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Google and its last-minute tax deals

Neil Hodge | May 16, 2017

Earlier this month technology giant Google settled a rather large tax bill of €306m with Italian authorities that had doggedly been pursuing the company for years.

As per usual with Google and other major companies that have hit the headlines in the European press for aggressive tax avoidance—Apple, Starbucks, Amazon, and so on—Italy’s beef was due to the stark numerical contrast between the billions of dollars in sales the U.S. technology company makes from European consumers and the rather paltry tax payments it makes to the countries where these customers live. For example, in 2014 Google paid just €2.2m in Italian taxes, according to company filings.

Italy’s tax authority, the Agenzia delle Entrate, said that the settlement resulted from an investigation into Google’s taxes between 2009 and 2013. The figure also included smaller amounts from disputes between 2014 and 2015, as well as between 2002 and 2006. In addition, the tax agency has said that talks would begin with Google on “preventive accords” for the “correct taxation” of its Italian business in the future.

Moreover, it has confirmed its “commitment to pursuing a tax control policy” for multinationals operating in Italy. Some Italian politicians want to go even further and have proposed introducing a special “Web tax” that could specifically hit internet giants like Google that operate in the country.

Italy’s settlement contrasts with a deal that the United Kingdom struck with the

multinational in February last year when Google agreed to pay £130m owed in back taxes covering a 10-year period. The deal caused such a stink that HM Revenue & Customs had to release a specially drafted factsheet to explain and justify its actions to the public before it got a kicking from Members of Parliament on the Public Accounts Committee over allegations the regulator cut a “sweetheart” deal.

Other EU member states are circling for their share of Google’s spoils. French tax authorities raided Google’s offices last May for aggravated financial fraud and organised money laundering. The company has said it is “cooperating” in a case that could see it repay as much as €1.6bn, although Google says that it has already paid what it legally owed. Last June Spain’s tax authorities also said that they suspected the company was not declaring some of its activities in the country, though they have not revealed how much they are seeking to recover.

The case highlights several problematic issues around tax reporting generally, and enforcement within the European Union specifically.

Over the years, it seems to have become acceptable for companies with aggressive risk appetites to also be aggressive tax avoiders: It is as if paying one’s fair share of tax is an unacceptable risk and one that can simply be mitigated a decade later by agreeing to pay—probably less than you should, and with no chance of a penalty or even jail time.

The situation is made worse when one considers that tax accounting in the European Union is also hampered by a lack of harmonisation and little political consensus as to what tax rates are fair.

Louise Gracia, a professorial teaching fellow in the accounting group at Warwick Business School in the United Kingdom, says that tax loopholes, differences in tax rules and regulations, and layers of complexity within tax practices make it difficult to decide how much a company trading across national boundaries owes in tax and where that tax liability crystalises. It perhaps does not help that the European Union is also home to some of the biggest tax havens in the world, namely Luxembourg, Jersey, Guernsey, Ireland, and the Netherlands.

While the EU has responded by relaunching its Common Consolidated Corporate Tax Base (CCCTB), a scheme that aims to eliminate mismatches between national systems and iron out differences that enable tax avoidance to flourish, the pace of change is grindingly slow: The idea was first raised in 2011 and still requires approval from member states, some of which are likely to want to water it down.

As a result, national tax authorities have little choice but to take on the pursuit of large multinational companies more directly for the tax they think they owe. But it takes time and money, and—more often than not—the companies being investigated have deeper pockets and more legal resources than the regulators investigating them, so deals are more likely to be cut rather than justice served.  

However, there is one potent driver of good corporate behaviour that is beginning to take root: increased public awareness.

Tax is no longer just being seen as a financial practice—it also has social and moral dimensions that are linked to notions of fairness and responsible business, says Gracia. And corporations are increasingly sensitive to being positioned as tax avoiders that do not front up to their moral and social tax obligations, as well as the potential reputational impact such tactics can have on their bottom lines.

Campaigns to boycott companies and their products have proliferated on social media—platforms where it can be very difficult for corporations to offset the damage and get their point across. As a result, “choosing to engage in aggressive tax avoidance and stall on settlements until the eleventh hour are not consequence-free decisions for companies anymore,” says Gracia.