That Google Deal

Here’s what Google Inc (the Company then at the top of the Google Group) reports to its investors about UK revenues.


That’s $6.5bn. Assume an exchange rate of £1:$1.60. That’s around £4bn (plus £62m of loose change).

We know it makes a margin of about 26%. Here’s what one analyst says:


Others give about the same.

And that’s a margin for all revenues – you’d expect it to be higher in the markets in which Google is already established, but leave that aside. And assume a rather lower 25%. That gives you a notional UK profit of £1bn.

We have a corporation tax rate – the equal lowest in the G20, alongside Saudi Arabia; Russia and Turkey – of 20%. But it would be nice if companies actually paid it. And on that notional UK profit figure Google’s tax liability would be £200m. In a logical world that’s what we’d get from Google in tax revenues.

John Gapper, writing in the Financial Times, said this about Google’s tax settlement yesterday:


Annualised, that £46.2m represents £30m per annum. That’s an effective tax rate on that notional £1bn of UK profits of 3%. (And for scale, that £30m is only half the amount of the “loose change” I ignored above.)

Here’s what Osborne said about that deal (quoted by the BBC here):


I’m perfectly prepared to believe it vindicates something. But you might wonder what.

And hang on a second. What happened to that £1bn of UK profits I mentioned at the start? What’s this £106m for 18 months (or about £70m a year) that John Gapper mentions?

The answer is that it has nothing at all to do with the revenues Google Inc tells its investors have been made in the UK. Nothing to do with them at all.

It has come from Google UK Limited’s new accounts – which have been shown to selected journalists but not to me. Never mind. We can look at their last filed accounts.


Yep, about £70m of profit. More or less the same figure as that annualised for the 12 months to June 2015. But what is that profit actually on?

Well, here’s what Google UK Limited does.



Now, that doesn’t sound much like selling advertising. And it isn’t. Its business is selling services to other Google companies. And it will charge a modest uplift on its costs – and that modest uplift will comprise its profits.

A consequence of this is that Google UK Limited’s accounting profits will never bear any relationship to the profits Google Inc chooses to report to its shareholders as having been generated in the UK. Those profits generated in the UK will never show up in Google UK Limited’s accounts and be subject to UK tax. Google UK Limited is never going to be hugely profitable.

Indeed if Google Ireland Limited and Google Inc were to choose to buy those services from some other jurisdiction, Google wouldn’t generate any accounting profits here at all.

The accounting profits they generate here they generate because they choose to buy services from here. They choose to make profits here.

But what about the Diverted Profits Tax? It was introduced with some fanfare just before the General Election. I was a rare enthusiast. The tax community hated it and the business community hated it but I thought it was a brave measure. I wrote about it on a number of occasions – but you might start here. Will it make a meaningful difference to Google UK Limited’s tax liability?

Well, the evidence suggests not.

The Diverted Profits Tax came into force on 5 April 2015. And the settlement with HMRC squares off Google UK Limited’s tax liability until June 2015 – or three months after the Diverted Profits Tax was introduced. And it increases Google UK Limited’s tax liability by £13.8m. Even if you assume all of that is attributable to the Diverted Profits Tax – an impossible assumption given that we know Google UK Limited also has back taxes to pay for other periods pre-dating the Diverted Profits Tax – and you annualise it, you still only get £55m.

Even with the tax already payable, still significantly short of the £200m that in a logical world Google UK Limited would be paying.

Speaking in Davos, Osborne also described the deal between Google and HMRC as a “major success”.

Well, clearly it was in publicity terms.

For a third of the annual price to Barclays of sponsoring the Premiership, that £13.8m of additional tax has generated a blizzard of favourable publicity for George Osborne, Google and HMRC.

But for the UK taxpayer? Not so much, I think.


49 thoughts on “That Google Deal

  1. Prior to the Diverted Profits Tax, how much tax was Google legally liable for?

  2. We don’t know.

  3. It’s probably good that you only have a very limited amount of information to base this on because you can come up with pretty much any view you like.

