carries out all of Google UK’s operations. The company works exclusively for Google, but is legally a separate business. They carry out work on behalf of Google UK in return for a fee. As a result, from a legal viewpoint only this fee qualifies as profit generated in the UK, and is therefore kept as low as possible. All other profits, which amount to millions, are counted as profits generated in Ireland where the business is based.
A number of other multinational businesses use similar arrangements to register their UK profits as occurring overseas in jurisdictions with lower rates of tax. The ruling that Google is operating within the boundaries of the law could therefore have important implications when it comes to assessing the legality of other major companies engaging in alleged tax avoidance. Technology giant Apple and major online retailer Amazon are among the more prominent examples of companies employing similar tactics.
The decision that this practice is currently legal has also led to increased pressure on the government to take steps to close loopholes and prevent profits from multinational businesses being diverted abroad in order to avoid paying tax in the UK on income that has been generated here.