A parliamentary committee has urged HM Revenue & Customs to "fully investigate" Google, after finding that the internet giant uses "highly contrived" tax arrangements with the sole purpose of avoiding corporation tax on its multibillion-pound revenues in the UK.
The report, from the House of Commons Public Accounts Committee branded Google's claims that its UK sales activities take place in low-tax Ireland as "deeply unconvincing".
The committee found that the company's account of its operations made "absolutely no sense". Committee chairwoman Margaret Hodge branded the company's arguments "brazen" and said the only way for Google to repair its damaged reputation was to arrange to pay a fair share of tax in the countries where it earns its massive profits.
But the report was also highly critical of tax authorities, finding it was "extraordinary" that HMRC did not challenge Google over its arrangements.
The cross-party committee also warned that the UK's big accountancy firms had damaged their reputations by helping big business clients avoid tax, calling on them to recognise that "the public mood on tax avoidance has changed".
‘Clarity needed on where sales are generated’
Google maintains it complies with UK tax law and that the role of its London team is to drum up business, before deals are concluded by their Irish counterparts, allowing it to book the revenue in Dublin where to corporate tax rate is 12.5%.
Corporation tax is payable on profits, not revenues, and the current debate around taxing multinationals hinges on companies' ability to shift profits between countries in order to achieve favourable tax conditions, with little clear relationship to where the sales are generated.
In May, it was revealed that Google's corporate website claims sales teams are based in London, and advertises jobs for London-based sales staff, whose duties include "negotiating deals," closing "strategic and revenue deals" and achieving "quarterly sales quotas".
The profiles of about 150 London-based employees on corporate social networking site LinkedIn said they were involved in drawing up sales strategy, managing sales teams, closing deals and other sales work. Despite these developments, Google denied it had previously misled the committee in saying sales go through Ireland.
Google generated around $18bn (£11.5bn) in revenue from the UK between 2006 and 2011, but paid just $16m (£10m) in corporation tax, found the PAC report. During this period, the main rate of corporation tax was between 30% and 26%.
In an appearance before the committee last November, the company's vice-president Matt Brittin insisted Google complied with UK law and paid all taxes required.
Anyone purchasing advertising from Google in Europe - including the UK - was buying it from Google Ireland, where all of the company's sales outside the US were billed, he said.
However, Brittin was asked to return to the committee in May to face a second grilling over evidence from whistleblowers which showed "clear discrepancies" with his claim that none of Google's 1,300 UK staff were working in sales. At that hearing, Ms Hodge questioned Google's famous "don't be evil" motto, telling Brittin: "I think that you do do evil, in that you use smoke and mirrors to avoid paying tax."
A Treasury spokesman said: "This Government is committed to creating the most competitive corporate tax system in the G20, but this goes hand-in-hand with our call for strong international standards to make sure that global companies, like anyone else, pay the taxes they owe. The UK, along with Germany and France, has since last year been leading the efforts through the OECD to modernise the international tax rules and we have put tax and transparency at the heart of the G8 agenda which we will chair next week."
A Google spokesman 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. We welcome the call to make the current system simpler and more transparent."
HMRC head of business tax Jim Harra said: "Since 2010 we have collected over £23 billion in extra tax through challenging large businesses' tax arrangements. Through tackling transfer pricing issues, we have collected £2 billion since 2010 alone. We relentlessly pursue businesses who don't play by the rules, these results reflect this."
Labour leader Ed Miliband wrote on Twitter: "Public Accounts Committee report shows Google goes to extraordinary lengths to avoid paying its share of tax in Britain. It needs to change."