Advertisement

Google's 2.5% UK tax rate

Here is an interesting nugget of info I've acquired about Google and its tax: Google's UK corporation tax liability for the 18 months to the middle of last year was £46.2m, including £13.8m that would not have been paid if it were not for the new deal with HMRC.

Google reached an agreement with HMRC to pay £130m to cover taxes owed since 2005. Credit: Nick Ansell / PA Wire/PA Images

Which implies that the renegotiated tax arrangement is yielding an increment for the Exchequer of around 43%.

Now a tax increase of more than 40% is not to be sniffed at.

But let's look at the implicit UK tax rate.

Extrapolating from published figures, Google's revenues from the UK in that year-and-a-half period was considerably more than £7bn, perhaps £7.5bn (the UK is Google's second biggest market, by the way - we matter to the company).

Now globally Google's profit margin - revenues minus costs - is around 25%. Which would imply a pre-tax profit for the UK of around £1.9bn.

That means the implicit corporation tax rate on its UK earnings is more-or-less 2.5%.

Which is a tax rate any of us would kill for.

To remind you, one of the Chancellor's proudest boasts is that he has brought the headline corporation tax rate down to 20% - which makes the UK look like a low-tax country.

But Google is - on my assessment of its UK profitability - paying an eighth of that.

Google and HMRC would of course argue that for taxable purposes my calculation of its UK profits is wrong.

They would say that there is a global convention that the profits in the UK should be measured as a margin or increment on top of what it would cost Google to operate here if all its operations were subcontracted to a third party.

Those notional taxable profits would appear to be a bit more than a couple of hundred million quid for for the 18 months to the middle of last year.

Google has been heavily criticised for not paying its fair share of UK taxes. Credit: Ole Spata / DPA/PA Images

And the British taxman would want credit for increasing that margin or increment in its latest negotiations with Google, to capture (in a way that I freely admit I don't understand) a new assessment of the maturity of its UK business and the low risk of operating here.

They would argue that it would be wholly inappropriate to tax Google on profits measured as I suggested, because most of the costs and business risks of developing Google were taken in the US - and therefore it is only fair that the bulk of the taxable profit of this global giant should be attributable to the US.

In other words, the British taxman and Google would both insist that the Chancellor and the Exchequer are getting quite as much tax as they deserve - perhaps even more - given that multinationals conventionally pay most tax in their homeland (or America in this case).

Here is the punchline.

George Osborne, who is struggling to reduce the government's deficit and needs every penny of tax he can lay his hands on, would seem to concur that he is not being short-changed by mighty Google.

Meanwhile his Labour opposite number, John McDonnell, says it is an outrage Google isn't paying more.

And in a way both are right: McDonnell may well have natural justice on his side; whereas Osborne may have done as well as any Chancellor could, given the power of global companies to move their homes to minimise their tax liabilities.

More on this story