Google's "brazen" explanation for its tax affairs is "deeply unconvincing" and makes "absolutely no sense", according to a report from a influential committee of MPs.
In a scathing report, the House of Commons Public Accounts Committee has called on 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.
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".
The committee urged the Government to take a lead internationally on modernising "out-of-date" tax frameworks covering internet-based commerce, and commended Prime Minister David Cameron for putting tax avoidance at the heart of his agenda for next week's G8 summit in Northern Ireland.
Google generated around $18 billion (£11.5bn) in revenue from the UK between 2006 and 2011, but paid just $16 million (£10m) in corporation tax, found the PAC report. During this period, the main rate of corporation tax was between 30% and 26%.
Google's Matt Brittin denied trying to 'disguise' business operations
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.
But Brittin was hauled back in front of 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, Hodge questioned Google's famous "don't be evil" motto, telling Mr Brittin: "I think that you do do evil, in that you use smoke and mirrors to avoid paying tax."
Today's report found: "Google defends its tax position by claiming that its sales of advertising space to UK clients take place in Ireland - an argument which we find deeply unconvincing on the basis of evidence that, despite sales being billed from Ireland, most sales revenue is generated by staff in the UK.
"It is quite clear to us that sales to UK clients are the primary purpose, responsibility and result of its UK operation, and that the processing of sales through Google Ireland has no purpose other than to avoid UK corporation tax.
"This elaborate corporate construct has damaged Google's reputation in the UK and undermined confidence in the effectiveness of HMRC."
Hodge said: "Google brazenly argued before this committee that its tax arrangements in the UK are defensible and lawful. It claimed that its advertising sales take place in Ireland, not in the UK.
"This argument is deeply unconvincing and has been undermined by information from whistleblowers, including ex-employees of Google, who told us that UK-based staff are engaged in selling. The staff in Ireland simply process the bills.
"Google also conceded at this second hearing that its engineers in the UK are contributing to product development.
"The company's highly contrived tax arrangement has no purpose other than to enable the company to avoid UK corporation tax.
"Google's reputation has been damaged by these revelations of aggressive tax avoidance. That damage will not be repaired until the company arranges to pay its fair share of tax in the country where it earns the profits from the business it conducts."
Hodge said the committee was not specifically singling out Google - or Starbucks and Amazon, which also gave evidence to the inquiry - but believed that their tax avoidance activities were "illustrative of a much wider problem" among multinationals in the modern globalised business environment.
Committee chairwoman Margaret Hodge has been strongly critical of Google's tax arrangements
The report found that HMRC was "not sufficiently challenging of multinationals' manifestly artificial tax structures", noting that the taxman has never challenged an internet-based company in the courts on the key issue of the location of its "permanent establishment", which determines which country's taxes it should pay.
Any "common sense" reading of HMRC's own guidance suggests it should "vigorously question Google's claim that it is acting lawfully", said the committee, which recommended: "HMRC should now fully investigate Google in the light of the evidence provided by whistleblowers".
After taking evidence from Google's UK auditor Ernst & Young, the committee found that the reputation of Britain's big accountancy firms had been damaged by "their substantial role in advising their clients on corporate structures and tax planning which serve only to help them avoid UK taxes".
Hodge said: "This committee has vigorously condemned the activities of the big UK accountancy firms in helping their clients find loopholes in legislation and establish highly artificial tax structures.
"These firms must recognise that the public mood on tax avoidance has changed and that the time has come for them to advise their clients responsibly."
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 £23bn in extra tax through challenging large businesses' tax arrangements.
"Through tackling transfer pricing issues, we have collected £2bn since 2010 alone. We relentlessly pursue businesses who don't play by the rules, these results reflect this."