news The Australian Government has outlined a series of new legislative initiatives with which it will attempt to protect its corporate tax base and rein in the tax minimisation strategies of corporations such as search giant Google, which expects to pay just $74,000 in corporate income tax for the 2011 calendar year in Australia, despite making an estimated $1 billion in local revenue.
The tax practices of corporations such as Google have been under constant scrutiny in Australia and in other jurisdictions over the past several years, due to the habit several such technology giants have of using offshore subsidiaries to avoid paying tax in some countries. For example, in May Google Australia published financial accounts revealing it expected to pay just $74,000 in local tax for the calendar year, off revenues of just $201 million – despite the fact that media analysts consistently peg its Australian revenue at closer to $1 billion.
It is commonly believed that Google is able to hold its Australian tax down through billing Australian clients through international subsidiaries in countries such as Ireland and associated practices. Despite the company’s status as one of Australia’s largest media players with most of its revenue coming through advertising contracts, Google’s local financial statements state that its revenues come through agreements with its international divisions.
In France, the country’s government is currently taking a heavy hand with the search giant due to the exact same tax issue with Google’s income being funnelled through Ireland. The company’s budget minister Jerome Cahuzac said this week that Google had been asked to ‘regularise’ its tax affairs; adding that if talks between Google and the French Government on the issue failed, the case could go to court.
In Australia, in a major speech given to a tax conference in Sydney this week (the full transcript is available online), the Australian Government’s Assistant Treasurer David Bradbury heavily criticised Google over the issue and outlined a range of measures that the Government would take to rein in the search giant’s behaviour.
“It is not my usual practice to mention companies by name or to publicly canvass the tax position of particular taxpayers,” Bradbury told the conference. “Nor is it my normal practice to publicly discuss strategies employed to minimise corporate tax. However, I will be departing from my usual practice today as I believe there is a strong public interest in drawing attention to practices that have the potential to undermine the future sustainability of Australia’s corporate tax base … I also want to be clear that I am not suggesting that these companies are in breach of the law as it stands.”
He went on to state:
“Earlier this year it was reported that Google Australia’s annual income tax bill may have been as little as $74,176. The same article reported that a spokesman for Google asserted that the correct figure was $781,471. Even if the higher figure is correct, I can understand why many in the community would be perplexed to learn that this figure is so low for a company whose annual advertising revenue from Australia has been estimated by media analysts to be over $1 billion per annum.”
“It has been reported that this is the outcome of an arrangement called the “Double Irish Dutch Sandwich”. While the day-to-day dealings of Australian firms advertising on Google might be with Google Australia, under the fine print of contracts Australian firms sign with Google, they are actually buying their advertising from an Irish subsidiary of Google.”
“It is then argued that the source of this income – and therefore the taxing rights under our tax treaty – would be with Ireland rather than Australia. Despite Ireland’s relatively low company tax rate of 12.5 per cent, we have just started to build the sandwich. The next step is to route a royalty payment from the Irish operating subsidiary of Google to a Dutch subsidiary of Google, which is then paid back to a second Irish holding company subsidiary of Google that is controlled in Bermuda, which has no corporate tax. That completes the sandwich – now for the tax treatment.”
“The first Irish subsidiary receives a tax deduction for the royalty payment to the Dutch subsidiary, substantially reducing the income subject to the 12.5 per cent Irish company tax rate. Under Dutch law, and because EU member countries do not charge withholding taxes on transfers within the EU, the transfers to and from the Netherlands are essentially tax free.”
“And under Irish tax law, the second Irish resident subsidiary is not taxed on the royalty payment because it is controlled by managers elsewhere. The profits from the sale of advertising to an Australian firm then sit in a tax- free jurisdiction – possibly indefinitely.”
Bradbury said the point of this analysis was not to single out Google for criticism – noting that the company was an important innovator and played a significant role in Australia’s economy. In addition, Google had engaged with the Government constructively on many issues, including taking part in the Prime Minister’s recent Digital Economy Forum, the assistant treasurer said.
However, Bradbury added, “the point is to highlight how the digital disruption brought about by the internet and changes in technology have transformed the way economic activity is occurring – and these changes are putting pressure not only on businesses but also on the corporate tax system in Australia and around the world.” He added: “In turn, this challenges some of the concepts that form the building blocks of our current international tax architecture – source, permanent establishments and residency.” Bradbury outlined a number of measures which the Australian Government will take to rein in the kind of behaviour which Google was demonstrating. It will:
- Conduct a wholesale modernisation of Australia’s transfer pricing laws, which govern how multinational firms charge Australian subsidiaries for products and vice versa
- Pursue general anti-tax avoidance rules, which will target groups “who enter into arrangements with the sole or dominant purpose of avoiding tax”
- Work with other countries on international taxation collaboration
- Investigate ways to provide greater transparency on the amount of tax organisations pay
Bradbury concluded: “There are some looming threats to the corporate tax base and that we would be negligent not to consider them and work towards developing effective and appropriate responses. The Gillard Government is committed to a fair, competitive and sustainable corporate tax base.”
Google told the Financial Review yesterday in a reaction to Bradbury’s comments yesterday that the company complied with all Australian tax laws and made a significant contribution to Australia’s economy by helping businesses grow online, providing services to millions of Australians at no cost, and employing some 650 people in Australia.
In May I wrote the following, and it still applies here: “I don’t know enough about Australian taxation law to say whether Google is breaking Australian law with respect to its taxation practices. But what I do know is that if you asked anyone on the street locally whether a company which makes an estimated $1 billion in Australian revenues should be paying less than $1 million in tax, the answer would definitely be “no”.
When Google was founded in 1998, its infamous unofficial slogan was “don’t be evil”. Its current approach to paying tax in Australia does not appear to fit well with that slogan. Right now, Google is making hay while the sun shines off Australian businesses and consumers. And it is not contributing its fair weight back to the nation in return. I would encourage the Australian Government to change taxation law, if necessary, to make Google’s practices illegal; and I would encourage the Australian Taxation Office to conduct an investigation into Google Australia in the meantime.”