Google’s UK tax settlement resolved transfer pricing disputes, no diverted profits tax paid

by Julie Martin

Google’s recently announced settlement with UK HM Revenue and Customs requires the company to pay additional tax on account of transfer pricing adjustments and does not include any diverted profits tax (DPT) payment, HMRC documents confirm.

The documents follow yesterday’s hearing, conducted by the House of Common’s Public Accounts Committee (PAC), concerning the recently announced £130 million settlement between Google and HMRC requiring Google to pay additional taxes for tax years 2005 to 2015. The deal has been widely criticized for being too generous to Google, though many facts about it are still unknown.

At the hearing, Google vice president Tom Hutchinson confirmed that Google has not materially changed its UK tax structure since the company’s tax officials were last hauled before the PAC committee in 2013 to explain their UK tax dealings. Google continued its practice of invoicing sales to UK customers by its Irish entity, Hutchinson said, even after the UK’s diverted profits tax became effective in April.

Google maintains that Google’s UK entity, Google UK Ltd., which employs 4,000 people, provides marketing services to Google Ireland Ltd., and that all UK advertising sales occur in Ireland.

The group also uses a “double Irish” structure, having an Irish subsidiary pay large deductible royalties to a Google group member located in zero-tax Bermuda, which holds the company’s valuable IP.

One issue considered in HMRC’s audit was whether Google Ireland Ltd. or Google Inc. had a permanent establishment in the UK.

Hutchinson said at the hearing that the facts did not support any such finding, but added that whether or not there was a permanent establishment “does not result in a change to the corporate income taxes you owe at the end of the day.”

Hutchinson said the additional tax Google paid was to settle transfer pricing disputes. HMRC determined that Google’s UK operations should receive more remuneration from related Google companies for its services, and Google agreed to pay that amount, he said. Hutchinson said that HMRC disputed the comparables and benchmarks to used by Google to determine the profit from UK operations.

Hutchinson also said that although the audit period related to 2005–2015, Google agreed to use the same methodology to calculate the UK entity’s profits in 2004, which was the year Google set up its Irish structure. That additional amount was included in the settlement.

Also included in the £130 million settlement, Hutchinson said, was additional tax from a revision in 2010–2011 to the UK entity’s transfer pricing methodology to include stock-based compensation for employees in its cost base for transfer pricing purposes.

From 2012 onward, Google UK Inc’s reported profits took account of the revised treatment of stock-based compensation put forward by HMRC, he said.

The last three months of the tax settlement period overlapped the period in which the DPT was in force; however, according to Jim Harra, HMRC director of general business tax, the parties agreed that Google would not be subject to the DPT during that period.

“The application of the diverted profits tax to Google in the future . . .  remains to be determined,” Harra added, though.

Hutchinson explained that the DPT did not apply because, through the settlement, Google was paying the correct amount of tax. “Going forward, if we are paying the right amount of tax according to the normal rules in the UK then the DPT would not apply again. The DPT is making sure you are paying the right amount of taxes based on the existing system,” he said.

Harra added that HMRC has observed that many large business have recently changed their transfer pricing and have paid more corporate tax to avoid the DPT.

Julie Martin is a US tax attorney and a member of MNE Tax’s editorial staff.

 

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