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Everyone is at fault for Google Inc.'s failure to pay enough tax, says a committee of MPs in the U.K. Parliament. Firstly, Google and its bosses are wrong for being greedy. Their accountants are accused of being naughty heads in helping Google to squirrel money into tax shelters in Ireland. And finally, the tax inspectors in HM Revenue and Customs are chastised for being dunces in failing to see through Google's clever schemes. Everyone is at fault. Everyone, except of course the MPs themselves and the legislators in America, in Europe and elsewhere who over many years constructed this Frankenstein's monster, that is the global corporate tax system.
There is a huge gap in today's report by the U.K. Parliament's Public Accounts Committee into Google's tax avoidance. It is the acknowledgment that all this was intended by governments who were desperate to capture and control the behaviour of big, fleet-footed international businesses. Had Margaret Hodge, the committee chairman, and her colleagues read Mary Shelley's book, she would have recognised that the monster the committee purported to investigate was carefully stitched together over more than a decade in which a Labour government attempted to turn Britain into an international corporate tax haven to help the City of London expand its financial centre. Others followed suit, notably Ireland, offering temptingly low rates of profit tax in order to build their own financial centres. Somehow, somewhere in this race to the bottom, the tax got lost. Google earned some $18-billion in advertising revenue in the U.K. between 2006 and 2011 but by processing the sales in Ireland, it paid only $16-million in tax to the U.K. exchequer.
So, governments have been foolish but Google and its Internet fraternity cannot be let off the hook as though they were eternal gap year bums, hopping from beach to beach in surfy gear, accumulating a huge wad of untraceable dollar traveller's cheques. Google owes a huge debt to the universities, the laboratories and the military industrial complex (all funded by government) out of which the Internet emerged and which still supply Google with an army of eager staff.
Ms. Hodge's committee says: "Public confidence in Google will only be restored when it establishes a corporate structure that ensures Google pays tax where it generates profit." That sounds easy but it is more evidence of the woolly thinking that caused this mess. Profit is not just made at a sale point but all the way up the chain of manufacture. Coca Cola's profit is not just made when the drink is canned and sold in Japan but in the recipe, the brand, the marketing and the advertising that make it a wanted product. All that investment must earn a return and most of it happens in the U.S., not where the cans are sold. Likewise, Google's profit is not just made where a salesman books an ad, but also where the Google algorithms, the architecture and the brand are dreamed up, designed and made to work.
If Ms. Hodge's proposed solution is adopted, there is danger for Britain and other developed nations. Wealthy nations depend more and more on the remittance of royalties, dividends and payments for services and intellectual property generated and used in the activities of multinationals overseas. If those earnings are taxed heavily at point of sale abroad, what will be left for the nations that do the clever stuff, the design, the marketing and the creativity?
Ms. Hodge's bandaged and bloody monster is staggering around the world trying to collect tax. People are getting frightened, but the monster is stumbling and looking rather pathetic. There is a risk that it will do something desperate. We need to get smarter about tax – and shout less.
Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights.
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Carl Mortished