Cantillon: How to squeeze more out of juicy Apple

The latest development in the tussle between Google and some British politicians over the amount of tax the tech giant pays in the UK is interesting on a number of fronts, not least the links between what is going on and Ireland's role in multinational tax planning.

The latest accounts for Google UK Ltd show it has made a provision of £24 million (€29 million) because of a project, initiated in 2010, wherein Her Majesty’s Revenue & Customs is reviewing the company’s tax affairs, and during which issues have arisen concerning how share-based compensation is treated for corporation tax purposes. The provision relates to potential additional corporation tax for 2005 to 2011. The first point of note is the small scale of the provision. Turnover for Google UK Ltd in 2012 was £506 million, up £110 million on the previous year. Pre-tax profits were £36.8 million.

The main problem politicians had was with the idea that so much of the business being conducted by Google in the UK, was being booked by Google Ireland, where the Irish 12.5 per cent tax rate applies (or would if Google wasn’t using other mechanisms to forward the income to no-corporation-tax Cayman Islands).

It is tax competition pressures such as these that lie behind another fact noted in the accounts: the ongoing reduction in the UK’s corporation tax rate (26.49 per cent in 2011, to 24.49 per cent in 2012, and falling to 20 per cent from April 2015).

Another factor of note is the close links between Google UK Ltd and Google Ireland Ltd. The UK company provides marketing services to Google Ireland and provides R&D services to the US parent. The turnover from the sale of services to Ireland accounted for £396.6 million of its £506 million turnover in 2012.

John Herlihy (pictured), head of Google Ireland, was on the board of Google UK up to February 2012, and Graham Law remains on the board of both companies. The UK company’s accounts are audited by Ernst & Young, Dublin, auditors of Google Ireland’s accounts.

So UK lawmakers are complaining about how much tax Google is, or, more to the point, isn’t paying in their jurisdiction, while at the same time responding to international tax pressures by reducing their corporation tax rate.

In the meantime, they dicker around with the treatment of share-based compensation schemes.

All in all, it is just another illustration of the fact that if national governments want to get more tax out of hugely-profitable multinational companies such as Apple, Microsoft and Google, international co-operation is the only game in town.