By Andrew Osborn and Costas Pitas
LONDON (Reuters) - Google Inc's tax affairs came under renewed scrutiny in Britain on Wednesday when the leader of the opposition Labour party accused the Internet company of wrongly going to "extraordinary lengths" to avoid paying tax.
In comments designed to politically outflank Prime Minister David Cameron ahead of next month's G8 summit on what has become a high-profile issue, Ed Miliband, the Labour leader, said he was disappointed that Google paid so little tax.
"I can't be the only person here who feels disappointed that such a great company as Google ... will be reduced to arguing that when it employs thousands of people in Britain, makes billions of pounds of revenue in Britain, it's fair that it should pay just a fraction of one percent of that in tax," Miliband told a Google event held just outside London.
"So when Google does great things for the world, I applaud you. But when (Google Executive Chairman) Eric Schmidt says its current approach to tax is just 'capitalism', I disagree. When Google goes to extraordinary lengths to avoid paying its taxes, I say it's wrong."
Google's methods of minimizing its British tax bill have made headlines at a time when voters' incomes are being squeezed, putting pressure on politicians.
Lawmakers have accused Google of using "smoke and mirrors" to avoid paying tax. Its northern Europe boss, Matt Brittin, was called back to testify to parliament after a Reuters investigation showed the company employed staff in sales roles in London, even though he had told the committee in November its British staff were not "selling" to British clients.
Schmidt defended his company's tax policy at the same event on Wednesday, saying its behavior was not unethical and that it was "trying to do the right thing".
"Virtually all the American companies have structures like this. This is how the international tax regime works," he told an audience at the event. "If that changes, we will follow."
When asked whether Google intended to comply with the spirit not just the letter of the tax law, he said he would need to have the distinction between the two explained to him.
"The answer is more complicated because we're governed by U.S. securities law," he said. "Google is a capitalist country ... company," he added, to laughter and applause from the audience.
Cameron, who has placed global tax regulation at the heart of the G8 summit he is chairing in June, has been coy about singling Google out for criticism, preferring to talk more generally about corporate tax avoidance.
Miliband, whose party is ahead of Cameron's Conservatives by up to 10 percentage points in opinion polls, criticized Cameron for not taking a tougher line.
"Google is said to have paid only 10 million pounds in corporation tax in the UK between 2006 and 2011, despite revenues of 11.9 billion pounds," Miliband wrote separately in a blog for The Huffington Post UK on Tuesday.
"I was surprised the prime minister failed to raise this when Eric Schmidt attended the business advisory council's meeting."
Nick Clegg, the deputy prime minister, told Schmidt at the same meeting that firms like Google shouldn't wait to be pressured into changing their tax practices, a senior source from Clegg's Liberal Democrat party said on Wednesday. Cameron raised the issue too, but did not criticize Google specifically.
Britain will host a meeting of G8 leaders on June 17-18 at a golf resort in Northern Ireland and Cameron said in April that tax compliance was one of his G8 priorities.
Google is one of several high-profile companies to face far greater scrutiny of its tax affairs in recent months. Apple Inc., Microsoft and Amazon.com have all been in the spotlight at a time of weak economic growth, high levels of public debt and squeezed household incomes in Britain.
Schmidt said his company, which is building a new headquarters in central London, would not change its investment plans even if it was forced to pay more tax.
"Google will continue to invest in the UK no matter what," he said.
(Editing by Michael Roddy)