What Is a Google Tax?
Let me tell you directly: a Google tax, which you might also hear called a diverted profits tax, is essentially an anti-tax-avoidance measure that some countries have put in place. These provisions are designed to prevent companies from shifting their profits or royalties to jurisdictions with lower or zero tax rates. Take Google, owned by Alphabet Inc. (GOOGL), for example—it managed to pay very little in taxes in the United Kingdom by routing transactions through low-tax Dublin, Ireland, despite generating $6.5 billion in revenue there.
Key Takeaways on Google Tax
Here's what you need to know: this tax is aimed at multinational companies to keep them from diverting profits from the country where they were earned to one with lower taxes. It's formally known as a diverted profits tax, and countries like Australia and the United Kingdom have adopted it. Google got famous—or infamous—for its tax avoidance, but companies like Amazon, Apple, Meta, and Starbucks have done the same to cut their tax bills. Some loopholes, like the double Irish Dutch sandwich strategy, have been closed off. Meanwhile, various countries have added digital services taxes on tech giants, and there's ongoing work toward a global agreement to tax them properly and share the proceeds.
Understanding the Google Tax
Even though it's named after Google, which became the face of this issue, profit diversion happens across many industries. U.S. tech giants like Meta (formerly Facebook, META), Apple Inc. (AAPL), Amazon Inc. (AMZN), and even non-tech firms like Starbucks Inc. (SBUX) and Diageo PLC (DEO) have used these tactics to reduce taxes.
Consider this: an app like Meta's WhatsApp or a game like Clash of Clans might have no employees in a country but still pull in huge profits from local users via ads and purchases. Companies used to record those revenues wherever they wanted, often in low-tax spots.
The U.S. Securities and Exchange Commission requires American companies to report global revenue details publicly, which helps authorities in places like the UK and Australia spot potential tax avoidance.
In response, the UK changed its laws and introduced a 25% diverted profits tax in 2015 amid public outcry. The UK's tax agency, HMRC, collected an extra £6.5 billion (about $8.33 billion) in taxes from 2012-2018 by challenging multinationals' transfer pricing. Their figures show £853 million (around $1.09 billion) in 2015-16, £1.62 billion (around $2.08 billion) in 2016-17, and £1.68 billion (around $2.15 billion) in 2017-18.
Australia started similar measures in 2015, leading to a 40% diverted profits tax from July 2017.
Now, companies are stepping up: they're paying back taxes voluntarily and settling with authorities to avoid the stigma. Diageo, the company behind Johnnie Walker and Tanqueray, agreed to pay an extra £190 million (about $244 million) in UK corporation tax to protect its reputation. Google settled for about $185 million in back taxes to the UK in 2016. In France, facing similar issues, Google paid nearly 1 billion euros (about $1.1 billion) in fines and taxes in 2019, stating that a coordinated international tax reform is the best approach for global companies.
What Is a Digital Services Tax?
A digital services tax, or DST, is something certain countries impose on the revenues of big multinational firms that sell goods or services online. As of October 2023, 38 countries have either put one in place or are thinking about it—examples include Austria at 5%, France at 3%, Italy at 3%, Spain at 3%, and the UK at 2%. At the same time, the OECD is pushing for an international deal to tax these companies and distribute the money, which would make separate DSTs unnecessary.
What Is the Double Irish Dutch Sandwich Strategy?
This was a tax avoidance method used by Google and others, where profits went to an Irish subsidiary, then a Dutch one, and finally to another Irish subsidiary in a tax haven like Bermuda. The goal was to avoid or delay taxes in the US or wherever the profits came from. Those loopholes got closed by 2020.
What Is Tax Avoidance vs. Tax Evasion?
Tax avoidance means using legal tactics, often loopholes, to lower your tax bill—it's legal, though it can seem underhanded. Tax evasion, however, is illegal, like hiding income to dodge taxes.
The Bottom Line
In essence, a Google tax hits companies that shift profits from where they're earned to low- or no-tax countries. While some extreme avoidance practices have been stopped recently, countries and international groups are still figuring out fair ways to tax multinationals, especially in the digital space.
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