04 February 2016
Lynching Google
Analysis of a tax witch-hunt.
By John Watson
What are the ingredients of a witch-hunt? No, put down that recipe book, I am not talking about a new form of gateaux but rather the sort of thing that went on in mediaeval England with ducking stools, ostracism, stocks, lynchings and all that. Not exactly what you would find in Jamie Oliver’s latest cook book, is it? So we’ll have to look somewhere else. A history of McCarthyism in the US perhaps, or the activities of some extreme political party of the right or left. Well, maybe, but, rather than running off to do hundreds of internet searches, it would be better think a bit. Try the following:
- a range of victims who by virtue of their wealth, sexual proclivities, faith or success have stored up resentment among people who are willing to think the worst of them. Let’s call them “Victims”;
- an area where the rules are sufficiently complex or unclear to make the position easy to misrepresent. Let’s call that “the Area of Confusion”; and
- a group of people, let’s call them “Trolls”, who make use of the Area of Confusion to smear the Victims.
Today we’ll start with the middle one, the Area of Confusion. “Can anyone think of an area whose complexity makes it easy to misrepresent. No? Ah, yes, the Gentleman over in the corner there. Yes, thank you. ‘Taxation’.”
The news that Google has settled its outstanding tax affairs for £130 million has caused a feeding frenzy amongst the Trolls. Surely it should have been more. The Italians are chasing £227 million. The French, notorious for their tough approach to tax avoidance, are said to be near scoring £380 million. Google does more in the UK than in either of those countries. We should have extracted more. Where are our government thuggos? Surely they could have threatened to make Google’s life so unpleasant that it would have paid much more money to be let off the hook. Wasn’t that why we merged Customs & Excise with the Inland Revenue in the first place? Never mind. If the press and the politicians push hard enough together we can probably reopen things and extract more. Not more because it is due, you understand, but more because it is there to be had. Chase the MPs. Make them join the hunt. Surely some spineless ministers can be pressurized into criticising the settlement. It doesn’t do to stand in the way of public opinion.
Hold on, though. That is my editorial desk on the line and they have the sort of silly question for which editorial desks are notorious. Would I comment, they ask, on how much tax Google actually owed? Well, I don’t see the relevance of that, but I don’t want to get fired either, so best have a go.
I have no doubt that the tax affairs of Google are complicated and that they arrange them to minimise the total amount they pay. Well, they would, wouldn’t they? That is because tax is a cost and successful businesses normally try to minimise those. On the other hand they must have the best professional advice so it is unlikely that they have in anyway misled the authorities. The fact that there is a settlement at all means that there has been a disagreement over tax, but that indicates no more than a difference of view on difficult matters of interpretation.
Let’s move the lens now to HMRC, who have been carrying out an investigation into Google for some time. These are not stupid people. The top Revenue investigators are tough but they are also fair-minded. They compute tax according to the law and they calculate any interest and penalties on that basis too. They will not generally be swayed by politics but it must have occurred to them that this was a settlement which was likely to be audited, so they will have been particularly careful not to sell the Exchequer short. Presumably then they settled the liability at a level commensurate with the result which they would expect if the issues were litigated in Court.
So let’s assume that £130 million is the amount which was actually due from Google to HMRC but that the reason it was low is the way in which Google structured its affairs. How then should HMRC have gone for more? What did Sajid Javid, the Business Secretary, mean when he said on the Andrew Marr show that the settlement was not “a glorious moment”? Did he know of some smoking gun of which the public and the Treasury are as yet unaware? If so, it was an odd way to announce it. Or was he merely trying to run with the hounds to boost himself politically at the expense of the public servants at HMRC? One certainly hopes not. Does he then think that the fact that Italy and France got more makes us in some way laggards? It is hard to tell but, if the latter is the case, there are a couple of points which he should bear in mind.
The first of these is that tax rules in different countries are different. Although there is a lot in common between the double tax treaties which assign revenue to one state or another, tax liabilities also depend on domestic law and that, and the way in which the courts interpret it locally, varies widely from one jurisdiction to another. Also we have been told how tough the French revenue authorities are in comparison with our own. What does that mean, exactly? Are they perhaps brilliantly perceptive, using Cartesian logic to analyse company profits and thus extracting the right amount of tax with great efficiency, or do they cajole and bully to extract the maximum amount that multinationals can be forced to pay? If it is the latter we should want none of it. To multinational enterprises, predictability is important, and if you begin to extract tax other than in accordance with the law you lose that. It is predictability that underlies London’s success as a financial centre.
The second point is that the settlement deals with the last ten years and that the Diverted Profits tax which came in last April will make it much more difficult for multinationals to limit their UK tax bills by planning. Google will expect to see their tax bills rise as minimisation techniques lose their effectiveness. So too will other multinationals. It remains to be seen by how much.
By now I think you will have a good idea of who are the victims in this story and what the Area of Confusion is as well. That leaves the Trolls to be identified. There are the commentators, of course, always anxious to sell their papers and needing a good story to help them do so. There are the politicians, looking for a cheap way to ride the crest of public opinion. And then, dear reader, there is you, cynically nodding at the suggestion of malfeasance by a multinational without really thinking about it. You are less to blame than the others because they play the position for advantage where you have merely been sucked in through credulity. Well, are you at least convinced that the merits of all this are less clear than you first thought? No? Still sticking to your prejudice against multinationals then? Still believe that we have been outsmarted by the French and the Italians? If so, I suggest you read this article again, think about the issues and then take heed of the advice given by Cromwell to the Synod of the Church of Scotland on 5 August 1650:
“I beseech you, in the bowels of Christ, think it possible that you may be mistaken.”
