Corporate taxes are always a sore spot politically – particularly when the rest of us are filing our tax returns. In retrospect, perhaps whoever runs the Chancellor’s twitter feed wasn’t too wise to boast of the “victory” in securing £130 million in back taxes from Google. The Opposition, as well as various campaigners, have described on the sum as, variously, pathetic, outrageous and an example of corporate cronyism.
The rise of e-commerce has posed a genuine technical problem for tax systems: where does online profit legally live, for tax purposes? Should a company be taxed where the consumer is, where the seller is, where the server is, or – for an advertising firm, as Google essentially is – where the client is, where the sales department is or where the users at whom the advert is targeted are? As the FT reports, the OECD has been thrashing over these very issues for quite some time.
Those questions are further complicated when a digital company is not only selling internationally but has multinational operations. As this blogpost by Maya Forstater makes clear, back of a fag packet calculations of Google’s UK profits don’t quite provide the full picture – legally speaking, tax authorities also need to discount costs incurred in the US which make those profits possible. And since a major chunk of Google’s technical work – making the site work and keeping it working – take place in the US, that eats into what is taxable in the UK. (The picture is further complicated by reports that Google is “poised” to pay a higher rate in Italy – though given that deal is “yet to be concluded”, the actual sum the company will pay there remains to be seen.)
It’s evident from the fact that back taxes are now being paid that those rules needed to be made more clear and enforced more closely - and that HMRC would do well to look at whether it can present a bill to other firms in the same situation. It’s also possible that, as new international agreements come into force, the amount Google and others pay in the UK will rise further in coming years.
Of course, it’s possible to change the rules if they’re deemed insufficient; Britain remains a sovereign state (in terms of most of its tax code, anyway). But doing so shouldn’t happen by means of politicians just deciding that x firm or y person should pay more tax and trying to shame or force them into doing so. A country in which the terms of doing business were arbitrarily determined after the fact by the Government wouldn’t be a particularly reliable or secure place to work or live – in fact it would essentially be Putin’s Russia.
So if you do want Google to pay higher taxes, then you need to seek a change in the law. Presumably the most simple way would be to redefine where a company’s activities profits exist for tax purposes - in Google’s case that would mean making it that all profits from UK advertising clients and adverts targeted at or seen by UK customers all exist here, and none of those technical costs incurred in the US could be discounted from the company’s UK tax bill.
That’s do-able. But we shouldn’t be under any illusions that doing it would be without consequences for other firms. There are unintended consequences for all aspects of public policy, and particularly in a field as complex as tax. We might be happy with the extra revenue secured from Google by such an approach. But would we be equally happy for other countries to apply such rules to our own exporters on all sales they make abroad, cutting the amount they currently pay in tax in the UK?
Of course, there is a simpler but less instantly crowd-pleasing way of increasing the amount we bring in from companies that currently have their homes overseas: attract them to move their base to the UK, through a high-skilled workforce, an attractive, low tax economy and a positive attitude to business.