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The Googlegate affair continues: now on confidentiality and other issues

As a follow up to our ‘Googlegate’ blog post from Tuesday this week we have been asked by various readers of the blog, including journalists, whether we think HMRC should publish details of the ‘deal’ done with Google. Essentially, the issue is that of balancing Google’s interest in avoiding confidential information reaching the public domain whilst pacifying claims that a ‘sweetheart deal’ has been done.

To date, HMRC has rightly (in our opinion) refused to disclose any details of its tax agreements with corporate taxpayers on the basis that every taxpayer’s affairs are confidential. The legal right of every taxpayer to keep their information confidential applies to corporates as much to individuals. Section 18 of the Commissioners for Revenue and Customs Act 2005 imposes a strict duty of confidentiality on HMRC with the corresponding criminal offence found in Section 19. In this context it’s difficult to see how the details of the deal could be published other than by way of court order or the consent of both parties (these being carve outs from the offence).  Conspiracy theorists, swivel eyed loons and tax campaigners get wound up by this.  To be frank, if they do that’s great by us. We’re glad we have this degree of protection; we’re glad we live in a country where the rule of law reigns supreme without which our fundamental human right to privacy would be in grave danger.

That said, as tax advisers, we’d love to see the nuts and bolts of the deal. We’d love Google to lift her skirt just a little bit so we can see what’s under the bonnet (mixing metaphors is great isn’t it?!). But alas, that would be for all the wrong reasons. We have absolutely no right as citizens of the UK to have disclosed to us the confidential details of another taxpayer’s dealings with the UK, including those of Google UK. It isn’t hard to understand. In fact, it’s much easier to understand when you take a step back, engage the grey matter and figure out what the £130mn is actually all about. Admittedly this would all be a whole lot easier if HMRC just published the details, but that just wouldn’t be right!

More thoughts on the deal

Without the benefit of seeing the correspondence between HMRC and Google, it’s impossible to be 100% certain as to the scope of the enquiry or of the reasonableness of its conclusions (including the £130mn amount agreed in settlement).  Much of the debate over the past 48 hours has focused on anything but the facts (which is scandalous to us). Dare we say it, but inflated egos and a lot of chest thumping have got in the way.

Claims (yes, we are referring to you, Margaret Hodge) have been made that Google et al have a ‘duty’ to disclose the content of the settlement agreement and therefore must be subject to a different set of rules than everybody else.  This is sensationalist poppycock.  As we’ve highlighted above, the UK tax system (similar to most others) is premised on the precept of confidentiality – in not disclosing, HMRC has simply treated Google like every other taxpayer – this is only right.

So, let’s focus on facts and what we know so far. Most large companies are under enquiry from HMRC at any given time. This isn’t unusual and no inference of wrong-doing should be taken from the fact that Google did have an enquiry and that it lasted for 6 years. In our experience, HMRC are very skilled at dragging out the very simplest of enquiries – a process that is time-consuming, costly and very distracting for the ‘customer’.

Again, let’s go back to basics and focus on the structure that’s under enquiry:

  • Google Ireland provides advertising services to unrelated third parties in the UK;
  • Google UK is retained by Google Ireland to assist in that sales process; and
  • Google Ireland pays Google UK for the services provided.

The scope of the enquiry will likely have been as follows:

  • does Google Ireland have a taxable presence in the UK (i.e., does Google Ireland have a so-called physical or agency permanent establishment in the UK)?;
  • does Google UK do more than provide auxiliary services (i.e. is it in reality the contracting party)?; and
  • is Google UK paid the right amount for the services rendered to Google Ireland?

The amount of information requested by HMRC in any enquiry is generally very extensive – which is what you’d expect. They repeatedly state in correspondence during an enquiry that establishing the facts is of paramount importance. So, despite newspaper reports to the contrary, it makes no sense for HMRC to have ignored the sales process adopted by Google Ireland and UK (i.e. looking closely at the functions carried on by staff and executives of both companies) and, in particular, where the contracts are actually concluded and the substance of those contracts. Given that the tax structure adopted by Google is likely to be based on there being no agency PE in the UK under Article 5(4) of the Ireland/UK DTA, it would be a scandalous oversight not to pick the sales process apart. In our experience of similar enquiries, HMRC go to extreme lengths to verify what in fact happens within the value chain process.

The transfer pricing issue

Based on the information in the public domain, the settlement reached between Google UK and HMRC relates to the fee paid by Google Ireland to Google UK. In other words, HMRC could find no evidence that a PE existed in the UK (otherwise it would be Google Ireland footing the bill) but that the fee paid by Google Ireland was too low and should be increased to what would be paid in an uncontrolled comparable situation. Transfer pricing enquiries are common place and almost always end in a negotiated settlement (neither side wanting to go to court where the only winners are the lawyers).