    But if you are HMRC then you have, or can get, sufficient information to take an informed view. So do you think HMRC is saying that based on the information that they have, their litigation and settlement strategy, the expectation that Parliament will ask them to come in for a chat about it, they deliberately settled for less tax than they were realistically entitled to?

    Or do you think that the state of the tax laws (before DPT and BEPS) meant that was the realistic maximum that they were genuinely able to get from Google UK?

    If the former, why do you think that is?

  4. Rather than just being rude about the calculations set out above, can I suggest you set out what’s intellectually or logically wrong with them?

  5. I don’t think I mentioned your calculations.

    You ask whether it is a good deal and answered it with no (or “not so much”).

    For me whether something has a good deal or not has to have a framework around it. My view is that we might as well use the tax law for that framework.

    If on a realistic view of the facts the law says that HMRC could have collected £1,000m in back taxes then that sounds like a bad deal. If they could have got £130m and actually got £130m (as they seem to have done per the FT article you linked to) then that seems like a good deal.

    My expectation is that it is probably the later. The scrutiny that this deal has already got (e.g. within HMRC) and the scrutiny it may well get later (e.g. from PAC) makes me think that.

    Your post suggests that it is very much a bad deal. In that case, I am trying to understand whether you think it is because, for example, HMRC threw in the towel or whether HMRC were limited by the tax law at the relevant times.

    I think ultimately the difference between us is that my framework is the then existing tax law. Your framework seems to be to tax a UK company on a proportion of its parent’s world wide profits. That’s a fine framework to have but it is so far removed from historic tax law that I don’t see that it is helpful in assessing whether HMRC or taxpayers have got a good deal today.

    What appears to be your framework may be a fine way of considering whether it is helpful to change the law going forward. I’m not convinced that this is necessarily the answer though as most businesses tend not to engage an a single homogeneous activity.

    I don’t know enough about the facts to quote different figures that could not be shot down. My perception is that the UK business did something different to the whole business (e.g. in terms of risk, assets employed, staff, ownership of intellectual property, etc). But I don’t want to spend the time trying to see whether that is justified or not.

  6. The problem with your calculations is that notional £1bn of UK profits.

    So far as I understand it, the value chain is that Google US creates products and services; it charges royalties to Google Ireland for the right to sell access to those; Google Ireland sells access to UK customers; Google UK sells marketing services to Google Ireland.

    The margin of 26% applies to the whole chain. The only element of that chain which is (pre-DPT) taxable in the UK is the profits Google UK makes, so to get to £1bn in the UK, you have to assume that the value is spread evenly across the chain.

    That is, you have to assume that a basic marketing operation should have the same margin as the creation of IP, the set-up and operation of massive data farms, and all the other operations carried on in the UK.

    THAT is the critical flaw in the calculations.

    It has been absolutely standard to regard this sort of marketing as being a cost-plus operation, getting maybe a 5% margin rather than 25% -and based on costs, not on sales into the territory. That would lead you to expect a much much lower UK taxable profit.

    The fact that HMRC have gotten additional tax out of Google UK suggests that they’ve managed a significant shift in the transfer pricing between UK and Ireland, but they’ve not been able to manage to dislodge the cost-plus structure.

    I find it hard to believe, incidentally, that HMRC would not have been trying their best to do so. Getting £1bn of tax out of Google would have been a huge coup for HMRC and the Government, and probably induced other firms to settle more readily. It would be pretty much the best thing that could possibly happen to Osborne politically.

  7. No. I merely assume that the UK should have taxing rights over revenues made here. Google has established arrangements which create a completely different basis of calculation: what costs does Google *choose* to incur here – plus a nominal profit. The arrangements may be intellectually explicable looked at in isolation (out of context from the broader reality). But that doesn’t make the result it produces something we should (and plainly I don’t) applaud.

