How much UK tax would Google pay if it recognised all UK income through Google UK Ltd?
The filing of accounts for Google UK Ltd with Companies House on 6th April has sparked lots of media reporting about the amount of UK tax paid to the HMRC by UK subsidiary of Alphabet Inc, Googles US parent company.
The problem with the media reports is that they look exclusively at the results of the UK subsidiary and are therefore meaningless. The headline numbers that have been picked up are that:
- UK revenue is £1.6 billion
- Average pay per employee before bonuses was £234,000 and
- After everything is said and done it paid £44m in corporation tax which is £21m less than the prior year
Now people smell a rat, they seem to instinctively know that Google has not paid its fair share in tax. How can taxes have decreased since the prior year? Google is certainly not a diminishing business. The high wages are a red flag but there is no substance in these numbers for people trying to calculate how much tax google should have paid.
The problem with these numbers in isolation are:
- Whilst the revenue figures relate to its UK entity they do not represent it’s UK activity. This difference is very important. The geographic split of group revenue is determined by the company accountants who use a complex system of international recharges to shift revenues globally.
- There are also intercompany recharges within the cost lines however the impact of these is likely to be less.
- There is no regional breakdown of turnover. My statutory reporting knowledge is dated but I seem to remember companies had to disclose revenue by region. This is not the case according to these accounts which quote Schedule 1, Para 68 of Statutory Instrument 2008 No 410 as the basis for non-disclosure. Likewise, the accounts of Google Ireland Limited do not show any geographic breakdown for its €38 billion revenue in 2018.
With limitations over the available information – can we estimate how much UK tax Google should be paying?
Yes. We can – but will need to make the following assumptions:
- Alphabet revenue generated in the UK has continued growing at the same rate since it was last published for FY2016.
- Alphabet’s operating margin is consistent globally.
- Alphabets UK tax is based on UK generated revenue less operating margin.
The last time that Alphabet Inc disclosed UK specific numbers was in its 2016 annual statement. At that point in time, UK turnover represented 9% of its $90 billion global revenue or $7.8 billion.
By 2019 Alphabet Inc revenue had grown by 79% to $161billion. Let’s assume the UK no longer represents 9% of global revenues ($14bn) as a substantial portion of the group’s $71 billion growth has come from less developed markets.
For the purposes of these estimates, we are assuming that UK revenue to 2019 continued to grow at its 2015 and 2016 rates – 10%. To take out the impact of fx rates we translate 2016 back to GBP and then apply the 10% growth rate for 2017, 2018 and 2019. We estimate 2019 UK sales to be £7bn. I think these estimates are conservative as we are showing the UK contributing far less to Alphabet Inc’s global sales than it did in 2016.
Alphabet Inc’s global operating margin in 2019 was 21% as per above. Applying this to UK sales and taking negligible interest and other costs shown in the UK accounts into account, the group would have made over £1.5 billion profit in the UK and incurred a tax bill of £284m.
In line with the assumptions above Google has saved £240m on it’s UK corporation tax bill through its system of global recharges.
How much would Digital Services Tax recoup?
The Digital Services Tax, a 2% tax on revenues of certain online businesses, came into force on 1 April 2020. The digital services tax will be charged on fees generated from UK users. Whilst not publicly published HRMC should know this from Google VAT returns.
If we assume the above estimates are correct DST would have netted HMRC £141m meaning Google would have paid £185m in UK taxes. This example shows how DST will recoup what the HMRC views as lost taxes. Because it is only levied on revenue, it is simple to operate and limits the scope of digital businesses for shifting profits to other jurisdictions.
HMRC’s estimates (below) show that it expects to generate £390m from DST next year so our estimates are not that far off.
Based on rough estimates using historic published data, Google has saved £240million in UK taxes during it’s 2019 financial year. We estimate HMRC will recoup 60% of this lost tax revenue from this year with the introduction of digital services tax.
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