It’s shameful that tech giants like Google are ‘ripping off’ SA
Alphabet brags about how much US tax it pays, but the rest of the world gets massively short-changed
One of the biggest issues bubbling up in the Competition Commission media inquiry is how much tax organisations such as Google, Meta and Tiktok pay in SA and elsewhere. To acknowledge partiality here, this also plays into Daily Maverick’s offline protest on 15 April.
As with so many complicated matters, there is much misinformation and obfuscation around the topic for various reasons. The errors are entirely unnecessary because some of the relevant numbers are a matter of public record. And some, of course, are not.
When one looks at the income statement of Alphabet, the parent company of Google, over the past decade, the first thing to notice is how Alphabet’s income has exploded. To go from total revenue of $55-billion to $307-billion in just 10 years beggars belief. Revenue growth and net income growth have bounced around a bit, but they are more or less in line. In other words, Alphabet is doing a good job of keeping expenses in line with profitability, on average.
Alphabet’s income statement also shows that the company, as it claims, pays an enormous amount of tax. It varies a bit, but a tax rate of about 20% is more or less average for large, profitable, international companies. The absolute amount of tax paid has tailed off a bit over the past few years, but it remains a thumping amount and has more or less kept up with turnover. There is nothing here that would give an investor any real worries; in fact, you would be openly cheering. As a competitor, perhaps, not so much.
However, there is some important supplemental information. Google, like other big international companies, specifies how much tax it’s paying in its country of jurisdiction and how much outside the country.
From South Africa’s point of view, as well as that of any number of other countries around the world, there are a lot of things to worry about. In its default tax statement,
Google says: “Our effective tax rate over the past decade has exceeded 20% of our profits, in line with average statutory tax rates.”
Well, that is a bit of a fib. First of all, the effective tax rate has only been above 20% twice in the past decade. Even if you just divide the tax paid by income, it’s been five
years since it exceeded 20%.
The other thing Google always says is: “The vast majority of tax is paid in the US.” That’s great for the US and somewhat justified because the US is its biggest market by country. But just look at the difference – it’s enormous. Technically, its domestic tax payable in the US is $17-billion, whereas its foreign tax is only $2.5-billion. That’s the rest of the world. The whole rest of the world.
Alphabet brags about how much tax it pays in the US, presumably to satisfy the people calling those pesky Senate hearings. But it means the rest of the world is getting massively short-changed on the tax front.
What’s happening here? Well, my guess is that this is linked to the nature of the internet. If a foreign company pays for an advert that appears in SA (and other places), what is the “source” of the income? Is it where the ad is displayed, or where it is created?
The way Alphabet is structuring its business is that it is adopting the posture that the source of the advert is in California for tax purposes, even though it’s displayed in SA and the product it’s advertising is in SA. This is just nuts. From this number, you can see why the Europeans – big users of Google – are so pissed with the company.
To be fair to Alphabet, I suspect it is doing this for simplicity rather than to reduce its taxation rate, which, as I pointed out above, is pretty normal. Imagine the complications of having to work out the tax on an advert that appears in hundreds of countries.
The general principle is that tax is payable where the profit is earned, and this is very obviously not happening. Countries around the world are extremely coy about specifying how much tax is paid to them by international companies.
Frankly, I think this is wrong. Companies have been required to state their tax payments for centuries; it doesn’t seem overly burdensome to require them to specify how much they pay in each country where they do business. And if they don’t, the tax authority should.
This might not be tax evasion, per se, but it encourages tax jurisdiction shopping and false invoicing. Taxpayers in all countries need to be reassured that every profitable business in their country contributes fairly to that country’s development.
Google contributes in myriad other ways and its service is indispensable. But we, like almost all other countries around the world, are being ripped off by these internet giants from a tax point of view, and that is shameful.