Is it Jolyon or Jesse getting this wrong?

So far, the effects appear slight. Tech giants are still reporting effective tax rates well below the lowest corporate rates, thanks to their armies of accountants and lawyers, says Jolyon Maugham, a U.K. tax lawyer and blogger. “Nobody pulls the plug on such machines without a fight,” he says.

At its core, the fight is about a system known as transfer pricing. Multinational companies devise transactions between subsidiaries, which allows Google’s Irish arm to make minuscule payments to its U.K. sister for the work done by the company’s London staff. Such deals can allow companies to shift profits to zero-tax island havens.

Completely the wrong way around. Transfer pricing means that Google cannot make miniscule payments into London. Such payments must be at least vaguely connected to market prices for such work.

And that’s what he £130 million deal was all about. HMRC said to Google, you know, we think a market price would be a bit higher than you’ve been paying Google UK. And Google shuffled its feet and went, well, OK then.

Transfer pricing doesn’t allow miniscule payments it forbids them.

20 thoughts on “Is it Jolyon or Jesse getting this wrong?”

  1. “Transfer Pricing” as a term gets mis-used. In the media, it tends to be a shorthand for “setting up commercial structures which aren’t necessarily the first ones you’d think of”.

    I suspect that the “transfer” is interpreted as being a verb – “transferring profits offshore” – rather than the noun.

    So with Google, selling from Ireland to the UK is “transfer pricing” as they’ve not done the obvious thing of selling in the UK, they’ve done something to transfer profits to Ireland.

    The article quoted is ahead of the pack in that the author does at least appear to know that transfer pricing is to do with the prices paid; but unfortunately they seem to have tried to work out from first principles how you transfer profits on transactions (and concluded that it must be by under-pricing them) rather than realizing that companies are shifting the transactions themselves.

  2. “…which allows Google’s Irish arm to make minuscule payments to its U.K. sister for the work done by the company’s London staff. Such deals can allow companies to shift profits to zero-tax island havens.”

    Er no, it’s definitely not the arrangements between the UK and Eire companies that allow profits to be shifted to zero – tax island havens.

    And, since you clearly don’t know what you are talking about, being surrounded by 360° of water probably isn’t of the greatest importance either.

  3. “Such deals can allow companies to shift profits to zero-tax island havens.”

    I was desperately hoping that article was from the Guardian.

  4. It’s not the whole story, but Jolyon is right and strictly speaking it’s not transfer pricing, but “commissionaire” arrangements under which (in this case) the UK company acts as the undisclosed agent of the Irish company. The UK company is paid a sales commission but the bulk of the sales price goes to the Irish company.

    Here is the entry in HMRC’s Inspector’s manual:
    http://www.hmrc.gov.uk/manuals/intmanual/intm441040.htm

  5. “Transfer pricing doesn’t allow miniscule payments it forbids them.” That’s surely wrong. Transfer pricing is just a thing, or at least it was in my day: it neither allows nor forbids. Presumably TW meant that the laws governing transfer pricing for tax purposes forbid whatever they forbid.

  6. What dearime said.

    Transfer pricing is just the price at which you do transfers.

    They could say that tax avoidance is carried out by abusive or artificial transfer prices; I’d have thought that would be a good term for the social justice warriors, but I suppose that would require them to understand the scheme in the first place..

    Where those transfer prices might not have been negotiated at arms length, the tax law on transfer pricing says that you get taxed as if you had done. And yes, that stops companies from avoiding tax through minuscule (or massive) payments.

    But transfer pricing itself? That’s like blaming multiplication.

  7. Pendants.

    Tim’s point is that the transfer pricing regime is there to prevent undercharging not, as implied by Bloomberg, facilitate it.

  8. The thing that puzzles me in all this is why soapy Jo wants Google to declare less profit in Eire. It’s almost as if he feels that all taxes belong to the UK by right. And it is a bit rich when he writes about how trust in HMRC is declining, considering the number of times he posts on his blog to complain about how Google are running rings around them. Candidly he is just as much an arse as Murph

  9. @ dearieme
    The transfer pricing rules are set up to prevent *unjustified* miniscule payments, which is, I assume, that about which Tim was talking.

  10. John, doesn’t it depend on each jurisdiction’s point of view? Eire would surely like the cross-charges to be as low as possible in order to maximise their tax take.

    Richard – I think you might be correct however it is odd to see such SJW’s as Maugham and Murph being so intent on squeezing the tax base of another country for such quasi-Imperialistic reasons.

  11. Jollyold Prawn does seem to be getting as bad as Murphy these days. His political beliefs mean he starts with his conclusions then batters the facts around until they fit his view.

    “Why don’t people trust HMRC” he bleats before launching into an attack on them where every unknown factor is taken as read to be negative. If people don’t trust HMRC it’s because tosspots like Prawn run with the same half-truths, exaggerations and failures to explain as the worse parts of the media.

    Fuck me, he even tried to suggest that the fact that Google UK had two enquiries was virtual proof that something awful was going on. “one might be unfortunate, but two?” he whined. TWO? I’ve represented family run back street businesses that have had more technical enquiries than that in the same timeframe.

    Poncy wanker.

  12. Maybe there should be be a pratting on prawn category here…. Or simply soapy Jo, watching as he wrings his hands at the idea of untaxed profits escaping his grasp

  13. I’m a little bewildered by the stupidity. “Miniscule payments to its U.K. sister”? Shouldn’t that be the other way round? Google UK are selling a product that was developed elsewhere. Where doesn’t matter. The payments for use/onsale of the product go the other way, from the local subsidiary to the multinational owner. If they manage to create some value added (service, support, that sort of thing), that gets taxed in the UK. There isn’t much value to add, so not much tax. Isn’t that fairly simple?

  14. @LtW: I don’t think it works like that. Google UK fronts up the sales but is actually acting as an undisclosed agent of its sister company in Ireland and is paid a commission on the sales for it’s work. Assuming that the UK authorities accept that this is not actiually the Irish company selling in the UK through a permanent establishment and the arrangement above is valid, the relative value of the work done is immaterial to the tax man. What is important is that the UK agent is paid an amount at least equivalent to the commission that would have been paid to an independent agent doing the same work – that fact that one company gets revenue measured in billions while the other company’s revenue is only measured in (hundreds of) millions is not important. Since Google UK manages to pay its employees on average more than the PM and nearly as much as a High court judge and still make enough cumulative profits to pay £130 million in tax, HMRC awould have a hard time convincing any tax court that the commissions are too low.

  15. Alex, have you tried to put that point to soapy Jo? His defence has been that paying income tax does not exonerate you from paying too little corporation tax. OK, he is too stupid to look at the overall tax take, but he is only a barrister . The English legal system is a wonder to behold.

  16. @diogenes: Little point. I don’t know that my analysis is correct but I expect that it i, based on my knowledge of other firm’s arrangements. I suspect that it doesn’t really address his issue: that the net effect is “wrong” in (his) principle, even if the facts ofarrangements currently support the treatment agreed between Google and HMRC.

    As I have said in another thread, I don’t think this treatment will last forever (a) because the OECD is drawing up a new model double taxation treaty which will eventually find its way into the UK-Irish agreement and (b) probably before that, the facts will not support the argument that whatever it is that Google UK is doing will continue to be treated as “preparatory or auxiliary” to the business of Google Ireland. The number of people working in Google UK is nearly as large as Google Ireland, and they are planning to move to much larger offices, so presumably they will have many more people in the UK, which doesn’t help their argument – but we don’t have full details of all the relevant facts, so it isn’t really fair on Google to comment any more.

Leave a Reply

Your email address will not be published. Required fields are marked *