Last week saw the announcement that HMRC has come to an agreement with Google on the issue of back taxes. In the UK, Google will be paying £130 million of taxes on profits relating back to 2005. While the Labour Party has criticised this as a “sweetheart deal”, it is worth reflecting on the circumstances surrounding this announcement.
I share the anger many people feel that Google, and others, have got away with paying little or no tax in the UK for so many years. It is incredibly frustrating that no action at all was taken to address this issue until recently. However as unsatisfactorily as this deal feels we have to recognise that it is a big step in the right direction.
Over the past few decades, multinational companies have grown, both in size and geographic reach. Revenues generated in the UK by global companies such as Google, Apple, Facebook, Starbucks and many others, run into billions of pounds, yet these organisations seemingly pay little or no tax in this country. On the face of it this appears unfair and much has been made of this so-called “tax evasion”.
The root cause of the issue is the existing international tax system. Each country has its own rules for taxing individuals and companies. The rules and rates of tax can vary greatly between countries. In France, for example the rate of tax applied to companies is 33.33%, while in Ireland it is 12.5% and in Bermuda no tax is levied on companies at all.
Multinational companies work to ensure that as much of their profits as possible are reported in the countries with the lowest rates of tax. It is this practice that is seen as unethical and even immoral, but is actually currently a perfectly legal way to maximise returns to shareholders. In the case of Google, much of the business it undertakes in the UK is reported via Ireland, where tax rates are lower. The international tax system has failed to adapt to these issues, and a tax system that will address the problem is likely to be some way away.
It is currently the job of individual Governments to get the best deal for their countries. In Italy, for example the tax authorities are taking an aggressive approach, with raids on corporate offices and other similar tactics. The Conservative Government in the UK has taken a more constructive approach. We see the need to continue to build relationships with the global multinational companies; they bring jobs and economic prosperity and we should do all that we can to encourage their ingoing investment in our country.
At the same time this strengthening relationship leads to the deal that HMRC brokered with Google. While Labour criticise from the side-lines that this is a sweet deal for Google, it is worth noting that the last Labour Government was unable to reach any such deal and collected no tax revenue at all from Google.
I concede that the outcome is not ideal, but in the light of the circumstances outlined above, I believe that the agreement reached with Google is a good step forward.
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