Google Isn’t Paying the ‘Google Tax’

Europe is struggling to close loopholes on sheltered profits.

General Views Of London's Old Street Silicon Roundabout

Light trails from traffic are seen at the Old Street roundabout in the area known as London’s Tech City on Dec. 17, 2013.

Photographer: Chris Ratcliffe/Bloomberg

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 Amazon.com 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 low-single-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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