  8. I think HMRC ( and possibly Margaret Hodge) deserves some credit for at least starting the tax-paying ball rolling. Perhaps the nudge factor and public opinion are stronger than changing rules.
    We have had transfer pricing rules for years and we still have the legal fictions which well-advised international groups have set up and which,apparently, cannot be attacked successfully. The parallel universe created is real.

  9. Taxing profits of large, multi-national companies with dozens or even hundreds of subsidiaries is a fool’s errand. As an accountant, I’ll make the profit flow into the entities where the taxes are lowest (Cayman, Ireland, Netherlands Antilles, etc.) and make sure the contracts and inter-company agreements conform to where I want the profits are being allocated.

    Tax sales, not profits. Using numbers above, for FYE 12-31-14 with ~£4bn of UK “real” sales, a 5% tax on gross UK sales would come out to around £200M of UK tax. A tax on actual sales regardless of which legal entity the company says the sales were earned (ie, Ireland, Cayman, etc), cuts through all of the inter-company agreements, transfer-pricing complexities and the myriad of other ways companies allocate profits offshore. Moreover, it’s relatively easy for a country’s tax authorities to allocate a company’s worldwide sales to the major markets where the company is really earning its income. For example, countries like Ireland, Neth Ant, Cayman have very few relative customers compared to the rest of Europe, Asia and the US market.

  10. Is there really only one logical way to allocate taxing rights on international value chains? As I understand it the heart of the debate is that there are several logical ways (i.e. the 1920s approach to source/residence, all at the consumer end as you propose here, all at the investor end, divied up in some formulary way etc… ) ….and that the virtualisation of products and services has made working out a workable solution between countries with different interests all the more difficult.

    We could change the global tax system and put all the taxing rights at the consumer end, as your 1bn calculation proposes, but we don’t at the moment (therefore using this as the benchmark for the Google deal will put it in the worst light).

    It seems a bit premature to declare that there is only one logical way – and that it is the one that in this case gives the UK 100% of the taxing rights on profits on Google’s sales to UK customers and 0% to US for the value created by of the boffins at the Googleplex – Conversely it would mean applying the same logical principle to companies with global sales that do R&D and other high value stuff in the UK?

  11. If you read my twitter feed (and this post) I’ve been careful not to criticise HMRC. But it does not follow that the self-congratulatory tone of Osborne, HMRC or Google is remotely justified, of course.

  12. I certainly agree that the underlying question is where we allocate taxing rights. But corporation tax is a tax on profits and so you’d expect profits taxed here to accord with those Google Inc says in effect are made here…

  13. Very similar question to that asked a second ago. And indeed our debate about Oxfam. If you look at small bits of the big picture you can justify all sorts of stuff. If you look at the big picture you say corporation tax is a tax on profits, Google Inc says it derived £4bn of revenues from here; as to what the costs are attributable to those revenues we know that (1) on a group level about 74% of revenues are matched by costs and (2) youd expect established markets to be more profitable. So although I understand your supply chain questions I would say your argument leads you to ignore that corporation tax is (or should be) a tax on profits.

  14. As always, the problem with this argument is that Google isn’t actually head quartered in the UK.
    The company rockstar produce the game Grand Theft Auto from the UK. They sell worldwide but a huge market is the US. The US tax rate is higher than the UK. By paying taxes (or “funnelling income”) to where the IP is, is this skipping American higher rate of tax? Or is it just that the way corporation tax works and can only work?

    The IP for Google, the search engine is owned by Google US, and licensed to Google Ireland. Google ireland may well be avoiding tax but that doesn’t mean the corporation tax is owed in the UK.

  15. It seems to me that there are two different discussions here. The first is whether it was a good deal or not and the answer is that we don’t know because we don’t know what Google’s legal liability was.

