Thoughts on Google tax

Google is in the news at present for its tax deal struck with HMRC. So, yet again, there is a spike of media coverage about tax avoidance; some well reasoned, some inane, some conflating avoidance and evasion…nothing particularly new. I should though say that I thought BBC2’s recent programme ‘The Town That Took on the Taxman’ about Crickhowell was a very good example of its genre and worth watching whilst still available on iPlayer.

This blog was prompted by several people asking me about Google – “what do I think?” “is it fair?”  and I thought I would try to summarise my thoughts. It is a quick note; I could write reams, and research my facts; but this is hopefully a good flavour of my thoughts.

I suspect at least 80% and probably even 90% of the problem is the legislation; 10% or possibly less is taxpayer behaviour. And 90% of the problem with the legislation isn’t easily fixable given that countries (i) compete with each other to attract jobs; (ii) countries are run by politicians, who, in democracies, want to get re-elected; (iii) politics seems to be all about fudge, shuffle, blame.

Taxation develops as economies develop. The system of double tax treaties stems mainly from the League of Nations in the 1920s, when the mechanism of international trade was sail boats, and England, the US and other developed powers ruled. So the framework of tax treaties looks to tax based on “permanent establishments”, bases. If you have a permanent establishment somewhere, you pay tax there. And if you read the old tax treaties, you will see that the e.g. British rulers framed the definitions of “PEs” so that good old British companies didn’t always have to pay tax on mining or other extracting or exploiting activities in their colonies. The definitions of permanent establishment were lop-sided. Yes, treaties have been refined over the years, but many of the core concepts include PEs remain more or less as in the past.

Now, take a family business, founded by mum and dad; say a village retail store. It develops, and son Jack and daughter Jill inherit it. They decide to open another store in the neighbouring village. It too goes well; son works in the Oldtown store, sister in Newtown. They want to divide the profits fairly, proportionate to their efforts. But what about the fact that the central stores are in Oldtown? Or the finance department in Newtown; or son also spends part of his time looking, so far unsuccessfully, for a third site. What’s a fair apportionment?  Such questions have no single right or wrong answer, but a range of answers.

Oh, I didn’t say that Oldtown and Newtown were in two different counties, which raise separate taxes, at different rates. How now to apportion? The compromise the siblings came to no longer looks good, when viewed from a tax perspective. Worse, OldCounty’s tax system has a different basis to NewCounty’s, assessing high taxes on people employed there: what to do about the staff who divide their time between the stores?

Then t’internet comes in. The business starts selling over t’internet from OldTown. Should they pay tax solely in OldCounty? Or solely where the customers are based? Or nowhere?

If countries weren’t run by politicians, and if politicians weren’t limited by what their electorate felt, but were run by mathematicians or logicians, then, maybe, they would conclude that taxing internet businesses by virtue to rules devised in Victorian England was past its sell by date. Better, tax something else: tax sales (so a higher VAT, or fewer exemptions); tax earnings more; tax annual wealth, tax unshaven heads (I’d vote for that), tax Celebrity Big Brother contestants(ditto),  just don’t try to tax trading profits based on where things physically are in the modern world.

Turning to the Google deal itself- and, shame on me, I haven’t bothered to read any of the detail so far, just listened to snippets on the news- it looks like a political fudge. I  heard, may be wrongly, that the tax payment is being made without acknowledging that there is a UK Permanent Establishment. That seems to be perverse – if that is the case, it is a Starbucks-type voluntary tax. We, Google, will give, UK, a gift. I would have more belief in the settlement if there was an acknowledgment of UK presence and the settlement was a negotiated Jack and Jill assessment of the profits split between UK and elsewhere.

So, as to 90%, the system is defunct; and as to 10%, Google have gamed the system, and HMRC have taken the reasonable stance of negotiating what is possible given the impossibility of getting a logically inherent answer.

Oh, there is nothing new in taxation causing problems. It happened first a long time ago, in a galaxy far, far away.