Google gets a pretty rough time in Europe. The European Commission is carrying out two separate investigations into its shopping services and its mobile operating system Android. In the U.K., it has been dragged across the coals for for not paying enough taxes. Now, after the company struck a deal to pay $185 million covering 10 years' worth of taxes, it is facing even more criticism from politicians and tax experts, who call its offer “derisory” and suggest the company owes over well over $2 billion in unpaid taxes.
The backlash has been swift. On Monday two committees in the U.K. Parliament confirmed that they would be seeking answers about the deal from both Google and tax officials at the U.K.'s tax authority in order to ascertain just how the figure of $185 million (130 million pounds) was reached.
On Monday in the House of Commons, Financial Secretary to the Treasury David Gauke said he was unable to go into details of any deal reached with a specific company. Labour Shadow Chancellor John McDonnell called it "disrespectful" that Chancellor of the Exchequer George Osborne did not appear in person to answer the question.
On Friday at the World Economic Forum in Davos, Switzerland, Osborne lauded the deal as "a major success," announcing that Google would be paying the additional taxes covering a period of 10 years (it has already paid nearly $100 million over that period) stretching back to 2005 and comes after a yearslong investigation into how Google — and other U.S. companies — pay their taxes in the U.K.
“This is a major success of our tax policy,” Osborne said in Davos. “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 think it’s a big step forward and a victory for the government.”
Earlier this year Osborne introduced the so-called Google Tax as part of his budget, which was designed to dissuade large companies from moving profits out of the U.K. to avoid taxes. Following in Google's footsteps, companies like Facebook, Amazon and Apple are expected to strike similar deals with the U.K.'s department of revenue.
It wasn't long before Osborne's celebrations turned sour. McDonnell was quick to call the move “a public relations sop,” while London Mayor Boris Johnson called the figure of $185 million “derisory." On Monday a report in the Telegraph claimed that Prime Minister David Cameron distanced himself from Osborne's positive outlook on the deal.
HMRC must publish details of deal with Google.Paying only £130 million for 10 year backlog looks like public relations sop.
— John McDonnell MP (@johnmcdonnellMP) January 22, 2016
Writing in the Sunday Times over the weekend, McDonnell said it is unclear how the figure was reached, and Monday in the House of Commons he called on the chancellor to explain exactly what method was used to come up with the figure. "The best news in this deal would seem to be the commitment for Google to pay taxes in the future, but even this raises concerns," McDonnell said. "Are future taxes to be calculated on the same basis?"
Google has been at the center of an investigation by the public accounts committee of the U.K. Parliament in recent years, with former Chairperson Margaret Hodge aggressively targeting multinational corporations that were seen as siphoning off taxes overseas. Writing about the decision in the Observer over the weekend, Hodge agreed with McDonnell's assessment of the deal. "It feels more like a PR deal designed to counter the reputational damage created by Google failing to pay a fair share of tax on the profits they make from their economic activity in the UK,” Hodge said.
The U.K. is one of Google's biggest markets, and aside from the U.S., it is the only country for which the search giant breaks out individual revenue figures in its financial reporting — something public companies typically do when a single market makes up more than 10 percent of overall revenue.
However, despite the huge amount of revenue booked in the U.K. (over $55 billion in the past 10 years), the company uses a complex international tax arrangement — known as the double Irish scheme — to minimize the tax bill on the profits it earns there. It routes revenue through Ireland, which has a much lower corporate tax rate.
According to calculations by one tax expert, Google's total $285 million tax bill for the past decade means it has paid an effective rate of just 2.77 percent, while the typical corporate tax rate in the U.K. is 20 percent, meaning Google's tax bill should have been closer to $2.6 billion (1.8 billion pounds). “Osborne will probably chicken out of explaining and say that the Treasury does not discuss individual tax payments, but they have instigated this by talking about it, so that is out of the window,” Prem Sikka, a professor and tax avoidance expert at the University of Essex, told the Guardian.
Defending Google, its head of Europe, Matt Brittin, said the payment was not an admission of tax avoidance. "We were applying the rules as they were, and that was then, and now we are going to be applying the new rules, which means we will be paying more tax," Brittin told the BBC.
He is set to once again have to defend his company's tax position in front of either the public affairs or Treasury select committees in the coming days, meaning that a deal struck with the U.K. government to appease critics of its tax policy will ultimately lead to even more negative press for a company that is currently challenging Apple as the world's most valuable company.