Nick Shaxson ■ Why Google (and other multinationals) are still not paying their fair share of corporation tax
Why Google (and other multinationals) are still not paying their fair share of corporation tax
Google says that it pays the tax required by every company in every country it operates. This is true apart from where the odd tax audit has resulted in tax settlements which have marginally increased the corporation tax it paid in some countries.
We learned in last week’s Public Accounts Committee meeting in the UK, with representatives from Google and HMRC [the UK tax authorities] how current international tax rules set by the Organisation for Economic Cooperation and Development (OECD), allow Google to earn revenue from UK (and pretty much all non-US) customers and have them booked in Ireland, where the associated profits are taxed at a lower corporation tax rate (12.5%) than would be applied in most countries.
The same rules also allow Google to reduce its tax bill even further by transferring these profits to Bermuda through the payment of a royalty – known among tax avoidance literati as the “Double Irish” structure. What is left to be taxed in Ireland and in the UK is small change, after all the OECD guidelines state that selling and sale support activities are relatively not worth that much. The recent settlement between HMRC and Google was centred on the remuneration of Google UK Limited’s sales support activities, and eventually led to Google agreeing that they were worth a bit more than they originally thought.
Current rules say that in Google’s case, Intellectual Property “IP” (e.g. online advertising technologies, search engine, cloud computing, and software) is what makes Google successful and the majority of the profits in the Google’s value chain should be attributed to this IP. Other activities, such as sales, marketing and R&D are deemed as routine and worth significantly less.
Where is this IP owned? In the US where this was created, or is it conveniently located in a tax haven? Bermuda is the answer you are looking for.
Asked how many employees Google has in the UK, Ireland and Bermuda, Tom Hutchinson, the Vice President of Google Inc., answered respectively 4,000, 5,000 and none. So this means that the vast majority of the profits associated with sales to UK (and non-US) customers are taxable in Bermuda, where Google has zero employees and of course, next to zero taxation.
Tom Hutchinson also argued that Google’s presence in Bermuda did not affect the amount of tax it paid in the UK and that there is legally no way for Google to pay more tax in the UK. This is only partly true. It is Google’s decision to have set up this convoluted structure to ensure that most of its non-US profits end up in Bermuda where there is little or no taxation, leaving Ireland and the UK with small change. Google seems to be happy to take you around each street in the world but not to pay their fair share of the costs to build them.
Current rules mean that UK and other tax authorities are unable to successfully challenge these tax avoidance structures. Google, and a number of other multinationals, simply play by these rules. This is why the rules need changing. The OECD has recently published revised guidance as part of their Base Erosion and Profit Shifting (BEPS) project to close a number of loopholes currently available to multinationals and this goes some way to reducing tax avoidance opportunities.
However, in the case of Google and other IP companies, these changes may simply mean that they will have to increase the number of staff employed by their subsidiaries located in tax havens to prove that they have enough “substance” to support the current allocation of profits.
Current international taxation rules are no longer fit for purpose. A much better alternative, endorsed by the Tax Justice Network, is available: unitary taxation. A simple formula based on internationally agreed allocation keys such as physical assets, employees and sales, which allocates the consolidated taxable profits of a group to each jurisdiction based on the real economic substance.
This is surely fairer than the current system where multinationals pay the tax required by every company in every country they operate, but where through the use of complex legal tax avoidance structures, how much tax is paid can basically be interpreted to ensure that it is as little as possible.
Tommaso Faccio is lecturer in accounting, Nottingham Business School, UK
A third in this brief series on Google’s UK tax affairs will appear shortly.
Monopolies and market power: the Tax Justice Network podcast, the Taxcast
A year the tide turned in the fight for tax justice
Taxing Wall Street: the Tax Justice Network December 2020 podcast
$427bn lost to tax havens every year: landmark study reveals countries’ losses and worst offenders
The State of Tax Justice 2020
20 November 2020
Corporate profit misalignment: An analysis of German parent companies and their foreign affiliates
In Apple’s victory lies a defeat for women’s rights
US blows up global project to tax multinational corporations. What now?
Time for the EU to close its own tax havens
4 April 2020