To refer to this transfer pricing settlement as a “sweetheart” deal without any, or at best limited knowledge, of the details of the deal, is simply idiotic.


We’ve said above that HMRC’s should not publish details of the settlement. Perhaps the more interesting question is whether the rules should be amended to allow currently confidential transfer pricing “deals” (e.g., APAs or similar settlements) to be made public in the interest of facilitating the application of the arm’s length principle (ALP). There is some logic to this.

Pricing between related party transactions is determined under the ALP, which requires a comparison between a related party transaction (e.g., the supply of marketing services by Google UK to Google Ireland) and an open market comparable transaction (e.g., the supply of marketing services by an unrelated party to Google Ireland). Pricing based on the turnover of a company is therefore irrelevant and any complaints about the amount agreed being too small when compared to the company’s turnover is a quite simply a by-product of technical illiteracy. At this stage, the use of the “sweetheart” noun in relation to the transaction is either uninformed (no one knows the details of the transaction) or biased in some way (mostly politically or ideologically).

It was fascinating to hear Margaret Hodge discuss the Google matter on Radio 4’s Morning Program.  The implication is that Google has somehow sidestepped UK law with HMRC entirely complicit in allowing it to do so – seriously?  Let’s return to some semblance of reality and, to the facts, as inconvenient as they are for sensationalist commentators.

Let’s get technical, technical (thanks Olivia)

As we explained in our previous blog, the allocation of profits calculated on global turnover (unitary taxation or formulary apportionment) has been repeatedly ruled out by the OECD on the basis it would require a total overhaul of current international tax principles and worldwide consensus.

The ALP isn’t perfect but it’s the best workable standard we have.  However, this is where things get tricky. The ALP is a standard, not a rule. A rule is, for example, a provision that demands that you “stand behind the yellow line” (sounds familiar?). The meaning is therefore precise. The ALP, on the contrary, tells related companies “act as if you didn’t know each other”, and that can only be determined ex-post by an administrative or judicial review of whether the companies in fact acted (or contracted) as if between “strangers”.

Making APAs and “deals” (such as the one between HMRC-Google) public could potentially assist, by increasing certainty, the application and understanding of the ALP. That is, in short, the thinking behind the ‘greater transparency’ proposal. Yet, even the OECD’s BEPS project, while recommending increased reporting obligations does not propose making information publically available. Can we surmise that even the OECD would see this as a step too far?  The BEPS Actions simply increase the information available to tax authorities to review and share with foreign counterparts.

To be clear: we’re not suggesting that the settlement between HMRC and Google should automatically be made public. We’re saying that the positive side of a potential change in the rules to make publically available all non-confidential information relating to the application of the ALP would seemingly benefit the application of the ALP in general.  We, of course, acknowledge the difficulty in determining the balance of confidential market sensitive information with disclosure sufficient to quell the gathering hordes.

State aid…again

Wading into the debate is the unwelcome hand of the EU Commission.  Mrs. Vestager and her team have been vocal in stating that the EU State Aid rules will be invoked if non-compliance with the ALP is established in the HMRC-Google settlement. For example, if the settlement failed to ensure that sufficient UK tax was paid on the profits of Google UK that arise from the provision of marketing services to Google Ireland. State aid rules have already been applied in relation to APAs involving various Member States and other (mostly U.S. headquartered) multinationals on the basis of non-compliance with the ALP. We therefore see the involvement of the EU Commission as a true possibility, although it is perhaps a little early to tell. The conditions of the Google deal (in full detail) will need to be weighed against the general rules applicable to companies in the UK.

One interesting aspect of the HMRC-Google settlement in the context of State Aid; the EU Commission has previously held that the establishment or quantum of taxable income through negotiations between taxpayer and the State “reinforces” the idea of non-compliance with the ALP and, therefore, the finding of illegal aid. It will be interesting to see if the EU Commission goes forward with the argument in this case where there has been clear negotiation between the two parties.

In the meantime, it remains to be seen whether Mr. Osborne is summoned to Brussels to disclose and explain the details of the agreement to Mrs. Vestager and her team.

The future

Two bed time questions / nightmares:

  1. will the EU Commission consolidate itself as the supervisory organ of Member States’ revenue authorities; and
  2. even more frightening, will the matter escalate into a full-fledged tax / trade war with the U.S.?

Watch this space!

Posted in Uncategorized

January 29, 2016

Miles Dean

Posted by Miles

Miles is a founder of Milestone having started his career in international tax in 1994.

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