Google’s next search may concern its own tax

Internet giant may have to rethink its structure as political pressure over tax returns mounts

Google’s European, Middle East and African sales headquarters on Barrow Street, Dublin. Photograph: Paul McErlane/Bloomberg via Getty Images

Google’s European, Middle East and African sales headquarters on Barrow Street, Dublin. Photograph: Paul McErlane/Bloomberg via Getty Images

 

The ongoing political controversy over the level of tax being paid by Google in its major European markets could have serious implications for its international structures, a key part of which is in Dublin, where it employs more than 3,000 people.

However, as matters stand, the multinational is holding strongly to its view that, while it has agents in the UK and elsewhere who assist in the sale of its product (advertising), the sales are actually conducted with Google Ireland Ltd, based in Barrow Street, Dublin; the payment for those sales goes to Dublin; and so the tax bill on any profits that arise falls due in Ireland.

The company refers to the work some of its staff are involved in in France, Germany, the UK and elsewhere, as “digital consultancy”. These staff encourage prospective clients to buy product from Google, and assist clients in doing so.

However, when the actual sale occurs, Google Ireland Ltd is the vendor. This is the case and has to be the case, the company argues, because Google Ireland holds the intellectual property rights to the product sold. It is self-evident, according to the company, that the subsidiary operations in mainland Europe and elsewhere, cannot sell something they don’t own.

The fundamental business activity of Google takes place in California, where it employs up to 17,000 engineers. When designing its global structure, it decided to set up its HQ for Europe, the Middle East and Africa sales in Dublin. Not least among the advantages was Ireland’s low corporate tax rate, as well as its position within the EU and the single European market.

Google has given its Dublin operation the licence to sell its product within the area covered by the Irish HQ operation. Subsidiaries in the UK and elsewhere are paid a fee for their digital consultancy work. The fee paid can generate a small profit for the subsidiary, which then must pay local corporation tax on that.


Dublin’s role
The company’s argument is that the corporation tax paid in each jurisdiction should be measured against the fee paid, not to the size of the sales conducted in the jurisdiction concerned (which are in fact sales conducted with Dublin).

If the authorities in Britain, France, Germany and elsewhere decided the activities of Google in those jurisdictions were such that they triggered taxable income arising from the associated sales, that could, in theory, prompt Google to increase the amount of work conducted out of Barrow Street, and reduce the roles of the local subsidiaries. That no doubt could create logistical challenges for the multinational.

Arguably a more likely scenario is a larger and more complicated arrangement mirroring the one that already occurs with other companies in Ireland. When Google Ireland Ltd gets its income from around Europe, the Middle East and Africa, it doesn’t simply pay Irish corporation tax on the associated profit. Rather it makes a huge licence fee payment to Google Ireland Holdings, which has licensed intellectual property rights to Google Ireland Ltd. Though registered in Dublin, Google Ireland Holdings is deemed for taxation purposes to have its centre of management in Bermuda, a tax haven with no corporation tax. So Google doesn’t end up paying as much tax here as it otherwise would on earnings in the area covered by the Dublin HQ.

If the authorities were to deem that the subsidiaries around Europe and elsewhere should be taxed on the local sales, Google might well, or arguably might have to, licence those local subsidiaries to conduct those sales. The profits that would arise locally, then, would be net of the licence fees that would have to be paid to Dublin. Which would bring matters back to where they started, in terms of tax paid in the jurisdictions expressing concern.

Google says the whole point of a single European market is to allow a company (Google Ireland Ltd) based in one EU jurisdiction sell across the union. Politicians concur, but say that at a time of rising taxes and public finances under strain, they can’t have super-profitable multinationals paying ever-reducing tax bills.

The problem for the governments is that they operate at a national level, while Google operates globally.

UK

By 2015, major companies in the UK will be expected to pay a 20 per cent corporation tax rate, the lowest of any of the world’s biggest economies, as chancellor of the exchequer George Osborne is fond of reminding audiences at every available opportunity.

The fall to 20 per cent has been dramatic, down from 28 per cent when the Conservative/Liberal Democrats coalition took office in 2010 – a necessary move, Osborne argues, to counter the challenge of low-tax countries pitching for foreign direct investment.

However, the public mood in the UK towards multinationals has soured: Google was accused of “being immoral” when its northern Europe head, Matt Brittin, went before the House of Commons’s public accounts committee last November.

Despite the charge, Brittin was seen as having had a relatively good outing before MPs compared with his colleagues from Amazon and Starbucks – the first was accused of feigning ignorance, the latter ridiculed for claiming his company did not make money.

Brittin, however, is unlikely to have enjoyed his return yesterday before the committee, which believed that it had been misled by his declaration in November that all UK-sourced advertising won by Google is sold by Dublin-based staff.

Despite the chorus of demands that companies should pay more, few have answers. One-tenth of all British taxation comes from corporation tax, although multinationals have opportunities to maximise avoidance that are not enjoyed by those who operate just in the UK.

The pressures are being intensified by the changing face of retail: Argos and Homebase pay £140 million in business rates, yet face ever-increasing competition from companies such as Amazon which have to pay only a fraction of such charges since they do not have high street operations.

Many business leaders, Sainsbury chief executive Justin King for one, believe the fall in corporation tax rates is dwarfed by higher charges, particularly business rates, but also national insurance contributions for employees.

Some levers are available to increase the sums paid in corporation tax, such as removing the freedom enjoyed by companies to write off debt interest against their tax bills – but such moves would not be considered lightly by a treasury worried about incoming investment.

Internationally, the British are pressing for change, urging the Organisation for Economic Co-Operation and Development to complete its review of global corporate tax rules as quickly as possible.

