Google should be investigated by the UK tax authority HM Revenue and Customes (HMRC) over its tax affairs, according to a parliamentary watchdog.
The search giant came under heavy criticism from the UK Public Accounts Committee (PAC) today for only paying $16m in tax to HMRC on turnover of $18bn between 2006 and 2011.
Google achieved this by basing its operations for Europe, the Middle East and Africa in Ireland, which has a corporation tax rate of 12.5 percent, less than half the 28 percent rate in the UK. It then reduced its Irish tax liabilities by sending cash to Bermuda via a Dutch holding company.
"Any common sense reading of HMRC's own guidance and tests suggests HMRC should vigorously question Google's claim that it is acting lawfully," says the Public Accounts Committee report, published today.
"HMRC should now fully investigate Google in the light of the evidence provided by whistleblowers."
The PAC challenges Google's assertion that while it employs about 300 people in the UK to "promote" Google's services, no UK employees can execute a trade, and therefore revenues it generates through sales of advertising to UK customers are not subject to UK corporation tax.
One "whistleblower" wrote to the PAC claiming to be a former Google salesman based in the UK. He said that Google set him "sales targets" and that he was paid commission for sales of ads to UK customers, with that commission accounting for some three to four times his basic salary.
When it comes to selling ads to UK customers, Google employs UK-based staff with "sales" in their title, who have "sales skills" to carry out "functions of sales", an earlier hearing of the PAC was also told.
"Google's reputation has been damaged by these revelations of aggressive tax avoidance. That damage will not be repaired until the company arranges to pay its fair share of tax in the country where it earns the profits from the business it conducts," said PAC chairwoman Margaret Hodge.
The PAC report also calls on HMRC to take general action against big business, calling for it to be "much more effective in challenging the artificial corporate structures created by multinationals with no other purpose than to avoid tax".
To help tackle the problem of tax avoidance globally HMRC and HM Treasury should "push for an international commitment to improve tax transparency" the report says. This commitment should include "developing specific proposals to improve the quality and credibility of public information about companies' tax affairs", and be used "to collect a fair share of tax from profits generated in each country".
Large accountancy firms are also singled out for criticism in how they advise corporations over tax matters, with the report calling on professional accountancy bodies to "emphasise the importance to accountancy firms of behaving responsibly in selling tax advice to clients, and in reaching audit judgements on the substance of their clients' UK operations and structures".
A Google spokeswoman said: "As we've always said, Google complies with all the tax rules in the UK, and it is the politicians who make those rules.
"It's clear from this report that the Public Accounts Committee wants to see international companies paying more tax where their customers are located, but that's not how the rules operate today."
A spokesman for HMRC said it couldn't comment on whether it would open a fresh investigation into Google's tax affairs. In a general statement Jim Harra, head of business tax for HMRC, said: "Since 2010 we have collected over £23bn in extra tax through challenging large businesses tax arrangements. We relentlessly pursue businesses who don’t play by the rules, these results reflect this."