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Why "Google Tax" Became a Catchphrase

Leonid Bershidsky is a Bloomberg View columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.
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The "Google tax" badly needs a dictionary definition. Both Spain and the U.K. recently introduced one, but the two measures are completely different. Sure, journalists use the search giant's name for click bait, but their choice also signals that in Europe Google has come to embody the evil excesses of the U.S.-dominated tech industry.

The Spanish version of the "Google tax" is a payment to the Association of Editors of Spanish Dailies, a media industry group, for the right to publish links to, and excerpts from, news stories. This is not the first time Google has been hit with something of this kind: Germany and Belgium imposed similar levies, only for the search company to fight back by pulling links to content produced by the measures' proponents. Traffic dropped and media groups in the two countries cried uncle, agreeing not to demand payment.

In Spain, Google is trying a more holistic approach. Richard Gingras, head of Google News, which aggregates press coverage, said in a blog post yesterday:

Sadly, as a result of a new Spanish law, we’ll shortly have to close Google News in Spain. Let me explain why. This new legislation requires every Spanish publication to charge services like Google News for showing even the smallest snippet from their publications, whether they want to or not. As Google News itself makes no money (we do not show any advertising on the site) this new approach is simply not sustainable. So it’s with real sadness that on 16 December (before the new law comes into effect in January) we’ll remove Spanish publishers from Google News, and close Google News in Spain.

As elsewhere, this probably isn't the end of the story: Google expects Spanish publishers to rebel against the legislation and for parliament to then shrug and cancel it. The U.S. company says it's fighting in a righteous cause: putting the dissemination of information, rather than money, first and prompting a more audacious business model to publishers in the process. Google is probably right, too. Otherwise some country would have been able to make a copyright charge stick.

The U.K. "Google tax" is a different kettle of fish. It's supposed to be payable to the government, not a lobby group, and could potentially cost Google and other multinationals serious money. If parliament approves the proposed "diverted profits tax," the U.K. would have a discretionary right to determine whether a company is using "contrived arrangements" to move profits from its U.K. business to other jurisdictions. If suspected of doing so, the company would be charged 25 percent of those profits, four percentage points more than the standard corporate tax rate, on a "pay first, argue later" basis.

Google, for example, does not have a U.K. presence for tax purposes. It declares about $5 billion a year in U.K.-generated advertising revenues in Ireland and then pays out most of that money to a Bermudan subsidiary as royalties for intellectual property. It will surely be one of the first companies to be slapped with the new tax, hence the "Google Tax" headlines.

In this case, neither side can claim a righteous purpose. U.S. Ambassador to the U.K. Matthew Barzun, has tried to defend American companies such as Google, saying they are "clever about using international rules that exist as written by all of us — U.K. and U.S. officials. We made these rules and they are playing by them.” That, however, doesn't mean the rules can't be changed, or that gaming the existing ones is honorable.

On the other hand, the U.K. proposal is a simple case of tax competition. It is an attempt to strike at the so-called Double Irish tax structure and draw companies to the competing U.K. scheme, dubbed the "Patent Box," which allows companies to separate out income from intellectual property and pay a lower tax on it. Ireland's answering move is already known: It is phasing out the Double Irish and introducing its own "Knowledge Box." 

Google and its peers will fight the proposed British levy, which may well go against the U.K.'s double taxation agreements and European Union law. As with the content levies and attempts to make Google separate its search engine from other services, there is no easy way to make the search giant change the way it does business: Google is run by smart lawyers and accountants, as well as engineers. Besides, its successful projects such as the search engine, Google News, the Android mobile operating system, Gmail and others deliver important benefits to consumers; their support allows the company to fight back boldly.

Still, Google is being attacked on so many different fronts, especially in Europe, that its image as a force for good is eroding. That's a more subtle problem than a new tax, but it did hurt Microsoft in its day. Once the U.S. software maker became an evil empire to many users, alternatives to Microsoft's products began to spring up; by now the dominance of the Windows operating system over personal computing is a thing of the past. Google, despite its enviable market position, is also vulnerable to such a fate. Playing nice on taxes -- if not on news copyright -- could help the company stave it off.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Leonid Bershidsky at lbershidsky@bloomberg.net

To contact the editor on this story:
Marc Champion at mchampion7@bloomberg.net