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How Google Really Dodges Taxes

Much is made of the way that Google manages to pay so very little in taxes on its international earnings. But there's also an awful lot of misunderstanding about hos this actually works. Perhaps the most important point to make is that each and every stage of it all is entirely legal: and at least some of them are the way that governments hope Google and other companies will actually act. The end result might not be all that pleasing to them but then they, the governments, did actually design this tax system that Google is using.

The second major point is that Google doesn't in fact avoid tax at all: it just delays having to pay it. The international tax system is not so full of holes that a giant US corporation like Google can get away with owing nothing: only that it can get away with owing a lot in the future but not having to pay it now.

In the European Union what Google does is really very simple. All sales of advertising (which is where almost all of the company's revenues come from) are made by a Google company in Ireland. This is one of those things that governments want the company to be doing. The Single Market really does mean that a company can, possibly should, treat the whole EU as just one market and sell right across it from just the one company. There's just nothing at all odd or dodgy about this. It's the next stage that really works though:

Revenue at Google’s Irish subsidiary rose 10 per cent last year to €17 billion, with pretax profits climbing almost 23 per cent to €189.1 million. The accounts filed for Google Ireland Ltd also show that “administrative expenses” at the subsidiary were €11.7 billion in 2013, up 7.3 per cent on the previous year. “Administrative expenses” largely refers to royalties paid to other Google entities, some of which are ultimately controlled from tax havens such as Bermuda.

It's that €11.7 billion there. That's royalties for the use of Google's technology and brand name. Those go off to Bermuda where there is no corporation tax at all.

So we might think that Google has managed to escape the tax system altogether: but that's still not true. Because of course the point of making a profit is to get that profit into the hands of the shareholders. And given that Google is, in the end, a US company then that money has to be taken into the US before it can be paid to them. And as soon as it is taken into the US then it will pay US corporate income tax at 35%.

So Google hasn't in fact escaped tax at all: it's only delayed the date at which it must pay it.

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