The European boss of Google, Matt Brittin, was hauled up in front of the Public Accounts Committee of the UK parliament earlier this week. Brittin was savaged by the MPs over the tax deal Google recently agreed in the UK.
Under the terms of the deal Google agreed to pay a £130m tax settlement, which is the most they have ever paid in the UK. Given that the UK is responsible for 10% of Google's global sales critics have argued that they should be paying far more- this figure equates to a tax rate of about 3%.
But Google hasn't broken any rules and in fact the company executives have suggested to politicians that they do not just want to follow the rules on tax, they want to be seen following the rules and paying an appropriate amount.
The real problem is that the politicians want to be seen savaging companies like Google, Starbucks, and Amazon because it plays well to be seen as a critic of "tax dodging" companies, yet the same politicians are happy to compete internationally by setting corporation tax as low as possible.
It's no surprise that Google does not pay much UK tax because their European operations are based out of Ireland. The basic level of corporation tax in Ireland is 12.5%, if you are investing in R&D then you can get it as low as 6.25%. In the UK the same tax is 20% so it's no surprise that they account for most of their European activity in Ireland.
But corporation tax is difficult to enforce anyway. It's a tax on profit, not revenue or turnover. Imagine a UK company takes £100m in revenue in one year, but has to pay various internal fees (licensing the brand for example) to a partner company in Ireland - let's say the fees are £90m. That leaves just £10m that can be taxed in the UK - the tax on the majority of the cash will be paid in the lower cost environment. In many cases companies will operate at a loss on their balance sheet allowing them to pay no corporation tax at all in expensive locations.
None of this is illegal or dodgy accounting, yet the MPs slamming Google and similar companies behave as if they can't understand the difference between taxing the profit of a company and revenue - and how easy it is for a company to deliberately reduce their profit by introducing various expenses or fees.
What Google are being asked to do is to pay tax they don't really need to pay. Imagine if you looked at your monthly salary slip and your company decided to tax you at twice the normal rate, just because it looks better for you to pay more tax. How would that feel? You might be justified in suggesting that you are happy to pay what the government asks for - and that is the situation all these companies find themselves in.
We live in an age where an artisan jeweller in Yorkshire can import raw materials from China and sell their product to a customer in Brazil using a financial payment system in California. Multinational companies can be small too - it's not just Google and Amazon that can transact across borders.
The real problem here is that the tax system has not caught up with the way that companies work in a global inter-connected society. Of course any sane executive operating across several countries will push the taxable revenue of the company to the country with the lowest tax rate. If he or she did not do that then the stakeholders in that business would be asking what they are doing.
A few years ago I was working with the UN in Bangladesh on developing the hi-tech economy there. Thousands of independent contractors found they could sell their IT skills online and work remotely for clients anywhere in the world. They were paid using PayPal and it was suspected that most people were not declaring this income. The answer, according to the government, was to ban PayPal.
The most obvious solution to the Google problem is to charge a corporate tax based on revenue. My company in Brazil has to pay 10% of everything that the company earns to the government, regardless of my business expenses. However while this might work for a company selling cups of coffee, a high-volume low-margin business like Amazon's retail offer might struggle to pass on the tax to customers.
International tax reform is required and the politicians need to deliver it, so before they try humiliating another business leader by asking what he earns, perhaps someone should drag them into the dock and ask how they will fix the problem of countries competing on corporation tax rates?
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