    The second discussion is how do you maximise tax revenues in a world where some countries/jurisdictions use tax as a competitive lever, where multinational companies are willing and able to play countries off against each other and where tax law tends to lag behind economic reality? As a layman (I was an IT auditor in real life) the answer to this second question interests me greatly.

  16. Not sure that we illuminate the argument on Google by contrasting it with a different entity whose tax treatment we can only speculate on.

    But to argue that the ownership by Google entity A of IP rights is relevant to the tax liability of Google entity B where we know what Google’s sales in the UK are and what the Group profit margin is, you have to assume a world in which it is acceptable to change your tax liability by moving money or rights from your right pocket to your left pocket. We may be – indeed I don’t dispute that we are – in that world. But that doesn’t have as its consequence that Osborne ought to be celebrating a 3% effective CT rate on profits made out of sales in the UK.

  17. In relation to: “But to argue that the ownership by Google entity A of IP rights is relevant to the tax liability of Google entity B where we know what Google’s sales in the UK are and what the Group profit margin is, you have to assume a world in which it is acceptable to change your tax liability by moving money or rights from your right pocket to your left pocket”

    But that ignores the fact that accounts are a single year thing whereas, for example, IP is often developed over a very long time.

    I don’t know enough about Google so let’s depersonalise it. About 20 years ago someone in Staines had a good idea. She set up a company and it employed some people. Revenue was low to start with and it never caught up with the costs. After a while those costs were huge and the revenue was huge. Each year the UK government gave tax relief to those costs. Then one year, the idea really took off. Revenue sky-rocketed and started to out pace costs. Some tax was paid to the UK government after all of the years of letting it off of tax on its revenues because of its huge costs. Then the profit margin increases hugely because the idea works, was very scalable and is gold. Then it expands out of Staines and into the US. They set up a local company there because it makes life easier for everyone (regulation is different, employment is easier, data protection is different, local contracts are better for their customers, that sort of thing) and it gets some US revenue, all leveraged off of Staines’s IP. They know that the UK government has these transfer pricing rules and they have a think about things and charge the US sub an arm’s-length price. This means that the US sub’s gross margin is 10% but the margin including Staines is 20%. Should the US complain that it is not enough tax? If they do, should the UK government claw back some of the tax relief Staines has had over the last 20 years because it has now been shown to benefit a non-UK business?

  18. Jolyon, it’s good that you have at least tried to run some figures on this, but as Charles Lewis says there are two, possibly three, separate discussions here.

    The first is the deal on historic liabilities. Andrew Jackson explains the structure, except (as I understood it) there was a ‘double Irish’ meaning the royalty payments mostly end up untaxed in one of the Irish companies. Andrew rightly says the law currently only taxes the value of the marketing to Google Ireland, but in reality I understood Google UK to get a lot further in the process than that. I’ve never quite seen why handing over a sale that just needed inking in should have been valued at cost plus, and it seems HMRC has at least agreed a better transfer price. If parliament wants to know how good, it needs to ask the NAO to look at the figures, but since it didn’t listen when told the Vodafone etc deals were probably about right, I don’t see the point.

    Richard Murphy says the structure survives the DPT, and I agree with him that, if it has, that would be very disappointing. In any normal world the deals should be concluded in the UK. But you would still only expect the margin to be that of an independent sales operation, given the point Maya makes about the boffns at the Goigleplex, not the full grou margin.

    Then finally, as she also says, what you are proposing is a massive change to international taxation – there’s nothing ‘mere’ about it. You’re not just proposing unitary taxation, where a multinational’s profits are treated as a global whole and divided between its countries of operation for axing, you are proposing to do that using only sales revenue as the numerator rather than the multi-factorial approach normally suggested.

    Maya has already pointed out the issues and alternatives, I would just add that it is equally easy to avoid – rather than having the selling company in a tax haven you simply put a subsidiary of the buying company in a tax haven, and give it the job of group purchasing. Companies like Google would then, with complete commercial justification, add 25% to their prices for purchase by UK companies but 0% for purchases by tax haven companies. Simples…

  19. Hi Mike,

    You may have misread my post. I’ve deliberately said nothing about the historical position. There may or may not be an interesting debate to be had about whether HMRC cut a good deal. I’d suggest ‘not’ because of the limited information available to us.

