July 13, 2017 / 10:25 AM / 2 years ago

Why Europe can’t beat Google on corporate taxes

The Google signage is seen at the company's offices in New York January 8, 2013. REUTERS/Andrew Kelly

LONDON (Reuters Breakingviews) - Google isn’t liable for 1.1 billion euros ($1.25 billion) of back-taxes after all, a French court has decided. That won’t be the last battle the U.S. search engine faces over how it arranges its profits. Giant technology companies will always have an advantage over local tax authorities, though. Unlike competing European countries, they can put their global interest first.

French authorities had argued that Google should pay up for corporate and value-added tax on activity that involved French customers, but was routed through its Irish subsidiary. That is, by now, a familiar story. Google, Amazon, Apple - as well as lower-tech groups like Starbucks - commonly take advantage of differences between national tax rates to locate parts of their business in a way that minimises the overall bill. In some cases, that’s beneficial for countries with big export sectors – which can charge taxes based on where products are developed and produced, rather than on where they are sold.

The battle is characterised by small wins and losses. Google paid 130 million pounds ($168 million) to UK authorities in 2016, and 306 million euros to Italy this May. But often, such decisions come down to a matter of nuance. A big company might argue, as Google has, that its UK business merely offers marketing services to an Irish-based sales company, which means that profit from actual sales is rightly taxed in Ireland. In some cases, it might be possible to argue that certain staff members in Britain were effectively engaging in sales. Even then, though, the principle that tax is payable where profit is booked – not where the customer is based – is still intact.

Governments remain at a disadvantage because big businesses like Google, Facebook and Amazon can think globally. Sacrificing a dollar in Ireland to save two in France makes perfect sense for them – and is what shareholders expect. The European Union, a collection of 28 member states, soon to be reduced to 27, finds that kind of thinking difficult. The idea that countries should retain full sovereignty over their tax rates has proven impossible to prise away. So long as that remains true, those that can put the bigger picture first will have the upper hand.


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