US multinationals dodge paying billions in taxes

Google reported sales of more than $4 billion in Britain last year. It paid less than $10 million in taxes. Some tax collectors, lawmakers and competitors of Google in Europe say this is unfair.

As governments throughout the region seek to close gaping holes in their budgets, they are taking aim at US multinational companies, especially Internet giants like Google and Amazon.com, which pay little or no taxes in Europe, despite generating billions of dollars in revenue on the Continent. “Why on earth do you manipulate your accounts so that you get away with not paying corporation tax in the UK?” Margaret Hodge, a member of Parliament, asked representatives of Google, Amazon and Starbucks last week, during a heated committee hearing in London.

In France, tax collectors have gone further. Amazon says it has received a bill from France for taxes and penalties related to the ‘allocation of income between foreign jurisdictions’ from 2006 through 2010. Other companies, including Google, are also reportedly in the French authorities’ sights. “Even if the Internet is a zone of freedom, it shouldn’t be a lawless zone,” Najat Vallaud-Belkacem, a spokeswoman for the French government, said last week. “Fiscal rules should be able to be applied to those activities as well.”
Google, Amazon, Starbucks and other American companies facing tax scrutiny say they are doing nothing wrong.

They use complex accounting strategies to exploit national differences across Europe in corporate tax rates, which range from less than 10 per cent to more than 30 per cent, and loopholes that can reduce their effective European tax levies to almost nothing. Google, for example, records most of its international revenue at its European headquarters in Ireland, where the corporate tax rate is 12.5 per cent. Across Europe, customers who buy advertising, Google’s primary source of revenue, sign contracts with the company’s subsidiary in Ireland, rather than with local branches.
Google ends up paying Irish taxes on only a fraction of the billions of euros that course through its Dublin office.

That is because the company uses a variety of methods, including royalty payments to a unit in Bermuda, to reduce further the amount of money exposed to tax liability. So, while Google told the Securities and Exchange Commission that it generated more than $4 billion in sales in Britain last year, it reported revenue of only 396 million pounds, or $629 million, in its official filings there.

The total, the company said, reflected the amount that Google’s British unit billed Google Ireland for promotional work, consulting and other activities. Google declared a profit of 31 million pounds in Britain, resulting in a British tax bill of only 6 million pounds. “We pay the tax we are required to pay in every country in which we operate,” Matt Brittin, Google vice president for North and Central Europe, told the parliamentary panel. Hodge, chairwoman of the Public Accounts Committee, acknowledged that she thought Google, Amazon and Starbucks were probably complying with the law. “We are not accusing you of being illegal, we are accusing you of being immoral,” she said.

Contesting claim

In France, more than morality is at stake. In his testimony to the parliamentary panel, Andrew Cecil, director of public policy for Amazon in Europe, confirmed that the company had received a demand for $252 million from the French tax collection agency. He said Amazon was contesting the claim, which was originally disclosed in a US regulatory filing. Amazon, which has European headquarters in Luxembourg, another small country with favourable tax conditions for multinational companies, reported 9.1 billion euros, or $11.6 billion, in revenue across Europe last year. It posted an after-tax profit of 20 million euros on those sales, and paid about 8 million euros in tax, Cecil said.

Cecil told the parliamentary committee that when customers across Europe bought books from Amazon, they were actually buying them from the Luxembourg-based Amazon entity, rather than their local subsidiaries. That response was met with incredulity by Hodge, who noted that when she ordered a book from the company, she used a British website, Amazon.co.uk, and the goods were delivered from a British warehouse via the British Royal Mail.

News reports in France note that French fiscal authorities are also seeking back taxes and penalties from Google, amounting to 1.7 billion euros. Vallaud-Belkacem told reporters that she could not comment on individual companies for privacy reasons. Google, in a statement, said the reports were premature. “Google has not received any tax assessment from the French tax administration,” the company said. “We have and will continue to cooperate with the authorities in France.”

Europe is not the only place where the complex tax arrangements of United States multinationals are being questioned. The authorities in Australia have sent Apple a bill for 28.5 million Australian dollars, or about $29.5 million, in back taxes, according to news reports Friday. Apple could not be reached for comment. In an era of globalisation, determining the tax liability of multinational companies has long vexed policymakers and tax collectors. International agreements generally state that commerce should be taxed in the physical location where profit-making activity occurs, not necessarily where a customer is based or where a transaction takes place.

While Google’s US taxes have come under scrutiny, too, the company pays substantially more in the United States. In 2011, the company’s annual report shows, it made a provision of $2.6 billion for income taxes, all but $248 million of that going to the state and national treasuries in the United States. Based on pretax income of $12.3 billion, that amounted to an effective rate of 21 per cent.

Though Google employees across Europe advise clients on the use of the company’s services, advertisers sign contracts with the company’s subsidiary in Ireland. This has shielded Google from tax liability in France, Britain and other European countries, at least so far.

“Google is saying, ‘We just float around freely above this useful aircraft carrier, Ireland,”’ said Richard Murphy, founder of the Tax Justice Network, an independent organization that campaigns against what it calls tax “loopholes and distortions.” “What France is saying is, ‘We don’t think you float around over Ireland, we think you are in France.”'
If Google believes that its profit-making activity – that is, its taxable work – occurs in the United States, Murphy said, then it ought to take its European earnings home and expose them to the Internal Revenue Service. Yet, like many other US multinationals, it has been reluctant to do so.

Instead, Google said it had accumulated $24.8 billion as of the end of 2011 outside the United States – part of a cache of stored American corporate cash that Citizens for Tax Justice, an American advocacy group, estimates at more than $1.5 trillion. The money has been accumulating in Bermuda and other offshore havens since a 2004 US tax holiday for the repatriation of corporate profits.

While some US corporate leaders have been lobbying in Washington for another tax holiday, lawmakers in Europe are moving to collect a greater share of multinationals’ taxes. Last spring, the European Parliament threw its support behind a proposal to create a single set of European Union-wide accounting rules for calculating multinational corporations’ tax liabilities.

After a meeting this month, George Osborne, the British chancellor of the exchequer, and finance minister Wolfgang Schauble of Germany called for “concerted international cooperation to strengthen international standards for corporate tax regimes.”  Osborne said in a statement, “We want competitive taxes that say Britain is open for business and that attract global companies to invest in and bring jobs to our country, but we also want global companies to pay those taxes.”