Google, Amazon, Starbucks and Tax Avoidance

Lough Erne Ireland

Lough Erne Resort – location of G8 summit in June 2013 to discuss tax avoidance

A number of international e-commerce and other business-to-consumer businesses have been in the media spotlight recently. Google, Amazon and Starbucks executives have received the most attention in the UK, following appearances by them to give oral evidence to the House of Commons Public Accounts Committee (PAC) investigation into tax avoidance. Google was asked to return to the PAC to clarify issues concerning its taxable status in the UK.

These three companies appear not to have paid similar amounts of corporation tax to those of other UK-based companies with a similar turnover, even though they appear highly profitable. This has led to criticism of their ethics as well as to the tax system itself that enables them to appear to get away with paying little or no tax.

Starbucks is reported not to have paid much tax as its UK subsidiary is not, on paper, a profitable company. It appears to pay significant sums for its supplies and branding rights to other companies in the Starbucks’ group of companies. This raises the issue of the real value of these transactions and what is known as transfer pricing. Starbucks has weathered the PR storm by ‘volunteering’ to pay £20 million in corporation tax for 2013/2014.

Here, I look at the situation where business is said to be conducted by foreign companies without a taxable presence (or, in tax jargon, a permanent establishment) in the UK. Google, in particular, is quite up front about its tax affairs, stating that all of its UK business is concluded by its Irish company, which pays 12.5% corporation tax in Ireland instead of the UK’s 20%+ tax rate.

The reason that these tax arrangements are legal is that for many jurisdictions’ tax laws, the mere carrying out of certain activities by representatives of a foreign company in a jurisdiction does not created a ‘permanent establishment’ for the foreign company in that jurisdiction. It is only companies with a permanent establishment that are taxable.

‘Permanent establishment’ is defined in the UK by Chapter 2 of Part 24 of the Corporation Taxes Act 2010. In summary, if the activities of a foreign company carried out in the UK by its employees or agents are only for preparatory or auxiliary purposes, then no place of permanent establishment is created. This closely follows the OECD Model Tax Convention on Income and on Capital 2010, Article 5. If the place of management, ie where the companies’ transactions are concluded, is outside of the UK, then no UK corporation tax is payable. As has been demonstrated by the Google case, this appears to be a surprise to many, despite this being long established international tax law and practice.

The obvious answer is not to vilify the executives of companies, who naturally seek legitimate ways to reduce their tax burden, but to change the relevant tax laws.

If I were to do this, I’d go for the definition of ‘permanent establishment’. I suggest that if a significant proportion (say 75%) of the total costs of sale or delivery of a service are physically incurred in a the same jurisdiction where the goods or services are delivered, then despite the fact that the relevant company’s HQ (place of management) may be elsewhere, the company should be deemed to have a permanent establishment in that jurisdiction.

Secondly, I support the idea already considered by the OECD Technical Advisory Group of amending the OECD Model Tax Convention (and the definition of ‘permanent establishment’ in the Corporation Taxes Act) to include virtual permanent establishment.

The TAG suggested in its report Are the Current Treaty Rules for Taxing Business Profits Appropriate for E-Commerce?:

323. The “Virtual Fixed Place of Business PE” would create a permanent establishment when the enterprise maintains a web site on a server of another enterprise located in a jurisdiction and carries on business through that web site. The place of business is the web site, which is virtual. This alternative would effectively remove the need for the enterprise to have at its disposal tangible property or premises within the jurisdiction. It would nevertheless retain some or all of the other characteristics of a traditional PE, i.e. the need for a “place” (whether physical or electronic) within a jurisdiction having the necessary degree of permanence through which the enterprise carries on business. Thus, for example, a commercial web site, through which the enterprise conducts its business and which exists at a fixed location within a jurisdiction (i.e. on a server located within that jurisdiction) is regarded as a fixed place of business.

I would go further than the TAG and not get fixated on the idea that virtual permanent establishment be tied to the physical location of the e-commerce website server. In addition to the server location, I’d also consider that where a website was clearly targeted at consumers in a particular jurisdiction, as shown by evidence such as use of language, billing currency, local contact details or the applicable law that would apply to the consumer transaction effected by the web site, then this, too, would create a virtual permanent establishment.