    There’s a separate debate about whether HMRC ought to have contended (as I understand France to) that Google has a PE such as to bring UK sales profits into charge to UK corporation tax. I haven’t tackled that debate either. That having been said, I think I’m likely to be in a broadsheet tomorrow saying I think it’s important that HMRC be seen to be testing before the courts a question of huge financial and public interest. It sounds like you agree with me on this.

    There’s a further question about the DPT. We don’t have much visibility about what it means for Google – although I suggest here a basis for reaching the conclusion that the answer is ‘not a lot’. You get to that conclusion by other means too, means that I have not here addressed.

    What does this leave? Well, it leaves the question which may be of little interest to tax geekery but is nevertheless of legitimate public interest, namely, is the Google Monolith making profits in the UK (answer, plainly yes) which are being hugely undertaxed (answer, plainly yes). There may be reasons why the UK feels unable properly to address this state of affairs – but I don’t think that it well behoves the Chancellor publicly to congratulate himself for achieving a deal that embeds the status quo, with the addition of only an added coin flipped into the UK fiscal hat.


  20. Imagine a company similar to Google, based in the US, which sells its valuable services to UK customers but with no UK premises, assets or staff. How much UK corporation tax should such a company pay on its UK revenues?

  21. It should pay tax on its profits not on its revenues.

  22. My take:

    – Most people involved in international tax think that the Google structure (or what we can infer about it) in the UK “works”, in the sense that it manages to generate UK-source revenues in a way that doesn’t give rise to material UK corporation tax.

    – HMRC could have had a go at claiming that non UK-resident Google entities had a UK permanent establishment to which material profits could be attributed. I’m guessing they didn’t argue this for very long if at all, and I’m guessing that the HMRC team looking at this weren’t idiots, so I’m concluding that Google was pretty good at remembering to look at the memo that its UK tax advisor put together as to what it could and couldn’t do in the UK. As far as I could see (from a google search, natch), the French PE argument doesn’t seem to be moving along very quickly.

    – Ultimately whether the historic settlement was £1.3M, £13M, £130M or £1.3BN is not that interesting. Until Friday, I didn’t know (and I don’t think it was widely known) that Google’s historic tax arrangements were likely to be the subject of a settlement. Had nothing been announced, I don’t imagine we’d have been on twitter in August wondering why we hadn’t heard anything. It’s tinkering around peripheral issues in a structure that works.

    – The DPT and potentially BEPS implications are far more interesting. I was particularly drawn by this in the story:

    “Matt Brittin, head of Google Europe, told the BBC: “Today we announced that we are going to be paying more tax in the UK.
    “The rules are changing internationally and the UK government is taking the lead in applying those rules so we’ll be changing what we are doing here. We want to ensure that we pay the right amount of tax.” ”

    The language is forward looking.

    – It seems inconceivable that Google wouldn’t be caught by the Google tax. I’ve looked again at the wording in section 86 and see no reason to change my mind. George Osborne specifically mentioned DPT in his tweet – he wouldn’t do that if it wasn’t going to affect Google’s structure and behaviour.

    – My conclusion is that Google is accepting the new international tax paradigm, will not be arguing that it is inconsistent with the UK’s DTTs/EU law (which a lot of people think it is) and will be paying much more UK corporation tax as a result of DPT/BEPS.

    – Has this backfired on Google? Unlikely that the don’t have an algorithm that predicted the unfavourable reaction in the media. Maybe the £130M was the hook to draw out the critics, with a view to delivering a sucker punch in the PAC.

    – Either way, I stand by my view that this announcement has changed the game in international tax, one way or the other.

  23. ” …the UK should have taxing rights over revenues made here.”

