A significant amount of (electronic) ink has been spilled since Friday on Google’s tax arrangements. It was revealed that the multinational had arrived at a tax settlement with HMRC for £130m. Lawyers, academics, economists, civil servants, politicians, accountants and tax advisers have (enthusiastically) discussed the intricacies of the deal, although the paucity of details has meant that arguments on all sides have been forced to rely upon assumptions, hypotheticals and even guesswork. Whether this is cause for greater transparency is a matter for another day however. The catalyst for this post is the interjection by George Osborne. At the World Economic Forum in Davos on Saturday, Osborne lauded the deal:
This is a major success of our tax policy.
We’ve got Google to pay taxes and I think that is a huge step forward and addresses that perfectly legitimate public anger that large corporations have not been paying tax. I think it’s a really positive step.
I hope to see more firms follow suit and of course I’ve introduced a diverted profits tax which will require this going forward. So I think it’s a big step forward and a victory for the government”
The reason that this is concerning relates to the fact that HMRC is a non-ministerial governmental department. In the words of HMRC:
“this makes it different from most other government departments, which work under the direct day-to-day control of a minister. The Queen appoints Commissioners of HMRC who have responsibility for handling individual taxpayers’ affairs impartially. This means that ministers have no involvement in taxpayers’ cases.”
This is worth emphasising. A minister does not control HMRC’s day-to-day collection and enforcement activities and there is no political involvement in taxpayers’ cases. During a reading of the Bill creating HMRC in 2005, former Attorney General Lord Goldsmith remarked that it was:
Osborne’s intervention calls into question the independence of HMRC collection and enforcement activities and undermines this “important principle”. In making its claims, the tone and tenor of the speech imply political involvement in the settlement. Although he did introduce the Diverted Profits Tax, that affects tax liability going forward from April 2015, not retrospectively to which the deal largely relates (it settles the tax dispute up to June 2015). By publically praising the deal at Davos, there is an uncomfortable implication that HMRC were under political pressure to arrive at the deal in time for his speech. The fact that it was Google itself that initially announced and endorsed the deal has the effect, not of detracting, but rather of supporting this assessment. It gives the appearance of a prior agreement on both sides to publicise the deal. Furthermore, this is not the first time political involvement by Mr Osborne has called into question the independence of HMRC operations (see: UK Uncut, especially para 22).
In and of itself, undermining the arm’s length relationship between politicians and non-ministerial departments is problematic. It has further implications however for the mechanisms for accountability. As a non-ministerial department, the traditional elements of individual ministerial responsibility are eschewed. No cabinet minister bears ultimate responsibility for actions taken by HMRC. Rather, that rests in the hands of civil servants, who cannot be voted out by the ballot box, forced to resign or sacked by the Prime Minister. Accountability must be sought through alternate avenues. To this end, select committees exercise Parliamentary control. In the case of HMRC, that is the Public Accounts Committee and the Treasury Select Committee, and these bodies regularly interrogate the Commissioners of HMRC over the performance of the body.
Osborne’s inference however blurs the line between policies for which he is accountable and actions for which HMRC is accountable. In so doing he attempts to take the fruits of a PR opportunity but without being held responsible for its minutiae. He holds no duty to Parliament if in time it turns out to be a poor deal for the exchequer. Further, by encroaching upon the territory of the Commissioners, he has placed them in the unenviable position of being forced inevitably to defend the deal before the select committees without divulging its details, restricted by reason taxpayer confidentiality. This invites another NAO report!
This idea of having one’s cake and eating it too ultimately calls into question the appropriateness of an arm’s length relationship between ministers and HMRC. In principle, I would disagree with the notion that HMRC should have direct political oversight. But Osborne’s actions mean that this objection in principle could be outweighed by the practical reality. Other common law countries, such as Canada, do have an element of political involvement in overseeing the actions of revenue-collecting bodies, and their worlds have not caved in. Perhaps it is time to interrogate the received wisdom that HMRC must be independent.
