Tax Research UK

Ur doing a fine job Ricardo !!

Non-story. Google operates its advertising business from Ireland (where its ervers are located), which licenses its IP from its parent. It is operatring a cross-border service business within the EU, as encouraged by the EU consitution and consistently with UK and Irish tax laws. I can”t see why you think there is a tax leakage when all that is happening is UK companies are paying Irish/US corporations for an advertising service.

Google pays tax on its world wide income at the statndard rates subject to credits for any foreign taxes paid, so they are hardly engaged in massive tax avoidance.

Richard,

I would suggest that my ability to analyse tax goes far beyond your limited career. I don’t give my name for good reason, but my client list reads like a combination of the FTSE-100 sand the Fortune 50. I suspect that yours does not.

If you knew Google you would know that tax avoidance is not part of their corporate ethos, indeed finance is a low-status occupation in their company, Patrick Pichette, is a relatively low ranking director and the company employs their intellectual capital to more important things than playing with their tax liabilities.

The reason they pay very little tax on their UK advertising revenue is because they are not trading in the UK through a permanent establishment. If customers outside the US want to buy advertising space with Google they deal directly with the firm in California or their Irish based EU head quarters, not with some subsidiary in the same country. There is no permanent establishment in the local country because the internet means there doesn’t have to be.

85% of Google’s $6 billion infrastructure and 90% of their staff are in the US. Most of the staff based outside the US and Ireland are not involved in the search machine/ advertising business but work on development of other tools. Google doesn’t set up a subsidiary in every country that they sell to because they don’t need to. Just like Boeing when they sell aircraft. It’s called a US export.

The Bermuda structure is probably nothing more than a hangover from the US FSC/ETI regime which was ruled illegal by the WTO in 2004 but which granted a 15% exemption from US Federal taxes for foreign sales by US corporations routed through certain tax haven countries where the totality of the foreign sales income was passed on to the US and taxed in the same year. I suspect that if it is still in use it is nothing more than a mixer company, which is utterly benign as far as the IRS is concerned.

The fact is that the Google 10-K for 2008 shows they provided for current taxes of $1.45 billion, at an effective tax rate of around 21% of pre-tax earnings. That may sound low, but after allowing for the fact that the company buys about $2.5 billion of new plant and machinery increasing at a rate of about 25% per annum, which generates tax depreciation benefits/ deferred tax liabilities of around $500 billion, and the company spends about $2.5 billion on R&D which should generate about $500 million in tax credits and the company’s effective tax rate becomes something over 35%.

So I think you (and the Sunday Times) owe Larry Page and Sergey Brin an apology.

Richard Murphy :Alex
a) How do we know you’re telling the truth?
b) If Google says in its publihed accounts it makes 14% of its sales in the UK and then tells the tax authorities (as you suggest) they are not trading in the UK, whether through through a permanent establishment or not, and in the process save around a billion in tax please don’t tell me i) they’re not tax avoiding as they clearly are and ii) tax avoidance is not important to them as it clearly is
No apology is owed. Google is acting as it believes a corporation should. I am accusing it of legally tax avoiding - nothing more or less. I am saying that is unethical in my opinion. I can think that. I am allowed to. It is, as the law stands, allowed to trade as it does.
But don’t deny the reality that Google is tax avoiding because that just makes you look foolish when they so clearly are
Richard

Rubbish. If Boeing sells $1bn of aircraft to British Airways (as they often do) they are making sales in the UK, but not trading through a permanent establishment and not subject to UK corporate taxation. Google is no different apart from the fact that they are selling capacity on web servers in Mountain View while Boeing are delivering planes from a factory in Seattle. The non-taxability of position of both Google and Boeing are assured by double taxation agreements, and neither are abusing well established principles.

If Google was employing people in the UK to sell advertising space, without creating a permanent establishment in the UK (I assume that Boeing also has salesmen based in the UK who market their planes and service the sales relationship with their UK-based airline customers, without it creating a permanent establishment here), then surely this would be covered by the standard HMRC “arrangement” whereby the representative office presence in the UK would be subject to tax on a “cost-plus” basis, which I believe I am right in saying is often a maximum of 5%, but often lower by negotiation.
If that’s correct, then surely Google would simply be liable to pay UK corporation tax based on a 5% mark-up on their total UK sales, and then presumably any resulting UK tax liability would be credited against its overall US tax liability ?
It seems to me that if Richard’s argument was correct, then Google would be liable to pay UK tax on those UK advertising revenues but wouldn’t those very same revenues not also be taxable in the US for which DTT relief would be available ? I can’t see how the same revenue could be taxed twice in two different countries (ignoring the interposition of the Irish company), and so what UK tax is actually being avoided in respect of those revenues ?

Drivel. I have overseas clients, and raise finance for them for their overseas assets, but that doesn’t make my business resident anywhere but the UK. By your measure, anybody who sells goods to the UK becomes a UK tax payer, a useful attitude for a supporter of a revenue poor government, but completely out of sync with the permanent establishment and business profits articles of the UK’s double taxation treaties.

Google’s business is based around their search engines which are based in the United States. Submit a traceroute request to ‘www.google.co.uk’ and you will find that it points to a server in the US, remarkably close to ‘www.google.com’.