    As you say in a later comment:

    “It should pay tax on its profits not on its revenues.”

    This is the fundamental problem. Profit is the taxable bit of revenue, the question is: how do you get from one to the other? No answer seems to satisfy everybody.

  24. But here there is not even an attempt.

  25. Pingback: Yes, Google’s UK back-tax payment is derisory. Here are the numbers that show it. | The Overspill: when there's more that I want to say

  26. I’m sure you didn’t mean to dodge my question, so let me rephrase: how much UK corporation tax should the US company in my example above pay its *profits derived from* UK revenues?

    Congratulations on your “Hot 100” place this year, by the way. Well deserved.

  27. The rate of corporation tax on income profits is 20% – although scheduled to drop to 18%.

  28. Right, so you would advocate charging UK corporation tax on any company’s revenues from customers in the UK, irrespective of its place of business?

    Would the reverse apply to, say, UK businesses selling their services to customers in the US? So for example firms of UK accountants or lawyers advising US clients should be paying US tax on their revenues from US customers, whether or not the advisers ever go to the US? Would this system result in the UK exchequer receiving more or less in tax revenue (after allowing credit for tax paid overseas)?

    Presuambly you would accept that this is not the way the tax law works at present in the UK (or the US – or really anywhere – are there some examples? US states? Canadian provinces?). Perhaps it might be “logical” but the current system, based on independent enterprises dealing at arm’s length, is also entirely self-consistent and logical.

    At least it is clear that your £200m figure is a notional figure based on what the law could be, not a realistic estimate of the tax that Google should be paying based on the law as it stands. For some reason, the press seems to think HMRC has given up on £200m pa of tax that Google should have paid in the UK in the past. This deal suggests that HMRC has concluded that tax at that level was never due.

    As a few other commentators have said, the historical questions are (a) whether Google had a permanent establishment in the UK in the past that was making sales to UK customers (as I understand the job titles of some of its UK staff might suggest) and (b) whether the UK operations were properly remunerated through transfer pricing at an arm’s length rate. No doubt there were questions for Google to answer, and no doubt HMRC was asking them.

    The question for the future is whether Google will be paying more tax in the UK as a result of BEPS and the DPT, and the answer is surely yes, as the company itself admits.

  29. If Google were making cars in Mountain View and selling them to UK businesses through a London branch office then the tax position would be obvious – even if the selling operation did constitute a “permanent establishment” then UK corporation tax would only be due on a reasonable wholesale margin less the administrative costs of the London office. Most of the corporation tax would be due in California, where the cars were made.

    This <a href=""article (first relevant Google search for me) says that the UKs food wholesalers made a profit after expenses of 0.8% of sales. Google UK made a profit after expenses of about 1.8% (£70 million on £4 million and change of UK sales), which looks reasonable. As a check, Google UK reported revenue of about 15% of Google’s UK revenue, which would correspond to a reasonable wholesale markup of about 20% when measured as a percentage of the “factory-gate” price.

    So the claim that Google should be paying an order of magnitude more UK corporation tax is either a claim that Google’s services are in some sense made in the UK, or a claim that a bunch of boffins in Mountain View should be charged UK corporation tax in exchange for the privilege of selling into the UK market.

    We already have a tax on selling foreign-made goods and services into the UK market – it is called import VAT (and all the above Google revenue numbers are net of it). Using corporation tax as a kind of second VAT that relies on the technicalities of foreign accounting to determine the UK liability doesn’t seem like a good idea.

  30. Your first paragraph is exactly the calculation I have done: what are the sales made in the UK (as reported to Google’s US investors) and what are the expenses of generating those sales (averaged in a manner likely to understate them).

  31. This is ridiculous Jolyon.

    The IP is not sourced here, it’s owned by another company and has no connection to the UK.

    Profits from that IP should be taxed in the US, not here. The fact that the US does not tax the IP profits properly is not the concern of the UK and should not affect revenues here.

