For almost two years, there has been unrelenting focus from all sections of the media on the tax affairs of large multinational companies (MNCs) and, in particular, whether they are paying their ‘fair share’ of UK tax.
The debate gathered momentum when the Public Accounts Committee (PAC) requested executives from Google, Amazon and Starbucks to give evidence at a hearing on 12 November 2012. The PAC subsequently issued its findings in its 15 April 2013 report that appears to disregard current UK tax law and much of the evidence submitted to it. The overriding impression is one of a Kangaroo Court (and one with arguably no jurisdiction). Despite this rhetoric, there seems to be no suggestion that any of the companies mentioned have done anything legally or technically wrong – quite the opposite. They have structured their investment into the UK within the constraints of current UK tax law and international treaty provisions. If there is a case to answer it is whether current UK tax law is fit for purpose and, to this end, there is a dire need for the complex issues at the heart of the debate to be considered properly and impartially without the rhetoric of ill-advised MP’s and ideologically biased ‘campaigners’.
Google’s corporate structure starts in the US and goes via Bermuda, the Netherlands and Ireland before it ends up on the shores of the UK. To this end many of the core business functions are located outside the UK (IP, finance, sales and so on) reflecting the fact that MNC’s will strategically place functions and risks in specific jurisdictions in order to optimise their corporate and commercial strategy, part of which is management of their global effective tax rate.
Google’s UK revenue streams are derived from the sale of advertising and in this regard it is Google Ireland that is the group company with whom UK customers contract (or at least that is what we are told). No doubt Google UK provides marketing and client relationship functions under contract to Google Ireland for an arm’s length fee. In basic terms, Google Ireland is the profit centre and Google UK is the cost centre of the advertising business.
This basic tax model is relatively simple: Google Ireland sets the broad business strategy and Google UK helps to implement this. Google is relying on case law, statute and the Ireland/UK double tax treaty to protect its UK revenues from UK tax. However, this only works to the extent that Google Ireland is not trading in the UK through a permanent establishment. This is critical to the tax outcome and is discussed below.
The debate appears to centre on the tax outcomes that flow from following the current state of tax law to its structured conclusion. Yet the press and commentators have suggested that this amounts to ‘avoidance’ and, more dangerously, moral depravity.
When Matt Brittin (Google VP for Northern and Central Europe) gave evidence to the PAC, he stated that the sales team was based in Dublin and that the marketing team was based in the UK. Reuters have subsequently received information from employees and clients of Google that appear to contradict this (i.e. that sales are actually concluded by the UK marketing company). This has caused PAC Chairperson, Margaret Hodge MP, to say: ‘We will need to very quickly call back the Google executives to give them a chance to explain themselves and to ensure that actually what they told us first time around is not being economical with the truth.’
A permanent establishment (PE) is a fixed place of business or agency through which a foreign company trades in another country. Managing PE exposure is central to many international tax structures adopted by MNCs. Provided the framework within which the business operates is properly set and adhered to this PE risk is often successfully managed. Domestic tax law, case law and the commentary to the OECD Model are invaluable in this regard. Google Ireland is highly unlikely to have a place of business in the UK. Google UK will of course have a UK office, but that does not, in itself, give Google Ireland a fixed place of business in the UK.
Fixed place of business aside, the greater PE concern for most multinationals is that of agency. Article 5(4) of the Ireland/UK DTA provides that the activities of a dependent agent may give rise to a PE for the principal (i.e. Google Ireland) where the agent (i.e. Google UK or any associated individual physically present in the UK) enters into contracts on behalf of that principal.
MNCs typically manage their global PE agency risk by setting processes to ensure that:
It is very likely that Google Ireland sets the marketing policy for the UK and gives Google UK a specific mandate to market Google’s services and perhaps negotiate contracts with UK customers. It would be highly unusual if the UK company concluded contracts with UK clients although this would be the exception to the rule and we would expect subsequent ratification to occur in Ireland. As highlighted above, provided the above processes are strictly adhered to it is unlikely that Google Ireland would have a UK PE. If, however, Google Ireland is found to have created a UK PE, this will amount to perhaps one of the biggest ‘own-goals’ committed by a MNC in recent years.
The approach of the PAC in recent months to Google (and the likes of the Big 4, Starbucks and Amazon) has undoubtedly struck an uncomfortable chord with advisers and MNC’s alike. Has the PAC gone beyond its remit and has it undermined the rule of law?
The PAC’s official remit is 'for the examination of the accounts showing the appropriation of the sums grants by Parliament to meet the public expenditure' (Standing Order No 148). Further, by their own admission, the PAC states that it 'does not consider the formulation or merits of policy' (their emphasis added). It is somewhat contradictory therefore (and perhaps ultra vires) that their approach to multinational companies has been to invoke a substantial amount of moral judgment.
Essentially, the rule of law is that law should govern; no one can be punished or made to suffer except for a breach of that law proved in a court, no one is above the law, and judicial decisions determine the rights of persons. Let’s be abundantly clear here: the PAC is not a court.
Yet despite this, the PAC Chairperson, Margaret Hodge MP, appears to be on a crusade to tackle any and all businesses she considers do not pay their 'fair share'. By bringing subjective criteria into the debate - fairness and morality – the PAC is not only exceeding their remit, but also undermining the rule of law. While the PAC may not agree, neither fairness nor morality has anything to do with the UK tax code.
Miles Dean
Founder, Milestone International Tax Partners
Email: miles@milestonetax.com
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