Ben Chu: Let's not get bamboozled by Google in the global tax avoidance debate

Outlook Who says politics is boring? There was another entertaining session of the Public Accounts Committee today as Google's Matt Brittin received a fresh savaging from the chair Margaret Hodge over the internet giant's tax avoidance. The climax came when Ms Hodge told Mr Brittin: "I think you do do evil". The spanking followed revelations about Amazon's minuscule corporation tax bill earlier in the week. How Ms Hodge must have wished she'd been able to give Jeff Bezos a tongue lashing too.

The temperature of the tax avoidance debate is rising. But there's a danger. We seem to be getting sidetracked. The PAC committee meeting was dominated by a row about how much of Google's sales activity actually takes place in the UK, rather than in Ireland, where revenues are officially booked. This seems off the point since corporation tax is levied on profits, not sales.

We need to take a step back and identify the main problem. Multinational firms, especially those whose businesses are based on monetising profitable intellectual property such as a search engine algorithm, are able to move profits out of a country in which they operate and into tax havens.

Here's how it works. A firm's management registers the rights to its intellectual property in a subsidiary in one country (let's say Bermuda) and requires a subsidiary in another country (let's say the UK) to pay a charge for the use of that intellectual property. Thus trading profits in a subsidiary serving a big market such as the UK can be offset by fees paid to a subsidiary in a tax haven. The profits then pile up in the latter.

There are some complexities. Profits often get shifted through places such as Ireland, the Netherlands and Luxembourg on their way to the tax havens. But this basic framework is, essentially, the reason multinationals are able to report a very high turnover in a country yet also record low profits and thus pay negligible local tax.

So-called "arm's length" accounting rules, created by the OECD, are supposed to prevent this kind of artificial profit shifting. It is called "arm's length" because those fees are meant to be no higher than the firm would charge a third party business for the same transaction. The snag is that determining an arm's length price for intellectual property is immensely difficult, since IP is not traded in the same way that a piece of capital machinery, for instance, is. There is thus no market price for the tax authorities to use as a benchmark for detecting abuses. The upshot is that multinationals, aided by phalanxes of clever accountants and lawyers, end up getting away it.

Exposing and shaming individual corporations who engage in aggressive tax avoidance will only get us so far. The fact is that no country can address profit shifting unilaterally. These footloose leviathans are exploiting a loophole in the global tax regime. To close it, two things are necessary jobs. First, governments need to agree to drive the tax havens –those sunny places full of shady people – out of business. Second, governments need to establish a new international tax framework for taxing multinationals. Should these firms pay a proportion of their worldwide profits to national treasuries? And, if so, how should this proportion be determined? By staffing levels in each nation perhaps? Turnover?

George Osborne and David Cameron say brokering a new deal on tackling multinational tax avoidance is the priority for the UK's G8 presidency. Yet what has emerged so far is just tinkering. Vastly more is needed, otherwise things are going to get steadily hotter – not only for the multinationals but also national politicians. The redoubtable Ms Hodge will no doubt see to that.

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Recruitment Genius: Office Manager / Financial Services

£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

Jemma Gent: Year End Accountant

£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

Jemma Gent: Management Accountant

£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

Day In a Page

The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003
Barbara Woodward: Britain's first female ambassador to China intends to forge strong links with the growing economic superpower

Our woman in Beijing builds a new relationship

Britain's first female ambassador to China intends to forge strong links with growing economic power
Courage is rare. True humility is even rarer. But the only British soldier to be awarded the Victoria Cross in Afghanistan has both

Courage is rare. True humility is even rarer

Beware of imitations, but the words of the soldier awarded the Victoria Cross were the real thing, says DJ Taylor
Alexander McQueen: The catwalk was a stage for the designer's astonishing and troubling vision

Alexander McQueen's astonishing vision

Ahead of a major retrospective, Alexander Fury talks to the collaborators who helped create the late designer's notorious spectacle
New BBC series savours half a century of food in Britain, from Vesta curries to nouvelle cuisine

Dinner through the decades

A new BBC series challenged Brandon Robshaw and his family to eat their way from the 1950s to the 1990s
Philippa Perry interview: The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course

Philippa Perry interview

The psychotherapist on McDonald's, fancy specs and meeting Grayson Perry on an evening course
Bill Granger recipes: Our chef recreates the exoticism of the Indonesian stir-fry

Bill Granger's Indonesian stir-fry recipes

Our chef was inspired by the south-east Asian cuisine he encountered as a teenager
Chelsea vs Tottenham: Harry Kane was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope

Harry Kane interview

The striker was at Wembley to see Spurs beat the Blues and win the Capital One Cup - now he's their great hope
The Last Word: For the good of the game: why on earth don’t we leave Fifa?

Michael Calvin's Last Word

For the good of the game: why on earth don’t we leave Fifa?