The British government has been lobbying the EU to remove Bermuda, used by Google to avoid paying high rates of tax, from an official tax haven blacklist. A memo allegedly circulated among Tory Treasury ministers described measures against the Island nation as "unhelpful".
The former British colony was added to the blacklist, drawn up last year, as companies are not liable to pay corporation tax there - thus multinationals like Google use Bermuda to avoid paying higher rates of tax. The 30-nation list has been drawn up by member states who are concerned about tax revenues being funnelled offshore.
Internet giant Google are set to reveal on Monday 1 February that the company has accumulated £30bn of profits from non US-sales. The UK is Google's second biggest market accounting for 11% of total sales.
Last week it emerged that the search engine struck a deal with the treasury to pay £130m in back taxes after earning an estimated £7.2bn in profits in the UK over the last decade. Chancellor George Osborne insisted that the settlement was a "major success" despite critics expressing their dismay that the UK government accepted Google's offer which amounted to a 3% tax rate.
According to the Observer the memo described sanctions as "unhelpful" and told the European commission they are "strongly opposed" to any sanctions against Bermuda. The newspaper adds that Tory MEPs were instructed on six different occasions last year to vote against proposals designed to target multinational corporations that pay tax offshore.
Labour shadow chancellor John McDonnell, said: "The mask has finally slipped. The Tories have been saying they want to clamp down on tax avoidance to the British people, but when they think our backs are turned they are telling their MEPs to oppose any measures to make it happen. The truth is they run a 'don't know, don't care' approach to tax avoidance."
The Google deal with HMRC could yet be subject to European Commission scrutiny after complaints from the SNP and Labour. Peter Barron, Google's vice president of communications and public affairs, insisted on the Andrew Marr Show: "The government sets the law, HMRC enforces it and we follow that. So it's HMRC that we follow."
A Treasury spokesperson said to the newspaper: "It is simply wrong to suggest the UK is anything other than at the international forefront of tackling aggressive tax planning, avoidance and evasion.
"The government has led the way in the G20 to strengthen international rules that counter aggressive tax planning by multinational companies, and supported global tax transparency through the automatic exchange of information, which will help HMRC to crack down on tax evasion.
"All of the UK's Crown Dependencies and Overseas Territories are early adopters of this new global standard. This is all in addition to introducing the world-leading diverted profits tax which stops companies moving profits to tax havens."