Stephen Daly is a PhD candidate at the University of Oxford and blogs regularly at http://taxatlincolnox.wordpress.com/
Follow him on twitter at @SteveLincolnOx
Waiting for Godot 
Good work, Stephen. This is why the FT and Jolyon are right to blame the government for HMRC’s shocking failure to ask the court to determine whether these companies have a PE in the UK. There is clearly a huge difference of opinion between HMRC and the companies. So, by any standard, this issue has long been ripe for a judicial determination in the interests of the rule of law, sound tax administration and public confidence in the tax system.
As Walton J said in Vestey v IRC [1977] STC 414, 439.
“I conceive it to be in the national interest, in the interest not only of all individual taxpayers, which includes most of the nation, but also in the interests of the Revenue authorities themselves, that the tax system should be fair. … One should be taxed by law, and not be untaxed by concession. … A tax system which enshrines obvious injustices is brought into disrepute with all taxpayers accordingly, whereas one in which injustices, when discovered, are put right (and with retrospective effect when necessary) will command respect and support.”
HMRC’s determination to settle these disputes in secret and their studious exclusion of the court from the process is bound to be seen as part of the government’s Large Corporates strategy.
I read someone on Twitter arguing that we can’t litigate ‘every’ case but we’ve never litigated ANY case on this matter!
Interesting comment, Mimi. Perhaps someone else knows better, but a quick search suggests the last court in England to rule in a case on the taxation of the profits of a permanent establishment was the Privy Council in a Malaysian appeal, Hock Heng Co Sdn Bhd v Director-General of Inland Revenue [1979] STC 291, which was really about (in effect) cross-border loss relief. However, there are a number of reported cases considering the similar concept of a “branch or agency”.
This sort of case is so fact-specific that litigation can be quite a lottery. Consider the rather unsatisfactory result of the Dixons transfer pricing case, which resulted in the court telling both parties to go away and try to reach an agreement.
On Stephen’s question: ministerial accountability for strategic oversight and policy, yes, of course; interference with day-to-day operations, no thanks.
As I understand it, the Google “deal” would not have been announced without Google’s consent (indeed, its request). You can hardly blame a politician for trying to frame it as a success, even if he had little to do with it.
I have a great deal of respect for Stephen and his blog is always worth reading.
But in this case I’m not so convinced as he is of the constitutional morass he thinks we’ve entered. This seems an over-reaction. No doubt others will have their own views, so another stimulating blog on Waiting For Tax.
Putting aside all the Rumsfeldian aspects (the known unknowns and all that, and a view from Prem Sikka that the settlement gives £200mn tax paid http://leftfootforward.org/2016/01/why-googles-tax-deal-is-unacceptable/), what do we have? A statement by a Chancellor that the settlement is a success for UK tax policy, that he hopes other firms will pay their taxes, and that the DPT will make it more likely. He says this is a victory for the Govt.
I cannot read all this as meaning he is personally directing HMRC and its operations. Or that he pressured HMRC into agreeing the timing would coincide with Davos. (The UK Uncut link is surely a red herring. That refers to a (mistaken) state of mind in a senior member of HMRC, not a view or direction from from Osborne. And Para 57 disposed of any claim the decision was made to spare Osborne embarrassment.)
If we were to take a view Ministers cannot comment on the work of HMRC then I think there are generations of Ministers who have drawn attention to successful tax collection, or the evils of avoidance, without alarming us and raising worries on independence. When David Cameron said (at Davos) it was time to wake up and smell the coffee, did we see that as a dangerous and unconstitional attempt to direct HMRC? When Danny Alexander warned about tax dodging and how HMRC were going to crack down on it, did anyone say that was political interference with HMRC?
HMRC works within the confines of HMG policies as reflected in the legislation Parliament passes. Surely a Minister can say we have legislated to make avoidance even more difficult (DPT) and I’m glad HMRC is bringing in the money?
I fully support an independent HMRC, subject to Parliamentary scrutiny (although by the TSC, not the PAC, whose only remit might be value for money). But
there are some real problems here. How can there be an independent HMRC if, when people who don’t like the outcome of that independence (which is taken as proof of incompetence, corporate capture, etc), require an enquiry, full details must be published, HMRC must litigate, and so on. Quis custodiet again
I think it would have been more comprehensive had Osborne praised the work of HMRC and its staff in delivering this result.