Note that the TAG report referred to above was published in November 2002, following work started in 1999. Any recent outrage and questions about the ethics and morality of tax avoidance from politicians of any party must therefore be taken with a pinch of salt. It is a shame that it has only taken the worst recession the UK has suffered for a generation for these same politicians to begin to wake up to tax avoidance.

How the legal aid budget might have been saved

On 15 November 2010 Kenneth Clarke, the Justice Secretary, announced to the House of Commons reforms to the legal aid regime that would lead, he said, to a reduction in the legal aid budget of £350 million in 2014/15 (Hansard 15 Nov 2010: Column 659). Just over a week before the Justice Secretary’s statement to the House, the Information Commissioner had issued a press notice following the Information Commissioner’s Office investigation into Google and its collection of WiFi data during its StreetView survey of the UK.

Google street view camera visits Peak District

The StreetView collection of personal data was deemed to be a serious breach of the Data Protection Act 1998, but as a result of it occurring before the Information Commissioner had power to impose monetary penalties, Google avoided a fine and was merely required to enter into an undertaking to behave itself.

The current Information Commissioner’s powers to impose monetary penalties are capped at £500,000 for serious breaches of data protection obligations (Data Protection (Monetary Penalties)(Maximum Penalty and Notices) Regulations 2010, SI 2010/31, reg 2). £500,000 is not enough to plug the legal aid budget, but what about £374 million?

Sadly for the Justice Secretary, Google breached data protection law 5 years too early. If Google had committed the same serious breach under the proposed Data Protection Regulation, which will not come into effect until 2 years (and twenty days) after the Regulation is published in the Official Journal of the European Journal, then the hole in the legal aid budget could have been plugged with ease. Article 79(6) of the draft Regulation gives supervisory authorities (the term for data protection regulators in the draft Regulation) the power to impose administrative fines of up to €1,000,000 (at the date of this post, approximately £837,890) or 2% of annual worldwide turnover.

Google, using its published 2010 audited accounts, would therefore have been liable to a maximum fine of $586,420,000 (2% of 2010 revenues of $29,321 million). At the date of this post, that is approximately £374,582,000.

As the meerkat says, “Simples”.

Cohen -v- Google not a skank decision

New York Supreme Court by Djmutex

New York Supreme Court

There has been a degree of consternation in the blogging community about the New York Supreme Court decision in the Liskula Cohen -v- Google, Inc “skank” case, given that it requires Google to disclose the identity of a blogger, subsequently revealed to be Rosemary Port.   The decision has even been described in some UK press as a precedent-setting case.

This is a surprise, given that the Supreme Court appears merely to have applied the facts of the case to Civil Procedure Law Rules 3102(c).  Having determined that calling Miss Cohen a “skank” and “ho” etc., together with posting sexually provocative photographs of her, amounted to actionable defamation, the Court then applied the rule to enable Miss Cohen to obtain a court order “to identify the proper defendant with respect to a known cause of action”.

In the English Civil Procedure Rules there is no direct equivalent of the New York CPLR 3102(c), at least as a means to identify an unknown defendant.  Instead, the court does have jurusduction following a House of Lords’ decision in Norwich Pharmacal -v- Commissioners of Customs & Excise [1974] AC 133, using what is now commonly referred to as a “Norwich Pharmacal order”.   Norwich Pharmacal orders have been made in similar circumstances, i.e. to obtain the account details from internet service providers of alleged authors of defamatory material on the internet (see Totalise plc -v- The Motley Fool Ltd [2001] EWCA Civ 1897, Keith-Smith -v- Williams [2006] EWHC 860 (QB) and Sheffield Wednesday -v- Hargreaves [2007] EWHC 2375 (QB)).

The outcome of the Cohen case should therefore not be a surprise to UK bloggers.

Google Street View

I’m normally one of the first to get on my soapbox about breaches of the Data Protection Act/Directive, but with Google Street View I seem to be missing the point.

Why is everyone so upset by a collection of crowd scenes? If I told you I featured on 10 street views for the UK, and that each view where I feature gives away some personal information about me, could you find them? Of course not. In fact, I couldn’t even tell you if I appear on any of them.

Let’s get proper enforcement of what laws we have about personal data sorted out before we get precious about so-called invasions of privacy by applications such as Street View.

Andrew (first posted as an answer on LinkedIn)