The fruits of the OECD’s work – including how tax should catch up with companies who exist only in the digital world, and curbs on the unacceptable shifting of profits between different tax regimes – are to be presented at the G20’s July meeting.

Common European Union-wide tax rules that would share taxes according to where products were brought, not sold, or made would have some benefits for the UK, as one of the EU’s largest countries.

However, the awarding of greater powers to Brussels is unthinkable given the current Eurosceptic climate in London – and one that is unlikely to mellow in any significant way as the UK prepares for a referendum on its EU membership.


Germany
Google’s new Berlin base has themed rooms named after the city’s most famous clubs. But it’s unlikely Chancellor Angela Merkel graced the Kit-Kat-Klub room, where walls are adorned with whips, handcuffs and a leather mask honouring Berlin’s famous fetish club.

When the German leader visited the office to chair an online discussion on the thorny issue of integration issues, critics called it pandering to the internet search giant, given the widespread discussion here, as elsewhere in Europe, of Google’s fiscal affairs.

Google employs more than 500 people in five locations around Germany, including Hamburg and Munich. It has approximately a 96 per cent market share in Germany’s online search market which, last year, saw a total advertising spend
of €6.4 billion – including almost
€2.3 billion spent by companies buying keywords to secure a good spot in search results.

Company records show Google Germany’s turnover in 2011 was €190.5 million, up 22 per cent on the previous year. Earnings before interest and tax were €16.2 million, while its post-tax profit was down by almost one-third year on year to €10.9 million. Its final 2011 tax bill amounted to €5.2 million. Anyone wondering where the rest of its taxable income went need only look at the top line of its annual return.

Google Germany “operates essentially as a service company of Google Inc, USA and Google Ireland Ltd, and performs services for the German market in the areas of marketing, hosting, research and development”.

In Germany, as elsewhere, Google insists it pays all relevant taxes. But German tax experts say Google and other international technology companies are as innovative with licence fees and other instruments to reduce their tax bills as they are with their products.

An official tax investigation of Google found, to date, no way to squeeze more money out of the company here. You’ll hear no equivalent of the energetic rhetoric criticising corporate tax
optimisation to be heard in London or Paris.

But German officials say it would be mistaken to confuse the relative calm for a lack of interest or ambition. Germany is playing a long game with corporate tax optimisation, one that it fully intends to win.

Officials here scoff at London’s recent deal with Starbucks whereby the coffee chain, facing acres of bad publicity on its tax affairs, made a voluntary contribution to the British exchequer.

In Germany, the land of the Reformation, such behaviour leaves an unpleasant aftertaste of a government pandering to big business, selling indulgences for tax forgiveness with no promise of reformed behaviour.

As for French talk of a “Google Tax”, German officials say it is a fata morgana to try and impose a toll booth on a virtual product. After decades of neglect, German officials insist Europe is facing a lengthy fiscal rewiring.

The fact that tax competences in the
EU remain at national level means teasing out the issues at intergovernmental level with real progress not likely, they estimate, for at least two or three years. What does Berlin’s Google gaze mean for Ireland?

Berlin insists it’s not planning to send in the fiscal cavalry to wreck the island’s economic model and replenish German corporate tax coffers at Ireland’s expense. But Berlin insists EU partners have committed to reform the European fiscal landscape so that international corporations can no longer play one EU tax regime against another.

In Ireland’s case, they say this will involve reform of company law.

France
Fleur Pellerin, the minister for the digital economy, hopes to include taxation of the internet in the 2014 law on finance. “We are forced to revise completely our fiscal concepts,” she said earlier this year, adding that “the present fiscality is not at all adapted to the digital economy”.

Search giant Google is widely reported to earn up to €1.5 billion annually in France, mainly on advertising, on which it pays some €5 million in tax. Last autumn, the French government reportedly sought €1 billion in back taxes, based on evidence collected in four raids on Google’s French offices in 2011.

The issue resurfaced tangentially this week when a government commission recommended taxing smartphones and tablets to finance France’s subsidising of its cultural industry. For once, only hardware producers, not search engines, were targeted.

“What do you do with these big operators, what we call the OTT, you know, the Over The Top – Amazon, Google, Apple – which make huge profits without paying taxes in France?” a presenter on France-Inter radio asked culture minister Aurélie Filippetti.

Her answer, that “there is a battle to be led at the European level”, summarised the near-impossibility of France acting alone.

Paris accuses Google of declaring advertising revenue from France as Irish income, to take advantage of Ireland’s low corporation tax. To the French mind, Google has a huge consumer base in France, and its taxes should reflect that.

A report released by state councillor Pierre Collin and government auditor Nicolas Colin in January said the concept of “permanent establishment”, used to determine tax status, should be redefined to consider internet users as co-creators of value, since companies profit from collecting user data. Collin and Colin suggested France create a new tax, modelled on the “carbon tax” and based on the number of users tracked by internet companies. Critics said it would be impossible to monitor data collection.

In response to demands by French print media that they receive payment for Google links to their websites, Google threatened last October to simply remove the publications from their index. That conflict was resolved in February, with an agreement between President François Hollande and Google executive chairman Eric Schmidt. The French dropped the demand for payment for links, in exchange for Google establishing a €60 million fund to help publishers develop online traffic.

But, Filippetti warned, the agreement “does not exonerate Google from its other duties. I’m thinking in particular of its fiscal duties.”

The French data protection watchdog CNIL has separately threatened “repressive action” against Google if it does not tell users how their data is being used.

The Court of Cassation will decide in June whether to uphold a €50,000 award to a property insurer who sued Google for defamation after its name was associated with “crooks” in Google searches.

But experts predict it will be difficult to raise Google’s taxes. “Thinking that you can work on the web without being Google-dependent is not realistic,” Nathalie Collin, who negotiated on behalf of French newspapers in the February deal, told the New York Times.

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