The fraction of the reported total revenue that Google paid taxes on in the United Kingdom serves as one of many examples of why public country-by-country reporting must be implemented. While the definition of ‘turnover’ is at the heart of the Google case, even if we take Google United Kingdom’s definition at face value, so that the company only provides sales services to Ireland and Research & Development to the group, the share of profit would still be three times higher. It is not that Google is a lone bad actor within the system, but rather that the misalignment between revenues and taxes illustrated in the Google case is a product of the current regulatory system – because it is based on the logic-free approach that each entity within a multinational group be treated as if it were a separate profit-maximising company. The only viable solution is to treat firms such as Google in accordance with the economic reality that they are unitary firms: that is, they have a common global management which takes the decisions, and it is at this level only that profit is maximised, and tax liabilities should be assessed. Some countries implement these standards for corporations within their borders, such as state-by-state reporting in the United States and similar systems by province and canton in Canada and Switzerland, respectively. Common measures used include sales; employment (wage bill and staff headcount); and (tangible) assets. To illustrate a bigger point, the tax authority, Her Majesty’s Revenue and Customs dedicated between ten and thirty skilled staff to this one case, every day for six years. And yet the outcome is that the United Kingdom will tax just a fraction of the proportionate profit that policymakers have aimed for, and that the public expects. This is more capacity than some governments have to review all their multinational corporations. A change in the system is needed as governments cannot constantly play check-up on multinational corporations that may have more resources than the country itself can muster. Multinationals must be required to publish their country-by-country reporting data to reveal where their economic activity takes place, where profits are declared and where tax is paid.
Key findings
- Google United Kingdom’s taxable profits for 2014, after the deal with Her Majesty’s Revenue and Customs, are about 10% of what would be expected if their profits were aligned with the United Kingdom share of Google’s real economic activity.
- Main sticking point is conflicting definition of ‘turnover’ as defined by the Financial Reporting Standard in the United Kingdom and Google United Kingdom’s accounts.
- Payments to the United States for Research & Development and Ireland for marketing and services significantly reduced the tax Google had to pay in the United Kingdom.
- If Google’s profits were aligned with its economic activity – which is the goal for Organisation for Economic Co-operation and Development rulemakers, and the public’s clear expectation – then Google might have paid the amount it’s just settled on paying for the last ten years, every single year.
Key recommendations
- Multinationals must be required to publish their country-by-country reporting data, under the new Organisation for Economic Co-operation and Development standard, to reveal where their economic activity takes place, where profits are declared and where tax is paid.
- Recognising that the Organisation for Economic Co-operation and Development Base Erosion and Profit Shifting process has failed to meet the scale of the challenge of profit shifting, policymakers should urgently convene an independent, international expert-led process to explore alternatives – starting with the taxation of multinational groups as a unit, rather than maintaining the current pretence of individual entities within a group maximising profit individually.
- Common measures that could be used to assess real economic activity include sales; employment (wage bill and staff headcount); and (tangible) assets.