Tax residence is a question of at you think it ought to be, and the fact is that contracts with Google are not signed with a UK company, no UK company is involved in the drawing up of any contracts, nor in the performance of the contract. From Google’s perspective, it doesn’t matter whether their advertisers are in the UK or the Ukraine. The process is the same and it takes place over the internet, not through a place of business in the customer’s country of residence.

The ‘economic substance’ is that the customer pays for Google to provide globally available adsvertisements, and those advertisements are developed and stored in and transmitted from the United States. Under current tax treaties, the position is clear.

I am not a hired hand for Google, but I know what the law says. It may not be what you would like it to be, but it is what the relevant governments have agreed it should be, and the rest of us have to work with the law.

Of course your accusations of tax avoidance miss the fact that (i) if Google were avoiding tax on their foreign income, they would be paying any tax at all because their US income is less than their deductible expenses (which is clearly not the case), and secondly they have no incentive to avoid foreign taxes at rates lower than 35% because they would simply reduce their supply of allowable foreign tax credits. So in short your story doesn’t stand up.

@alex. very entertaining. I am sure your clients like your analysis but i am equally sure it can be torn apart as your position always seems to be premised on compliance with the law. as useful as laws are they still have much scope for improvement - and as an interested tax payer and citizen I find your basic position rather against my best interests. I rather hope that if I earned large fees for giving advice or raising finance I would be concerned to demonstrate that what I did was socially useful. Are you?

Richard
If you re-read the last part of my posting I referred to the ignoring of the interposed Irish company, ie if it wasn’t there then how much tax was actually being avoided? As far as I can see there wodnt be any.
I’m not sure whether I’ve really understood your argument with Alex. On the one hand you seem to be accusing him of skullduggery but on the other hand you criticise the laws for being ineffective. Unless I’m missing something, you seem to be wanting the UK to claim part of the tax revenues which belong to the US under well-established principles. The US has its own anti-avoidance legislation to protect what rightly belongs to it. Is that the UK’s problem when the UK has no claim to that tax revenue in the first place ?

Richard Murphy :
@Alex
Indeed - this is the logic of unitary taxation - and quite right too
You seem quite unable to comprehend that the existing system you defened Alex is broken

The system works perfectly well when trading partners are roughly trading in a balanced manner, with equal values going in both irections. The tax treaties are designed to give a bright line test, and support the principle in this case that businesses are taxable in countries where they have a substantial trading presence. Google differs from most other companies in so far as its “product” can be exported over the internet just as easily from the US as it can be supplied domestically. Google’s position is no different from the 1970-’s “time-sharing” computer services or other international computer-based services such as SWIFT 0or Euroclear, which are taxable in the country where they operate, not in the country of their customers.

If you think the system is “broken” that is probably because the UK is now a massive importer of goods and services, which very few exports.

You like abusing existing law

I don’t abuse existing law. I merely understand the position how it applies to commercial transactions.

None of which gets round the obvious fact that Google admit they avoid about $1 billion of tax
How do you account for that?

They don’t “avoid” any tax at all. Their business has a profit margin of about 25% of turnover, and they pay US taxes at an effective rate of 21%. As already explained, the difference between the 21% and the 35% tax rate is accounted for by the large investment in plant and machinery, probably mostly 5 year MACRS (200% DB) depreciation and R&D tax credits, neither of which is “avoidance” because the pre tax cost to the shareholders of buying the equipment or undertaking the R&D is far higher than any potential tax saving provided by US tax rules.

And why do they structure via Bermuda and Ireland if not for tax avoidance

Again as already explained, they probably set up the Bermuda structure soon after the company was formed in 1998, to take advantage of specific US tax provisions enacted by the US Congress to tax exports of goods on a favourable basis. Bermuda based FSC’s and ETIs were commonly used by Boeing, Microsoft and a host of other US corporations with the explicit approval of Congress to encourage US exports. The measure was found to be illegal by the WTO in 2004.

Please answer that too
They probably set up in Ireland for a number of reasons, not least the young population, English language, low cost labour force, the most favourable time zone in Europe for a Californian firm and the encouragement and support of Irish agencies encouraging inbound investment. A presence in the EU probably assisted in their VAT arrangements with their customers, and a sole base in Europe was all that they needed too administer billings if contracts are actually made with the US company. Since Google is an internet based company it clearly makes no sense to set up a business entity in every EU country.

Google does have a presence in many countries outside the US, but that is generally for R&D, not for its revenue generation activities. Google continues a long tradition established by IBM and AT&T Bell Labs amongst others of pure research, which has little bearing on its advertising business, but which may have some products in the future.

Richard Murphy :Alex
This is make believe fantasy
Google admit they avoid foreign tax
You deny it
You’re not worth debating with
Richard

Google don’t “admit they avoid paying foreign tax” except to the extent that any of the other 6,000 million people in the world who are not resident in the UK “avoid paying” UK tax by simply not being here. They are a big company that pays ample tax on their worldwide profits in the United States, which is where substantially all of their revenue generating business operates.

Very funny Richard, but I have been doing it for over 25 years, both as a technical advisor on financial transactions or leading advisory firms and as a credit offier / corporate financier for blue chip banks. The Google tax liabilities are clear to see in their SEC filings reports.

I note that you tend to play the man and not the ball when you have lost the argument.