European Countries Seek More Taxes From U.S. Multinational Companies
Ralph Orlowski/Reuters
PARIS — Google reported sales of more than $4 billion in Britain last year. It paid less than $10 million in taxes.
Peter Muhly/Agence France-Presse — Getty Images
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 United States 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 U.K.?” 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 percent to more than 30
percent, 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
percent. 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, 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
in Britain, resulting in a British tax bill of only £6 million.
“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.
Ms. 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.
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 an American
regulatory filing.
Amazon, which has European headquarters in Luxembourg, another small
country with favorable 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, Mr. Cecil said.
Mr. 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 Ms. Hodge, who noted that when
she ordered a book from the company, she used a British Web site, 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. Ms. 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 globalization, determining the tax liability of
multinational companies has long vexed policy makers 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.
Determining the appropriate jurisdiction for taxation is especially
difficult with Internet businesses, because of the intangible nature of
many of the goods and services that change hands and the ease with which
transactions can cross borders.
Google says that most of the economic value it creates is generated in
Silicon Valley, where its engineers toil away at the computer algorithms
behind its search engine and other services. So the company says it is
fair that most of what it pays in taxes goes to the United States
Treasury, not its foreign counterparts.
While Google’s United States 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 percent.
“If Google was a British business, if Google had been founded in
Cambridge by Larry and Sergey, I think we’d be in a very different place
here, because the profitability would rightly sit where all the
technology and innovation take place, which is not here,” Mr. Brittin
said. He was referring to Larry Page and Sergey Brin, the co-founders of
Google.
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, Mr. Murphy said, then it
ought to take its European earnings home and expose them to the Internal
Revenue Service. Yet, like many other American 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 United
States tax holiday for the repatriation of corporate profits.
While some American 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. But policy
makers are divided over whether the standards should be voluntary or
mandatory.
Ms. Vallaud-Belkacem said last week that the administration of President
François Hollande of France was discussing with other European
governments ways to crack down on tax avoidance by international
companies.
After a meeting this month, George Osborne, the British chancellor of
the Exchequer, and Finance Minister Wolfgang Schäuble of Germany called
for “concerted international cooperation to strengthen international
standards for corporate tax regimes.”
Mr. 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.”
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