Ireland might be wise to look more closely at Google

Analysis: Scrutiny of the web giant’s tax affairs may have serious knock-on effects

John Dixon, Ernst & Young’s head of tax, gives evidence the House of Commons Public Accounts Committee  inquiry into Google’s tax affairs. Photograph:  PA/PA Wire

John Dixon, Ernst & Young’s head of tax, gives evidence the House of Commons Public Accounts Committee inquiry into Google’s tax affairs. Photograph: PA/PA Wire

 

The head of tax at Ernst & Young in the UK gave some interesting evidence to the House of Commons Public Accounts Committee on Thursday as part of the committee’s inquiry into Google’s tax affairs.

Committee members struggled to understand how Google could have a large sales staff in the UK, operating to sales targets and receiving commission as a large part of their income, and yet pay next to no tax on sales of about £4 billion (€4.7 billion) there.

However, John Dixon of Ernst & Young was there to explain the tax law involved. He couldn’t talk specifically about Google but he was willing to explain how the rules worked.

Google has what it calls a service company, Google UK, supporting sales in that jurisdiction which, it says, are actually conducted with its Irish subsidiary, Google Ireland Ltd, the company that has the right to sell Google advertising throughout Europe, the Middle East and Africa.

The key test for an Irish resident company trading in the UK, Dixon said, was whether it had a “permanent establishment” in the UK through which it was trading.

In the context of a UK service company providing services to an Irish company, Dixon said the key test on the permanent establishment issue was whether the service company had the authority to conclude contracts on behalf of the Irish company, and whether it habitually exercised that authority.

Google executive Matt Brittin told the committee that 99 per cent of his company’s customers in the UK conducted business directly through Google’s online live auction process, with the computer platform actually setting the price.

Business conducted directly through the website did not create a UK tax charge even if the customers were based there, Dixon said. He said the key issue was whether the owner of the website concerned had a permanent establishment in the UK. Trade conducted over a website based outside of the UK, the owner of which was in a country that had a tax treaty with the UK, would not be taxed in the UK.

The customers that dealt directly with Google’s support staff in the UK were Google’s major clients there, Brittin said, and they accounted for 60- 70 per cent of total UK revenue.

The revenues that go to Google Ireland Ltd flow on to Google Ireland Holdings, the Dublin-registered company that is located in Bermuda for tax purposes, as it actually owns the intellectual property that Google Ireland Ltd is licensed to sell. No withholding tax is paid when the money goes from Google Ireland to Bermuda.

It was put to Brittin that this untaxed money was then available to Google to compete against, for instance, UK-based companies that were subject to tax there, and that this gave Google a competitive advantage. Brittin’s response was that the product Google was selling assisted UK businesses and businesses elsewhere in growing sales.

While no one in the UK has the right to close a transaction, the committee was told, the Google staff who dealt directly with larger customers had the right to negotiate a price within specified ranges. If they want to go outside these ranges, the price has to be authorised outside the UK.

On RTÉ yesterday TCD associate professor of finance Jim Stewart said Ireland was in a “risky position” in relation to the international structures of companies such as Google. A change in the way these companies’ tax affairs were treated in the UK and elsewhere could have serious implications for operations such as the Google one in Dublin, which employs more than 3,000 people.

Liberal Democrat MP Ian Swales, who is a member of the committee, said the issue of how multinationals were taxed was best dealt with internationally, through such organisations as the OECD. He suggested that Ireland get involved in this debate.

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