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Google’s UK tax deal is a joke at our expense

Google’s UK tax deal is a joke at our expense

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Death and taxes. You can’t escape them. But corporations can and do.

It’s common knowledge by now that big multinational companies exploit the inconsistencies between national tax regimes to secure the lowest possible tax rate for their profits. This is legal and deeply frustrating. In the wake of a popular backlash against profit-shifting practices, the UK government has begun to take some remedial actions. At the end of last week, Google agreed to pay the UK treasurer £130 million ($185 million) in back taxes, covering the period since 2005, and to also pay higher taxes in the future. UK Chancellor George Osborne hailed it as a "major success." The numbers disagree.

Improving on an effective tax rate of 2.5 percent

Google’s UK revenue in 2013, as reported by the BBC, was £3.8 billion ($5.4 billion). That’s money raised primarily through sales of online advertising. But Google makes sure to complete all its sales in Dublin — no matter how much preparatory work is done within the UK, and irrespective of the ads’ localization — so its British operations generate negligible accounting profit, if any. If Google were to properly account for its UK profits, and its global profit margin of 20-something percent holds true, it would have made something close to £760 million in 2013. At the UK corporate tax rate of 20 percent, that would result in a tax bill of £152 million, but Google paid only £20.4 million that year. That's an effective tax rate of just over 2.5 percent.

The new agreement between Google and the UK threatens to let Google off the hook too easily. Even the £130 million that Google is paying now pales into insignificance relative to the billions in sales that the company generates in the United Kingdom, its second biggest market after the United States. Failing to tax that revenue properly has been a chronic problem for the UK and many other jurisdictions. If people are left with the impression that Google’s legal but unethical tax dodging — which is widespread across both tech companies and service industries — has been reined in, then the passionate indignation that’s led to these measures in the first place could peter out prematurely.

Some uncertainty still pervades Google’s new UK deal, which includes a promise from the company that it "will now pay tax based on revenue from UK-based advertisers, which reflects the size and scope of [its] UK business." The details are left intentionally undefined, but if the tax rate going forward is anything like the retrospective payments that have been agreed, then the change is unlikely to satisfy many. UK tax expert Richard Murphy puts it in blunt terms when he says this is another instance where his country’s tax authority "rolled over and had its tummy tickled by a major corporation in exchange for a tax payment way below anything we should have expected."

Google's paying a small price to keep things broadly unchanged

This is not a fix. The problematic "double Irish" setup that allows Google and its biggest competitors like Apple and Facebook to siphon off profits via supposed royalty payments is still in place. The Irish government is looking to eliminate the loophole, though not before the end of this decade. As far as the beneficiaries of the current tax regime are concerned, pushing such solutions off into the future is as good as preventing them. The same is true of Google’s settlement with the UK now. It’s in Google’s best interests to be cooperative, and even to spend a bit of money placating the UK Chancellor, if it helps to ward off more severe measures. And the most severe — and painfully obvious — measure would, of course, be to treat UK sales as UK sales and levy the typical 20 percent tax rate that every small shop owner is subject to.

Instead of growing a spine and recognizing just how important it is to Google’s business, the UK government is taking a comparatively trifling sum of money and going on a PR campaign to make itself look proactive. What’s worse is that this decision sets a precedent for other tech giants and for other nations — and if everyone follows suit, the only thing that would result is a slightly increased income from companies that would still be paying unconscionably low tax rates.

Governments have the mandate to act, now they need the courage

A popular disdain for tax evasion across Europe has given an impetus and a mandate for governments to act. The UK is in the lead because it knows it can afford to upset the multinational giants without losing their business. But it’s not going far enough. No one should be celebrating Google’s minuscule increase in its contribution to the UK tax coffers — not while the company continues to offshore profits that are hundreds of times larger.

It’s been over a year since the UK announced its so-called Google tax, which levies a 25 percent tax rate on profits that are deemed to have been improperly diverted overseas. Google, ironically, hasn’t been found to have infringed the provisions of that measure. And so it goes on. Making huge revenues. Paying microscopic tax bills. It’s an upsettingly bad joke, composed of cowardly, uncoordinated tax enforcement and the ruthlessly precise, strictly legal exploitation thereof. When are we going to get serious about eliminating corporate tax dodging?