Google And The UK Tax System – Tax Avoidance?
For several years now Google has been facing what appears to be a case of tax avoidance in the UK, at some point in time, the company went as far saying it did not make any money from business in the UK all in a desperate attempt to pay less than is required, lets take a closer look at the UK tax bill, before we do that, we however first need to understand what tax avoidance is.
What is Tax Avoidance?
Tax avoidance occurs when legal methods are used to modify an individual’s financial situation in order to lower the amount of income tax owed and this is mostly achieved by claiming the permissible deductions and credit. Tax avoidance is not to be confused with tax evasion as tax evasion is illegal. Tax avoidance allows the legal usage of the tax regime in a single region or a country to the one’s advantage to reduce the amount of tax that is payable by means that are within the law. Tax avoidance is bending the rules of the tax system to gain a tax advantage that was never intended to by the authorities, it often involves contrived, artificial transaction that serve little or no purpose other than to produce tax advantage.
A company may choose to avoid tax by setting their companies or subsidiaries in an offshore jurisdiction. Individuals may also avoid tax by moving their tax residence to a ‘Tax heaven such as Monaco, they may also reduce their tax to a country with lower tax rates.
Though a small number of countries tax their citizens on their worldwide income regardless of where they reside, examples of countries that practice that are; the United States and Eritrea In the UK, it is not different from other regions as the vast majority of the individuals and businesses pay the tax that is due, but however there is a small minority who don’t and this is kind of unfair to the honest majority and prevents money from reaching the crucial public services that need it.
The labor government in the UK in 2004 announced it will use retrospective legislation to counteract some tax avoidance schemes, and it has subsequently done so on a few occasions notably BN66 (Budget Note 66). Some of the initiatives announced in 2010 suggest an increasing willingness on the HMRC to use retrospective action to counter tax avoidance schemes, even when no action has been given.
Tax avoidance by individuals and businesses contributes to the ‘Tax Gap’ along with error, failure to take reasonable care, non-payment, legal interpretation, the hidden economy and criminal attacks on the tax system. The difference between revenues collected that Her Majesty’s Revenue and Customs‘ (HMRC) view should come in and the total actually collected by HMRC is known as Tax Gap. The tax gap in the 2010 to 2011 financial year was estimated to be £32 billion– 6.7% of the total tax that HMRC estimates was due and tax avoidance and tax evasion together accounted for the £9 billion of this.
Action Aid in 2011 reported that 25% of the Financial Times Stock Exchange 100 Index (FTSE 100) companies avoided taxation by locating their subsidiaries in Tax havens (Jurisdictions which facilitate reduction of taxes). This increased to 98% when using the US congress definition of tax haven and bank secrecy jurisdictions. In 2016 in was reported in the Private Eye current affairs magazine that four out of the FTSE top 10 companies paid no corporation tax.
The Google, Amazon and Starbucks story
Although Google appears to be the only company facing tax avoidance issues in the United Kingdom, Amazon and Starbucks were also two companies that were under series of investigation by the British government. In 2012, tax avoidance came to national attention in Great Britain when British MPs singled out Google, Amazon and Starbucks for criticism, following accusations that the three companies were diverting hundreds of millions of pounds in UK profits to secretive tax havens, there was widespread outrage across the UK, it was also followed by boycotts of products by Google, Amazon and Starbucks.
Following the boycotts and damage to the brand image, Starbucks promised to move its tax base from the Netherlands to London and pay HMRC £20 million, but the executives from Amazon and Google defended their tax avoidance as being with the law. Google has remained the subject of criticism in the UK regarding their use of the ‘Double Irish’ (A tax avoidance strategy that some multinational corporations use to lower their corporate tax liability), Dutch Sandwich (The Strategy payment between related entities in corporate structure to shift income from a higher-tax country to lower-tax country), and Bermuda Black Hole (a scheme which hundreds of billions of pounds of multinational companies’ profits have been routed to Bermuda) tax avoidance schemes.
However Amazon has also been subject to scrutiny across the UK and EU (European Union) for its Tax avoidance, with a ‘sweetheart deal’ between Luxembourg and Amazon enabling the American company to no corporate tax across Europe declared illegal in 2015.
Chancellor George Osborne in the 5015 Autumn Statement announced that £800 million would be spent on tackling Tax Avoidance in order to recover 5 billion pounds a year by 2019-2020.
Some UK active corporations have been identified in relation to tax avoidance in 2015 particularly the Double Irish, Dutch Sandwich and Bermuda Black Hole; Football clubs: Manchester United, Birmingham city, Coventry City and Cheltenham Town; Retail: Boots, Kellogg’s and TopShop. Technology: Apple, PayPal, Uber, Netflix, Intel, Yahoo, Microsoft, Hewlett-Packard, EBay, IBM, and Twitter.
Google in 2016 agreed to pay back £130 million of tax dating back to 2005 to HMRC, a move that has received a lot of criticism from most UK citizens, this had led the British MPs to launch inquiry into a payment that is seen as too little by Google. Although the MPs mentioned that the inquiry is not directed at Google, it is aimed at strengthening the UK tax system, which many see as being too elastic as it allows companies to carry out tax avoidance with no legal implications.