COLUMN-Business, taxes and responsibility-Chrystia Freeland

Comments (2)

When looking at this whole issue, its worth understanding some history and background. The current system of tax treaties and international structuring arose from a desire by many national governments to try and maximize the tax revenue they collect. They did this by recognizing that there are constant situations where an international corporation may be obligated to pay tax on the same revenue but numerous times. Of course this would result in no net revenue and the corporation going bankrupt.

Therefore in order to attract the good or service to their jurisdiction; get as much tax revenue as possible; and encourage the corporation to set up some of its physical structure and work force in their jurisdiction, countries like the UK and US set up tax treaties between themselves and other countries (such as Ireland).

It is key to understand this underlying motivation for the current system. This system arose and continues to exist not out of some noble desire to relieve taxpayers of the “unfairness” of double taxation or even at the bequest of the lobbyists of those taxpayers. It came out of a logical self-interest of various governments. For what its worth, the UK tax treaties with both the US and Ireland were signed into being by the Labour government of Harold Wilson.

With this background in mind, let’s look at the Google situation.

-Many US politicians and citizens want Google to pay US tax on its WORLDWIDE income, including income earned from UK customers. They argue that while this may not be legally correct, it is MORALLY correct because a) Google was founded, IPOed and has its headquarters in the US; AND b) The citizens of the US are suffering in a financial downturn and “deserve” this money;

-Many UK politicians and citizens want Google to pay UK tax on the revenue generated from UK customers. They argue that while this may not be legally correct, it is MORALLY correct because a) Google is deriving income from UK tax resident individuals and corporations; AND b) The citizens of the UK are suffering in a financial downturn and “deserve” this money;

-You could insert “Starbucks” for “Google” in this fact situation. Both companies want to maximize their net revenues (“gross revenues” minus “expenses including tax” equals “net revenue”). Both companies used the tax treaty network and international structuring regime to minimize their global tax burden. As part of this structure they may have to set up operations in places like Ireland; or assigned intellectual property rights to places like the Netherlands. However there are important differences between the two companies;

-Starbucks needs to respond to this “Moral but not legal” obligation demand because a) it has physical facilities in the UK which could be picketed or damaged reducing sales; and b) There are many UK competitors who could service UK customer needs and decrease gross revenues. As a result, it is logical that they may consider paying more tax than legally obligated in order to maintain gross revenues and thereby maximize net revenue.

-Google is different in that a) it does not have or need physical facilities in the UK to deliver its service; b) With all due respect to other search engines, it is not really realistically worried today about losing customers to its competitors. Therefore, the current controversy is unlikely to significantly reduce people from using its products and services. As a result, it is logical that they will not consider paying more tax than legally obligated;

The end result is that the UK push to have Google pay more UK tax is probably doomed to failure UNLESS the UK can show that Google did not properly operate the tax structure they set up. Whether the Reuter uncovered “UK sales team” is sufficient to undermine the Google tax structure is a legal question, not one that will be settled in Parliament or the courts of public opinion.

As a tax lawyer, I can tell you that the Reuters revelations about UK employees is interesting enough to warrant further investigation but hardly a slam dunk that Google was offside. Investigation and adjudication will tell.

If Google is currently tax-compliant then you have to look at the practical levers to force Google to pay more tax than they are legally obligated. Starbucks which sells a standard physical commodity which is readily available from other competitors was clearly subject to pressure. “Search” is not a standard physical commodity today and whether through perception or reality, it is a far and away market leader. As a result Google is not motivated by self interest to pay more tax to maintain gross revenues.

May 03, 2013 12:54pm EDT  --  Report as abuse

When looking at this whole issue, its worth understanding some history and background. The current system of tax treaties and international structuring arose from a desire by many national governments to try and maximize the tax revenue they collect. They did this by recognizing that there are constant situations where an international corporation may be obligated to pay tax on the same revenue but numerous times. Of course this would result in no net revenue and the corporation going bankrupt.

Therefore in order to attract the good or service to their jurisdiction; get as much tax revenue as possible; and encourage the corporation to set up some of its physical structure and work force in their jurisdiction, countries like the UK and US set up tax treaties between themselves and other countries (such as Ireland).

It is key to understand this underlying motivation for the current system. This system arose and continues to exist not out of some noble desire to relieve taxpayers of the “unfairness” of double taxation or even at the bequest of the lobbyists of those taxpayers. It came out of a logical self-interest of various governments. For what its worth, the UK tax treaties with both the US and Ireland were signed into being by the Labour government of Harold Wilson.

With this background in mind, let’s look at the Google situation.

-Many US politicians and citizens want Google to pay US tax on its WORLDWIDE income, including income earned from UK customers. They argue that while this may not be legally correct, it is MORALLY correct because a) Google was founded, IPOed and has its headquarters in the US; AND b) The citizens of the US are suffering in a financial downturn and “deserve” this money;

-Many UK politicians and citizens want Google to pay UK tax on the revenue generated from UK customers. They argue that while this may not be legally correct, it is MORALLY correct because a) Google is deriving income from UK tax resident individuals and corporations; AND b) The citizens of the UK are suffering in a financial downturn and “deserve” this money;

-You could insert “Starbucks” for “Google” in this fact situation. Both companies want to maximize their net revenues (“gross revenues” minus “expenses including tax” equals “net revenue”). Both companies used the tax treaty network and international structuring regime to minimize their global tax burden. As part of this structure they may have to set up operations in places like Ireland; or assigned intellectual property rights to places like the Netherlands. However there are important differences between the two companies;

-Starbucks needs to respond to this “Moral but not legal” obligation demand because a) it has physical facilities in the UK which could be picketed or damaged reducing sales; and b) There are many UK competitors who could service UK customer needs and decrease gross revenues. As a result, it is logical that they may consider paying more tax than legally obligated in order to maintain gross revenues and thereby maximize net revenue.

-Google is different in that a) it does not have or need physical facilities in the UK to deliver its service; b) With all due respect to other search engines, it is not really realistically worried today about losing customers to its competitors. Therefore, the current controversy is unlikely to significantly reduce people from using its products and services. As a result, it is logical that they will not consider paying more tax than legally obligated;

The end result is that the UK push to have Google pay more UK tax is probably doomed to failure UNLESS the UK can show that Google did not properly operate the tax structure they set up. Whether the Reuter uncovered “UK sales team” is sufficient to undermine the Google tax structure is a legal question, not one that will be settled in Parliament or the courts of public opinion.

As a tax lawyer, I can tell you that the Reuters revelations about UK employees is interesting enough to warrant further investigation but hardly a slam dunk that Google was offside. Investigation and adjudication will tell.

If Google is currently tax-compliant then you have to look at the practical levers to force Google to pay more tax than they are legally obligated. Starbucks which sells a standard physical commodity which is readily available from other competitors was clearly subject to pressure. “Search” is not a standard physical commodity today and whether through perception or reality, it is a far and away market leader. As a result Google is not motivated by self interest to pay more tax to maintain gross revenues.

May 03, 2013 12:54pm EDT  --  Report as abuse
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