Google's tax bill in the spotlight again

A year ago we published a Q&A on the topic: "How is Google’s tax bill calculated? And other questions and answers about corporate taxation". This followed the news that, following a tax audit by HMRC, Google UK were paying about £30 million a year in corporation tax in the UK. Our assessment was that, based on the rules as they are, and the limited amount of information in the public domain, the amount of tax Google was paying in the UK seemed to be in the right ball park. 

Google UK's financial statement for the year to the end of June 2016, which was published today, shows Google UK paid annual corporation tax of about £25 million in its latest financial year. This is on a profit of £149 million on a turnover of £1,037 million. At just under 17% of profit this is slightly below the amount you might expect the company to pay given the 20% rate of UK corporation tax over the period in question, but it is not too far away and the reasons for the difference are set out by the company in its statement (principally 'Differences including foreign exchange arising in respect of share based compensation'). 

A year ago much of the comment around Google's UK corporation tax bill related it to the company's total UK sales. In anticipation of this it is worth reminding ourselves of the distinction between Google UK's turnover and profit (the subject of the financial statement) and Google's UK turnover and profit. In brief, Google UK provides services to Google's European HQ in Ireland and Google's central operation in the US, for which they receive payment from Google centrally. They don’t have a separate income stream. They may market to UK businesses to encourage them to take out adverts but when the business comes to sign the agreement the arrangement is with Google Ireland. Thus Google UK's revenue is just over £1 billion a year, while Google's UK revenue (ie the amount they make in sales to UK customers) is £6-7 billion. And Google UK's annual profit is £149 million while Google's profit from UK customers is probably in the vicinity of £1.3-£1.6 billion.

In response to a request for comment from a newspaper today the Institute's Tax Policy Director John Cullinane explained:

“The amount of corporation tax Google pays in the UK is not based on the amount of profit Google makes from its sales to UK customers. If it were Google would be paying about ten times as much – probably about £300 million based on Google’s UK revenue of about £6-7 billion having the company’s global profit margin of about 22% applied to it.

“But that Google is not paying this amount is not evidence of avoidance. It results from the fact that UK corporation tax - in line with the principle currently most commonly adopted internationally- is based on the proportion of profits attributable to UK activity. Google’s UK profits will be only partly generated by UK activity, with some coming from US activity (where most of its staff and development work are) and some from Ireland (where it appears all European advertising contracts are signed).

“If the principle on which UK tax is based were changed, it would not necessarily benefit the UK overall as British exporters would pay more of their tax abroad. And reducing the degree of consensus between tax systems internationally would lead to more mismatches, penalising some companies with double tax and allowing others to avoid it."

For further explanation we strongly recommend going back to our blog of a year ago, as the basic facts around Google's structure in the UK and elsewhere appear to be more or less the same, and the broader questions about how corporation tax works still apply.

By George Crozier, CIOT Head of External Relations