  32. You’re making an argument about how the tax system works, a system that enables a single economic entity to manipulate its tax liability by moving money from its right trouser pocket to its left trouser pocket. I’m making the argument that if you treat it as a single economic entity and you ask ‘what is the margin that it makes on revenues that it generates’ you get to a profit of £1bn on revenues in the UK. I’m happy for others to decide which result is the ridiculous one.

  33. I think we all agree it is ridiculous that the profit is allowed to sit in an Irish subsidiary, or get transferred to whichever tax haven, if that is what happens. What is being disputed is the idea that UK taxable profits should be global taxable profits multiplied by UK revenues over global revenues. Not the least of the problems is the one I raised above, that it is just as easy to create avoidance structures around.

    Indeed I’m prepared to bite the bullet and say that yes, the current system is actually more appropriate than your proposal. The current system should have seen a harder attack by the UK on the transfer price of the “oven ready” sales supplied to Ireland, and a fortiori it should have seen a much harder attack from the US on the transfer price for the IP and other services. The issues raised by BEPS suggest that the current system will be adapted into something which is much more fit for the 21st century. But given the Hobson’s choice of the current system and your unifactorial (!) unitary taxation, I’d say the current system was better.

  34. Jolyon

    Working how to effectively tax international business in the internet age is a real and difficult issue -I think all are agreed –. But it seem to be putting the cart before the horse to think of Google simply as a very profitable London ad-agency, which has developed Search, Maps, Youtube etc… not as its core way of creating value, but as an elaborate ruse to ‘move money from one trouser pocket to another’.

    Looking at Google’s 10-K they break down their costs into

    Costs of Revenues 39% (i.e. acquiring content – youtubers & games developers, server farms, inventory etc..)
    R&D 15%
    Sales and marketing 12%
    General admin, legal, finance HR – 9%

    Your calculation as I understand it says that after these costs are taken out, global profits should be attributed to the four activities something like this:

    Acquiring content, servers, inventory – 0% of global profits
    R&D 0% of global profits
    Sales and marketing -100% of global profits
    General admin, legal, finance HR – 0% of global profits

    Is that right ?? (and as Mike Truman, Jonathan Monroe and many others have said above, why??)


    I had a go at running your back of an envelope calculation but attributing profits to the four activities in the same proportion as costs. On that basis if we assume that UK ought be able to tax the value created by the sales and marketing activities related to UK revenues (i.e. following Jonathan’s car dealing analogy) I think it would look like this:

    £4bn x 26% x12% = £125m profits from sales & marketing activity related to the UK (in which case £30m = 24% not 3%)

    (of course there are other ways to play around with these numbers, maybe R&D gets more profits, to reflect risk etc… )

    My point is not to defend Google or Osborne, but (as ever) that anchoring these debates with wildly overoptimistic revenue estimates contributes to dysfunctional public and policy debates.

    You are one of the most thoughtful and respected tax commentators on the UK progressive scene with an admirable mission to shed light on misconceptions around tax and tax avoidance in the UK. If you say that the ‘right’ number is £200bn people give that a lot more weight than for example if UKUncut comes up with such a figure. But if that it turns out to be in the wrong order of magnitude then no policy could ever deliver on, and will add to confusion and further reduce confidence.

  35. Ah hold up….. marketing is 12% of revenues but 16% of costs (i.e. 12%/75%)

    So it should be (I think…)

    £4bn x 26% x16% = £166m profits from sales & marketing activity related to the UK so that = £30m = 18% rough back of an envelope effective tax rate.

    Apologies for confusion on that

  36. One thing I would say is that I am pleased that you allow the debate to go on in the comments section. I was talking to a colleague who knows of another tax barrister with a blog and she, apparently, makes sure that no comments get published that are not absolutely supportive of her position.

