British lawmakers described Google's tax affairs as "contrived" in a report released on Thursday and called on the UK tax authority to vigorously investigate whether the company was acting within the law.
The parliamentary investigation was prompted by a Reuters report, which showed the company employed staff in sales roles in London, even though it had told lawmakers in November its British staff were not selling to UK clients - an activity that could boost its tax bill substantially.
"The company's highly contrived tax arrangement has no purpose other than to enable the company to avoid UK corporation tax," said Member of Parliament Margaret Hodge, chairwoman of the Public Accounts Committee (PAC).
Corporate tax avoidance has become a hot political issue internationally as citizens suffering from austerity measures have grown tired of revelations about the shifting of profits by large companies.
Google said it complies with all British tax rules and that it was up to politicians to change the law if they were unhappy with the outcome.
From 2006 to 2011, Google generated $18 billion in revenues from Britain, according to statutory filings, and paid $16 million in taxes.
Its low tax bill is a result of channelling revenues through Ireland, from where most revenue is sent to Bermuda, without any income taxes being paid anywhere in the chain.
The report said that given the facts uncovered by Reuters and evidence provided to the PAC by people who leaked information about the company, Google's argument that it was selling to UK customers from Dublin, rather than London, was "deeply unconvincing".
"It is extraordinary that the department (tax authority) did not challenge Google over the complete mismatch between the company's supposed structure and the substance of its activities," Hodge said.
The report called on Google to change its structure and on Her Majesty's Revenue and Customs (HMRC) to investigate the company.
HMRC does not comment on individual taxpayers but said it relentlessly pursues businesses that do not play by the rules.
Google's Northern Europe boss, Matt Brittin, told the PAC in November that Google staff in London did not sell to UK clients, but Reuters found dozens of job advertisements for staff to "negotiate" and "close" deals as well as LinkedIn profiles for over a hundred staff who claimed to work in sales.
Former staff and customers told Reuters and the PAC that the London operation was a sales office that managed all the company's largest UK accounts.
Approval in Dublin
Brittin denied misleading parliament and insisted that no deals could be done without Dublin's approval.
If the Irish approval amounted to rubber-stamping, however, the internet search giant could fall foul of international tax rules, which say a tax authority can interpret a sale to occur where an employee solicits deals and receives orders, even if they pass contracts to others to be finalised.
The power is outlined in the commentary to the model tax treaty drafted by the Organisation of Economic Co-operation and Development, a group of mainly rich nations, and used when countries reach agreements on double taxation.
HMRC did not respond to queries on whether it believed such powers could be applied in practice.
The PAC also called a representative from Google's auditor. Ernst & Young, one of the 'Big Four' accounting firms that audit most multinational companies, to testify alongside Brittin.
The report criticised the big accounting firms for helping clients avoid tax and said they should "provide responsible advice to ensure that corporate arrangements reflect the substance of transactions".
Ernst & Young denied it had promoted artificial schemes and said it supported greater transparency in the tax system.
© Thomson Reuters 2013