Google V. Treasury

February 25th 2014

Google, one of the most influential companies in history, is no stranger when it comes to having its hand smacked by tax officials domestically and internationally.

The information giant was reported to avoid over $2billion in worldwide income taxes in 2012.  The words ‘Tax Evasion’ have been bandied around by several countries, but the multinational company firmly disagrees.

The tech bigwig, among other multinationals, has managed to stir countries like the United Kingdom, France and Italy as well as their home base, the United States, into a frenzy that has resulted in severe changes in corporate taxation.

Google was accused of avoiding taxes on advertising sold in Italy, France and the United Kingdom, by channeling payments through subsidiaries in Ireland, then Bermuda, thereby avoiding the corporate tax in the country where the sale originated.  Eric Schmidt, Google’s chairman, maintains that Google’s international tax strategy is legal.

In an Interview with BBC Radio 4, Schmidt stated, “I think the most important thing to say about our taxes is that we fully comply with the law and we’ll obviously, should the law change, we’ll comply with that as well.”

However, Italy has instituted a new measure to cut down on tax-avoidance strategies by multinational tech companies. The first of its kind in Europe, the new law is intended to prevent tax-avoidance by companies who use intermediaries in countries and jurisdictions with lower or no international taxes. The Italian media has nicknamed this new law, the ‘Google Tax’, which was scheduled to go into effect on January 1, 2014.

South Africa’s largest online publisher, 24.Com, a division of the digital media giant, Nasper, is the most recent to launch an attack on Google’s tax practices. The company estimates that Google generates approximately one billion South African Rand each year ($92million). However, they claim that because Google uses offshore subsidiaries, the country loses approximately R140 million ($13million) in taxes. They believe that Google’s strategy makes it impossible for local companies to compete. Google maintains that it complies with tax laws in South Africa and every country in which it operates.

The United States, Europe, and even South Africa are implementing major changes in their tax legislation which are meant to protect the respective nations from losing revenue. However, there are many opponents to the changes who believe that sovereign states are simply trying to reach deeper into corporate pockets.

International Taxation is complex, often without a ‘right’ or a ‘wrong’.  It is driven largely by a long established tax policy that all income should be taxed.

We have represented many clients in positions similar to Google, and agree that Google is firmly within the bounds of the law. Google owes a judiciary duty to its shareholders to pay as little tax as possible, and to do so legally.

Unfortunately for Google, what is legal is in the eye of the legislator and can be changed by any sovereign state to accommodate its needs.