HMRC, Google and EY were back before the Public Accounts Committee (PAC) once again, over an ongoing dispute between MPs and Google about their low payment of corporation tax in the UK.
HMRC chief executive Lin Homer engaged in a series of occasionally heated exchanges with committee chair Margaret Hodge, who accused HMRC at one point of being "bamboozled" by large companies.
Hodge v HMRC
Homer gave as good as she got, defending the department's record on collecting tax from multinationals and telling MPs that determining what tax needs to be collected is their remit.
Hodge said she accepted this but didn't trust the Revenue's judgement, saying it had: "lousy judgement and the people who are taking those judgements are not fit for purpose".
While noting the recent judical review that ruled the Goldman Sachs settlement was legal, one committee member told Homer, “You are operating in the space in favour of big companies.”
Homer returned the assertion with a statement that the law is their responsibility.
The intricacies of transfer pricing occupied significant portions of the hearing. At one point HMRC director general for business tax Jim Harra told the MPs he was not sure the points they were raising made a difference to the actual tax raised under the existing rules. Hanna and Homer also sketched out the achievements of the deparment's anti-avoidance and evasion campaign, including expanding its existing specialist transfer pricing team.
According to Homer, transfer pricing enquiries bring in around £1bn a year, comparable with HMRC's foreign counterparts. “The standard we are achiveing so far is good, and I want that on the public record,” she said, adding that tougher envorcement has an effect on business, and its behaviour.
When Austin Mitchell challenged Homer about the undue influence weilded by the Big Four - including three former representatives sitting on its board, Homer answered: “I share the committee’s view that the top of HMRC needed more tax experience. The three [external] directors mean we have a better balance of skills.”
Google and Erns & Young on the spot
The PAC hearing centred around whether Google is ‘disguising’ its sales process in order to not pay corporation tax, which the company pays from its European base in Ireland despite having “some elements” of sales in the UK.
Committee chair Margaret Hodge warned Google vice president, sales and operations Matt Brittin: “I want to remind you that it is a very serious offence to mislead a parliamentary select committee.”
The Google executive denied he had misled the committee when he appeared before them in November 2012, despite Hodge presenting evidence to back her allegations from a number of whistleblowers, including former employees.
Hodge alleged that the entire trading and sales process of Google took place in the UK, citing invoices signed by customers in this country.
High end clients such as Lloyds TSB, Amazon, BT and eBay are dealt with by Google staff in the UK, Brittin replied, but all billing and transactions go through the Irish base, set up around 2003 for as a gateway for European operations.
Despite Google’s hour of questioning, however, Brittin did not relent, prompting Hodge to conclude: “You are a company that says you do no evil and I think that you do do evil in that you use smoke and mirrors to avoid paying tax.”
John Dixon, head of tax at Google's auditor Ernst & Young, refused to speak about the company's affairs, citing client confidentiality.
He did however speak about the situation "hypothetically", saying the evidence wasn't relevant to the matter, but rather whether a multinational was trading in the UK.
“As auditors, in the context of tax, our audit processes mandate we look at whether the company we’re auditing is trading other jurdistiction in a fixed establishment,” Dixon said.
“We look at what is going on on the ground to assess the points you have heard today - such as the intricacy between liaison versus sale, to satisfy ourselves that we don’t have a material tax liability.”
Hodge tested her accounting knowledge against Dixon by drawing on the principle of substance over form.
“The concept entails the use of judgement on the part of the preparers of financial statements to derive a business sense from transactions of events and present them in a manner that accurately reflects them,” she said.
Responding to the arguments that dominated Thursday's hearing, CIOT technical director Tina Riches commented: “Yet again the spotlight is being shone on the rules of transfer pricing and permanent establishment. The international corporate tax system was designed for the mid-20th century trading economy rather than modern internet world of seamless multinationals.
"The system needs to change and adapt and that is difficult for individual countries to do: it needs collective international action. We need to make sure the work of the OECD and G8 gets somewhere.”