Understanding the Google Tax
A Google tax, also known as a diverted profits tax, refers to anti-tax-avoidance measures aimed at preventing companies from diverting profits or royalties to jurisdictions with lower or zero tax rates. These provisions have been adopted by countries like Australia and the United Kingdom to counter practices predominantly used by tech giants and other multinational corporations.
For example, despite earning $6.5 billion in revenue in the United Kingdom, Google effectively minimized its tax liability by routing transactions through Dublin, Ireland, which has favorable tax conditions. Similar strategies have been employed by other global giants like Amazon, Apple, Meta, and Starbucks to leverage tax structures to their advantage.
Key Takeaways
- A Google tax targets multinational companies to prevent profit diversion to low-tax jurisdictions.
- Countries such as Australia and the UK have implemented this tax to combat tax avoidance.
- Not exclusive to Google, companies like Amazon, Apple, and Starbucks have also used tax avoidance strategies.
- Enactments like the ‘double Irish Dutch sandwich’ loophole have been closed to curb tax avoidance.
- Several countries are now imposing digital services taxes on large tech firms, with ongoing efforts for a global tax agreement.
How Google Tax Addresses Tax Avoidance
While the term is derived from Google, the practice of diverting profits to low-tax areas is widespread across various industry sectors. Global enterprises such as Meta (formerly Facebook), Apple Inc., Amazon Inc., Starbucks, and Diageo PLC have consistently capitalized on such strategies to lower their corporate tax obligations.
Consider technological products like Meta’s WhatsApp, which can generate significant profits from local users through ads and in-app purchases despite having minimal physical presence in certain countries. Formerly allowed to declare such revenues in low-tax jurisdictions, these revenues now come under stricter scrutiny due to Google tax laws.
The Securities and Exchange Commission (SEC) in the U.S. mandates comprehensive reporting by American businesses, providing transparency on global revenue. This assists international tax authorities in identifying and addressing potential tax avoidance.
In response to publicized tax avoidance tactics, the United Kingdom implemented a diverted profits tax in 2015, applying a rate of 25%. This move by Her Majesty’s Revenue and Customs (HMRC) resulted in £6.5 billion in additional tax from 2012-2018 and fostered greater accountability among corporations.
Australia followed suit with similar measures and introduced its diverted profits tax in July 2017, imposing a 40% tax on avoidance practices. Such significant tax rates and stricter regulations are compelling global companies to settle dues proactively, preserving their reputational value and compliance status.
Diageo, among others, reached an agreement to pay £190 million in additional taxes to the HMRC, averting potential reputational damage from non-compliance with the Google tax provisions. Similarly, Google agreed to a $185 million settlement with the UK tax authorities in 2016.
In France, Google faced nearly 1 billion euros in fines and back taxes, reinforcing the drive for a coordinated international tax reform that provides clarity for companies operating globally.
Understanding Digital Services Tax
A digital services tax (DST) applies to the revenues of large multinational companies providing online goods or services. As of October 2023, 38 nations had enacted or considered DSTs, including Austria (5%), France (3%), Italy (3%), Spain (3%), and the UK (2%). The Organisation for Economic Co-Operation and Development (OECD) is pursuing a global agreement to uniformly tax these companies, streamlining tax distribution among nations and reducing the need for individual DSTs.
The Double Irish Dutch Sandwich Strategy
The double Irish Dutch sandwich strategy previously enabled companies to utilize Irish and Dutch subsidiaries to funnel profits to tax havens like Bermuda, deferring United States or other countries’ tax liabilities indefinitely. This loophole was effectively closed in 2020, mitigating a popular tax avoidance practice.
Tax Avoidance vs. Tax Evasion
- Tax avoidance involves legally minimizing tax obligations by exploiting loopholes within the law, but these strategies can sometimes seem unsavory or controversial.
- Tax evasion is illegal, involving concealing income to reduce taxable income or avoid taxes altogether.
Final Thoughts
The Google tax is designed to address the issue of profit diversion by multinational companies. While strides have been made to curtail flagrant tax avoidance practices, ongoing global efforts aim to ensure fair taxation of multinational corporations, especially in the digital sector.
Related Terms: tax evasion, double Irish Dutch sandwich, digital services tax, transfer pricing.
References
- HM Revenue & Customs. “Diverted Profits Tax”, Page 1.
- HM Revenue & Customs. “Transfer Pricing and Diverted Profits Tax Statistics”, Page 1.
- Parliament of Australia. “Diverted Profits Tax Bill 2017”.
- U.S. Securities and Exchange Commission. “Diageo Form 6-K, Aug. 7, 2020”, Page 31.
- BBC News. “Google Agrees £130m UK Tax Deal With HMRC”.
- Reuters. “Google to Pay $1 Billion in France to Settle Fiscal Fraud Probe”.
- Bipartisan Policy Center. “Taxation in the Digital Economy: Digital Services Taxes, Pillar One, and the Path Forward”.
- OECD. “Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy”, Page 4.
- California Management Review. “Doubling Down on Double Sandwich Tax Schemes”.
- Internal Revenue Service. “Worksheet Solutions: The Difference Between Tax Avoidance and Tax Evasion”.
