Google skirts the “Google tax”

Europe is strug­gling to close loop­holes on shel­tered prof­its “No­body pulls the plug on such ma­chines with­out a fight”

Bloomberg Businessweek (Europe) - - CONTENTS - −Jesse Drucker

Close to four years ago, Europe be­gan to no­tice that some of the world’s big­gest tech­nol­ogy com­pa­nies were pay­ing min­i­mal tax on the bil­lions of dol­lars they earned across the con­ti­nent. Among those the U.K. and other gov­ern­ments crit­i­cized was Google. De­spite the years of de­bate since, anal­y­sis of the search gi­ant’s newly avail­able se­cu­ri­ties fil­ings shows that over the past three years, the ef­fec­tive tax rate on its non-U.S. prof­its has re­mained in the sin­gle dig­its—about 7 per­cent.

In a Feb. 11 hear­ing with Par­lia­ment’s pub­lic ac­counts com­mit­tee, Google tax chief Tom Hutchin­son and Matt Brit­tin, head of Euro­pean op­er­a­tions, ar­gued that Google shouldn’t be cough­ing up more than the $185 mil­lion in back taxes it agreed to pay fol­low­ing a six-year govern­ment au­dit. Hutchin­son said his com­pany pays close to the 20 per­cent cor­po­rate in­come tax Bri­tain re­quires, which is true if you look only at the tiny sliver of prof­its recorded in the U.K. “We are pay­ing the right amount,” he said. He got laughs. (Google de­clined to com­ment for this story.)

Gov­ern­ments in the U.K., France, Ger­many, and Italy have been try­ing to vary­ing de­grees to pre­vent com­pa­nies like Google, Ap­ple, and Ama­ from low­er­ing their tax bills by keep­ing prof­its in lower-tax ad­dresses. Since 2014 the Euro­pean Union has de­clared that tax breaks of­fered by Ire­land, the Nether­lands, and Lux­em­bourg have con­sti­tuted il­le­gal state aid. The Or­gan­i­sa­tion for Eco­nomic Co-Op­er­a­tion and De­vel­op­ment (OECD) is craft­ing highly tech­ni­cal ways to clamp down on the most ex­treme uses of Ber­muda and Grand Cay­man mail­boxes. In­di­vid­ual coun­tries, in­clud­ing the U.K., have passed laws to tax so-called di­verted prof­its.

So far, the ef­fects ap­pear slight. Tech gi­ants are still re­port­ing ef­fec­tive tax rates well below the low­est cor­po­rate rates, thanks to their armies of ac­coun­tants and lawyers, says Jolyon Maugham, a U.K. tax lawyer and blog­ger. “No­body pulls the plug on such ma­chines with­out a fight,” he says.

At its core, the fight is about a sys­tem known as trans­fer pric­ing. Multi­na­tional com­pa­nies de­vise trans­ac­tions be­tween sub­sidiaries, which al­lows Google’s Ir­ish arm to make mi­nus­cule pay­ments to its U.K. sis­ter for the work done by the com­pany’s Lon­don staff. Such deals can al­low com­pa­nies to shift prof­its to zero-tax is­land havens. As part of a

pop­u­lar shel­ter called the Dou­ble Ir­ish, com­pa­nies have moved the li­cens­ing rights to their pa­tents into Ir­ish sub­sidiaries that ex­ist only on pa­per and claim tax res­i­dence in zero-tax Ber­muda.

More than a decade ago, Google moved a chunk of its soft­ware pa­tents off­shore as part of a Dou­ble Ir­ish. Most of its world­wide earn­ings get cred­ited to a Ber­muda mail­box, and it has stock­piled $58 bil­lion in lightly taxed prof­its. No prof­its are likely to be trans­ferred to an­gry tax au­thor­i­ties in France and Italy, where the com­pany has of­fices, em­ploy­ees, and cus­tomers.

The Ir­ish govern­ment said in 2014 it would phase out the rules that let com­pa­nies use the Dou­ble Ir­ish, but it grand­fa­thered in com­pa­nies in­clud­ing Google and LinkedIn un­til 2021. Af­ter that, Ire­land says it will of­fer a new tax break on prof­its re­lated to patented in­no­va­tions. That could mean big tech com­pa­nies us­ing Ire­land as a tax haven will even­tu­ally see their lows­in­gle-digit for­eign tax rates rise into the low dou­ble dig­its—still well below what coun­tries are try­ing to charge their largest cor­po­rate tax­pay­ers.

Guide­lines re­leased late last year by the OECD have the po­ten­tial to tax tech com­pa­nies more ef­fec­tively, says H. David Rosen­bloom, an at­tor­ney at Caplin & Drys­dale and di­rec­tor of the in­ter­na­tional tax pro­gram at NYU School of Law. Among oth­ers, the OECD plan would re­strict de­duc­tions for in­ter­est paid by a com­pany’s sub­sidiary to a sis­ter unit. “The chick­ens are com­ing home to roost,” he says.

The chick­ens have a long flight. Rosen­bloom and oth­ers say mean­ing­ful change will take years or decades, and no plan sur­vives con­tact with lawyers and lob­by­ists. At the Feb. 11 Par­lia­ment hear­ing, Google noted that un­der the terms of its set­tle­ment with the Crown, it isn’t sub­ject to Bri­tain’s “Google Tax,” which is meant to tar­get off­shore prof­its. Un­til prof­its are taxed based on the lo­ca­tion of cus­tomers or em­ploy­ees, “we can make it a bit bet­ter,” says Maugham, the tax lawyer. “But what we are left with is some­thing that is still bro­ken.”

The bot­tom line Bar­ring the adop­tion of new reg­u­la­tions, com­pa­nies like Google can ex­pect their global tax bills to re­main well below the stan­dard.

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