And incidentally, am I the only one who finds it ironic that this enquiry began long before Google et al were publicly criticised? Critics of HMRC assured us that it was doing nothing, was spineless, would do nothing, etc. They might not agree the outcome (although given the secrecy are we sure everything is yet disclosed) but perhaps they could acknowledge that enquiries did take place?
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Hi Iain,
Thank you for the comments as always!
I don’t think we really disagree on much here at all, other than the weight to be attached to the Chancellor’s intervention. For me, it is different from directions to Multinationals (Cameron in Davos) or in relation to broad policy initiatives (Danny Alexander). Here, the intervention implies Osborne had some hand in the individual settlement itself – perhaps he could have chosen his words and timing better – but that, for me, is a crossing of the Rubicon and that’s the core problem.
At any rate, I hope all is well up in Edinburgh-send a message my way next time you’re down this way!
Steve
Rather than comment at length, just to note that the broad relationship between Ministers and HMRC is governed by the very short section 11 of the Commissioners and Revenue and Customs Act 2005 which provides merely “In the exercise of their functions the Commissioners shall comply with any directions of a general nature given to them by the Treasury”. What was intended by this was set out in a letter from the then Attorney General to the Chairman of the Select Committee on Constitution which is well worth a read here … http://www.publications.parliament.uk/pa/ld200405/ldselect/ldconst/78/7807.htm
“This is why the FT and Jolyon are right to blame the government for HMRC’s shocking failure to ask the court to determine whether these companies have a PE in the UK. There is clearly a huge difference of opinion between HMRC and the companies.”
Is that clear? As far as I can see, HMRC has never argued that Google Ireland has a UK PE under current law. To have a UK PE, Google Ireland would either need a UK fixed place of business or someone in the UK able to conclude contracts on its behalf. It (presumably) has neither, unless Google screwed up in practice (which nobody has suggested, to my knowledge)/
Nor is having a UK PE a panacea for HMRC that allows them to tax google’s “real” UK profit. They’d still have to show that the profits were attributable to that PE (as opposed to Ireland).
What appears to be in question is what the correct remuneration for the UK should be. That question boils down to “what would an independent advertising sales agency specializing in selling internet search engine adverts charge, if such an independent company existed, which it doesn’t”. Hence the room for (significant) disagreement.
What bothers me about this argument is that people are essentially arguing that HMRC could have obtained the “right” amount of tax if they wanted it, but chose not to for political reasons. If that were true, reform of the tax rules would be pointless. If the pro-tax reform side don’t get behind legislative change (in particular, the BEPS initiatives) then it won’t happen – because clearly business lobbies won’t want it to happen.
The message the public needs to understand is “multinationals aren’t paying the right amount of tax, but there is a solution”, not “multinationals aren’t paying the right amount of tax and its pointless trying anything cos they have Westminster in their pocket, not worth the effort of trying”.
Andy, I think some have suggested that there could be people in the UK with sufficient authority to conclude contracts (effectively, anyway, even if the contracts were formally approved in some sense in Ireland).
It would have been interesting to see a judge deciding whether all that happened in Ireland was “rubber stamping” and if so whether a formal step of that nature was enough to prevent there being a UK PE. Given the number and nature of the staff in the UK, I have no doubt that HMRC will have considered the issue, but I also don’t underestimate the difficulty of proving it in court (or indeed the problem of finding convincing evidence, and the possibility of HMRC losing a reported case and so making it more difficult to negotiate with other taxpayers).
What we are missing is a convincing explanation of why this is actually the “right” answer under the existing law.
“If that were true, reform of the tax rules would be pointless.”
So, why did HMRC strike a deal with Google that preserves their arrangements for the future, after a six-year investigation without applying the DPT or waiting for the BEPS proposals to be enacted into law?
“So, why did HMRC strike a deal with Google that preserves their arrangements for the future, after a six-year investigation without applying the DPT or waiting for the BEPS proposals to be enacted into law?”
Well, you can’t apply DPT to periods before it was enacted. Google Ireland won’t have even filed a tax return for 2015 yet.
