Google strikes £130m back tax deal

Google has reached a settlement with the UK to pay £130m in back taxes and higher taxes in future in a deal that could pave the way to it paying more in other countries where it is accused, along with other multinationals, of aggressive tax avoidance.

The agreement covers underpayment of tax over a decade in the UK, its biggest market outside the US. It comes after a multiyear audit by HMRC, Britain’s revenue service, of whether Google skirted tax by allocating profits to Ireland, where its European operations are based.

Google paid only £20.5m in tax in 2013 based on attributed UK profits despite raising $5.6bn in UK revenues. Its tax structure led Margaret Hodge, former chair of the UK parliamentary public accounts committee, to accuse it of being “immoral”.

The deal may form a precedent for other companies because Google will now pay a share of its revenues from UK advertisers in tax, as well as its existing profits-based formula.

The Treasury hailed the agreement as “the first important victory in the campaign the government has led to ensure companies pay their fair share of tax on profits made in the UK and a success for our new tax laws. What’s particularly significant is that we are collecting tax not just on future profits, but on profits made in the previous decade.”

Some others, however, criticised the deal. John McDonnell, finance spokesman for the opposition Labour party, said the amounts involved in the settlement were “relatively trivial in comparison with what should have been made”.

“This looks like another sweetheart deal,” he told BBC Radio on Saturday.

The deal could lead to Google also agreeing to pay more tax in other European countries where it is under scrutiny. It faces a tax demand for up to €1bn in France, where authorities have challenged the Irish structure, asserting that Google’s French arm is resident in tax terms. The HMRC ruling does not involve a change in the status of its UK operations.

Google is paying £46.2m in taxes on UK profits of £106m for the 18 months to June 2015, together with back taxes and interest going back to 2005. The new formula increased its 2014-15 taxes by £13.8m, according to its UK accounts to be published shortly, and it will now pay a higher rate of tax.

The deal comes amid moves by governments to crack down on companies shifting profits overseas to reduce tax in countries where they employ most staff and have significant sales. The Organisation for Economic Co-operation and Development has agreed on a series of measures.

Margrethe Vestager, European competition commissioner, is investigating whether Ireland gave favourable treatment worth billions to Apple, the US technology company. She has ruled against Luxembourg and the Netherlands in cases involving Starbucks, the US coffee chain and Fiat, a subsidiary of Fiat Chrysler Automobiles.

Matt Brittin, Google’s president of business and operations for Europe, said the new tax arrangement “reflects the size and scope of our UK business. The way multinational companies are taxed has been debated for many years and the international tax system is changing as a result.”

Q&A: Google’s deal with the UK taxman

Group hopes to put an end to relentless criticism over how much it pays

George Osborne, UK chancellor, has called on multinationals to pay more taxes and introduced a penalty for artificially diverting profits offshore, dubbed the “Google tax”.

But Google, whose Californian parent company is now called Alphabet, gains from the ruling since HMRC did not find that it had been evading tax and it has not been fined. It also avoided any penalty for tax diversion under the “Google tax” regime, which came into force in 2015.

Although it will pay a higher share of revenues booked from UK advertisers in UK tax, Google is keeping its “double Irish” arrangement under which its Irish taxes are reduced because its subsidiary pays intellectual property royalties to a Bermuda entity. The Irish government plans to phase out such structures in future.

Google’s UK business is its biggest overseas operation, employing 2,400 staff, with revenues of $6.5bn in 2014.

An HMRC spokesman said: “The successful conclusion of HMRC enquiries has secured a substantial result, which means that Google will pay the full tax due in law on profits that belong in the UK. Multinational companies must pay the tax that is due and we do not accept less.

“HMRC enforces the tax rules impartially, irrespective of the size or structure of the business. Last year our compliance activities yielded £26 billion in extra tax, including £7.3 billion from the largest and most complex businesses”

Additional reporting by Reuters