Google tax avoidance and George Osborne's Soviet-style 'victory'

George Osborne's "major success" in raising £130m of tax from Google reminds me of the "record-breaking" grain harvest figures that Communist leaders used to announce in the 1970s and 1980s. This was a victory for the government, the chancellor declared. I hope we never get to see what a defeat looks like.

Tax experts are agreed: this sort of payment represents an effective corporation tax rate of no more than 5%, and possibly less. Other businesses in the UK pay corporation tax on their profits at 20% (although that figure is being cut to 19% in 2017 and heading for 18% in 2020). The Google discount is worth hundreds of millions of pounds to the company.

It is impossible to say for sure what arrangements Her Majesty's Revenue and Customs (HMRC) has made with the company as the details remain confidential. While Treasury minister David Gauke denied the effective tax rate was as low as 3%, he wasn't able to say exactly what it was. He doesn't know. Neither do we. The deal is so mysterious that even Google's sharpest algorithm maestros would not be able to track it down.

We should have a bit of sympathy – strictly limited, of course – for the overworked, under-resourced tax officials and their bamboozled political masters. Global businesses are complicated and the successful ones hire clever people to structure their affairs in a "tax-efficient" way. They rarely break the letter of the law, even if they are sometimes in breach of its spirit.

Google itself has been fairly blunt on this matter in the past. Almost three years ago, the company's executive chairman, Eric Schmidt, told the BBC: "What we are doing is legal... I view that you should pay the taxes that are legally required. It's not a debate. You pay the taxes. If the British system changes the tax laws, then we will comply.

"If the taxes go up, we will pay more, if they go down, we will pay less. That is a political decision for the democracy that is the United Kingdom."

While the logic was clear, the argument was somewhat disingenuous. In spite of its impressive buildings, significant staff numbers and cool presence, Google claims not to make its massive sales in the UK as its transactions are processed in Ireland.

But Richard Murphy, a tax expert and professor at City University in London, says Google made sales of "about £4.5bn into the UK in 2014, according to its global accounts". If it maintained its usual level of profitability – around 25% in similar markets – we can guess that profits of around £1bn will have been made in 2014 alone. HMRC should be collecting a lot more than a measly £130m over the past 10 years.

This is an international problem that requires and international solution – another reason why Osborne's triumphalism at cutting a deal was so unwise. The bigger and more fundamental questions are: how do companies make money and how should they be taxed?

A move to compulsory national accounts for international businesses has at least a superficial appeal. Currently, through "transfer pricing" and other accountancy moves, businesses are able to generate profit, officially, in the places that might tax them least.

Then there is the related and growing problem of "inversions", whereby US corporations (pharmaceutical company Pfizer being the latest example) nominally merge with an overseas business to alter their tax status. Big organisations can be hard to tax. Virtual flows of cash can be hard to pin down. Land and property make easier targets for tax officials. So the government needs to up its game.

And business needs to play fair. They benefit from the state in so many ways: the rule of law, transport and infrastructure, an educated and healthy workforce, customers with money to spend in a stable economy. It is right that businesses pay tax. Competition between countries to tax less can be damaging. The UK has a serious budget deficit. Why, then, are we rushing to make life so much fiscally easier for big, profitable businesses? They are doing well enough already.

For those companies that are so minded – and able to pull it off – corporation tax seems to have become almost optional. This cannot be right. Governments should take Eric Schmidt at his word and set tax laws to suit the country's needs, not those of the boards of a few global companies. And businesses that want to be better corporate citizens should pay their tax without complaint.

Politicians needs to change their tune, get off their knees and act. In his July 2015 budget, the chancellor said: "We are giving businesses the lower taxes they can count on to grow with confidence, invest with confidence, create jobs with confidence." That may or may not be so. For now, Google can be confident that its UK tax bill is going to remain satisfyingly small for the foreseeable future.

Stefan Stern is a business, management and politics writer. He writes for The Guardian and The Financial Times and is a visiting professor at Cass Business School.