Similar with BEPS. The new legislation hasn’t been introduced yet, so you can’t apply it to the years under investigation.
“Andy, I think some have suggested that there could be people in the UK with sufficient authority to conclude contracts (effectively, anyway, even if the contracts were formally approved in some sense in Ireland).”
The bit in brackets in the point. The legislation, and the UK/Ireland treaty, does not say “effectively”, it says “concludes contracts”. Under BEPS, they want to change that to add “or agrees the material elements” or something similar, but that hasn’t happened yet.
It’s important to understand, I think, that the treaty definition isn’t just about stopping tax avoidance, but it’s about allocating taxing rights between the UK and Ireland. If an activity of an Irish is part of a UK PE, the UK has primary taxing rights; if it isn’t then they lie with Ireland.
“What we are missing is a convincing explanation of why this is actually the “right” answer under the existing law.”
Well, you may not find it convincing, but my understanding is this: The old OECD method of allocating profits it to assume that the two parties are entirely separate enterprises, and ask what profit each entity would have made in that situation. In doing so, a lot of weight is placed on economic risk (because that’s exactly how it would work in the case of independent parties – the one taking on all the risk wants a biggest slice of the cake to compensate).
Google will have written the contracts so that all the economic risk lies in Ireland. As such, the old rules would say that Ireland deserves the bulk of the profit.
People now want to change various bits of the tax code, to say (among other things) that it’s enough to effectively conclude a contract rather than actually conclude it; that you can’t argue that a PE doesn’t exist just because it’s activities were only a minor part of your overall activities; and that more weight it placed on where activity takes place and where it is utilised when looking at pricing cross border transactions, especially in IP heavy industries such as Google’s. All of this is broadly sensible (though I do have some significant specific concerns), but none of it has happened yet.
Thanks for that, Andy – you may well be right, but it would be nice to see one of the parties involved – HMRC or Google or even a government minister – explaining that in simple terms so the public is not misled into thinking that there is some fanciful £200m pa of tax that has been forgone, when it was never legally due; or that the effective tax rate for Google UK is just 3%, when it is not. (I think Jim Harra has tried, but it is not cutting through; May’s blog is a step in the right direction – https://hiyamaya.wordpress.com/2016/01/25/did-the-uk-really-agree-to-charge-google-a-3-tax-rate/ )
Yes the definition of a PE in the UK-Ireland double tax treaty says “has, and habitually exercises in that State, an authority to conclude contracts in the name of the enterprise”. http://www.revenue.ie/en/practitioner/law/double/uk.html
The UK domestic definition in s.1141 CTA 2010 is a bit broader, saying “has and habitually exercises here authority to do business on behalf of the company”.
Question: is a contract “concluded” when the two parties have reached an agreement in all material respects, which is then implemented without any material change, or only when a functionary applies a rubber stamp? What would a judge say?
Some HMRC guidance here: http://www.hmrc.gov.uk/manuals/intmanual/intm266140.htm
“A person who is authorised to negotiate all elements and details of a contract in a way binding on the enterprise can be said to exercise that authority ‘in that State’ even if the contract is signed by another person elsewhere. The level of an agent’s actual authority in the business should be tested by reference to the commercial realities of the situation.”
An interesting comment on Maya’s blog by an online marketing consultant, about how Google actually operates. Much is done automatically, but when he needs to speak to a human being, he deals mostly with people in Ireland.
Oh, I meant to add a link to s.1141 – http://www.legislation.gov.uk/ukpga/2010/4/section/1141
Building on the comment from the online marketing consultant, Andrew I wrote a second post specifically looking at Google’s business model: https://hiyamaya.wordpress.com/2016/01/28/how-much-does-it-matter-where-google-books-its-sales/ . I’d be interested in you legal folks’ opinion – a lot is being made about the PE issue – and I understand that this is where the idea of abuse is, rather than an adjustment to transfer price.
But the idea that Google UK is warming up contracts to be ‘inked’ or ‘rubber stamped’ in Ireland seems to be at odds with the way Google actually works in terms of its core business model of instantaneous ad-words auctions (no ink involved!) — there seem to be pretty good commercial reasons to do that all in one place.