  37. Let’s say I make a widget in the US for $1 and sell it in the US for $2: I generate a $1 profit in the US.

    Let’s say I make another identical widget for $1 in the US and sell it in the UK for $3, and incur 50c export and distribution costs.

    In total I have made a profit of $2.50 on $5 of revenue.

    Your argument is that the profits should be matched to the revenues, so half of my profit ($1.25) should be taxed in the UK.

    The IRS would argue that a widget has a demonstrable commercial value of $2 when it leaves the US, so $1 of the profit from each widget should be taxed in the US irrespective of where that widget is sold. In total $2 of my profit should be taxed in the US, and 50c in the UK.

    The IRS’s argument would be right, based on the underlying commercial reality of the transactions involved. It is not a matter of ‘moving money from its right trouser pocket to its left trouser pocket’.

  38. Incidentally my annual report would show me generating 60% of my revenue in the UK, but 80% of my taxable profit would be in the US. This would not be ridiculous, although it might attract some negative publicity in the UK.

  39. Thanks for all your comments, folks. I’m not ignoring them. I will reply. I’ve been writing something else but I hope to come back to this tomorrow night. We generally have good quality contributors and I need to engage to seek to ensure that continues.

  40. Pingback: Did the UK really agree to charge Google a 3% tax rate? | Hiya Maya

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  42. I have responded to the points made in this comments section in a separate post. Thanks for engaging. Please carry on!

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  44. I run a small software company which has undertaken work in Kuwait. That has involved my visiting Kuwait for periods of at most 2 weeks twice a year. All other work has been undertaken in the UK. In some years I have never visited Kuwait. Yet Kuwait has applied its Foreign Corporate Income Tax to the Company’s entire turnover from the work invoiced to Kuwait.

    The reason? Kuwait uses the United Nations definition of Permanent Establishment (PE) and deems my company to have a PE in Kuwait. Fortunately, the double taxation agreement between Kuwait and the UK recognises Kuwait’s definition of PE, so I can claim double taxation relief against the Kuwaiti tax.

    It seems to be a political decision as to what constitutes a PE. It would be interesting to know whether the UK could modify the definition of PE which it uses and, if so, what effect this would have.

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  46. I don’t know the details of the law in Kuwait, but the UN definition of a PE in its model double tax treaty includes a so-called “services PE” where a business established in one state provides services to customers in the other state, even if the business does not have a fixed establishment (premises) or a dependent agent (a person with authority to conclude contracts) there. See Article 5(3)(b) here: However, it should only apply where the “activities” continue in the other state for more than 183 days per year. There seems to be an implication that some sort of presence of personnel on the ground for that aggregate amount of time is required, not just for a couple of days a year, but you could read it as applying where the services are provided for more than that period without people being there at all, and that may be the view the Kuwaiti tax authorities are taking. I would not want to be a foreigner arguing with the tax authorities in Kuwait!

    The UK’s domestic definition of a PE follows the OECD model treaty, which does not include a services PE. However, the BEPS report on Action 7, on avoidance of PE status, includes some changes to the OECD definition of PE, so a person who has a principal role leading to the conclusion of contracts, that are then concluded without material modifications, will constitue a PE, even if the contracts are formally concluded elsewhere. In the case of Google, that change is likely to see a chunk of the UK business becoming taxable here – assuming they continue to employ staff in the UK to manage relationships with UK customers.

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  48. It’s been touched on in some of the comments above, but a basic point to make is that the allocation of revenues in Google Inc’s accounts to the UK does not follow (UK) taxation principles but is determined by accounting standards. Your $1bn starting point is unlikely to be right.

    For instance, Jolyon, if you represented a US client in the UK courts the fees could be classed as “US revenues” by your accountant (and your clerk correctly wouldn’t charge VAT to the client) but you’d hardly expect to file a US tax return.

    Keep up the posts – always interesting.

  49. That’s entirely fair. I’m certainly not saying that £1bn represents Google’s profits actually chargeable to UK corporation tax.

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