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Technology giants agree to pay more UK tax

With Google and Facebook now paying some more tax in the UK, eolas asks what the deal will mean for Ireland?

 

In January, Britain’s Chancellor of the Exchequer, George Osborne MP announced a deal with Google that will see the search engine and advertising giant pay €168 million to HMRC and bear a greater tax burden in the future.

The deal, which has been hailed as a ‘victory’ by Osborne will hit the Irish tax bill as less tax will now be paid by Google in Ireland. The deal has been roundly criticised by the Chancellor’s political opponents and in February a British parliamentary committee found the settlement to be ‘disproportionately small’ in comparison with what other countries around the globe are demanding.

The UK market is Google’s second-largest outside the US, contributing more than €6.3 billion to the company’s 2015 revenue. The parliamentary committee said HMRC had taken too long to reach the settlement and added that authorities in other countries appeared to be more challenging.

The French tax authorities are reportedly seeking around €488 million in back taxes from Google and the Italian tax authorities are reported to have asked the company for €192 million.

Like Google, Facebook has also come under heavy criticism for the amount of tax it pays in the United Kingdom although at the start of March it also announced its decision to overhaul its tax structure and no longer route advertising sales through Ireland.

Transfer pricing

But what does this mean for Ireland? At present these technology giants with a base in Ireland take advantage of a system known as transfer pricing. Multinational companies devise transactions between subsidiaries, which for example, allow Google’s Irish franchise to make payments to its UK arm for work done by the company’s London staff.

Google’s large unit in Ireland serves as the company’s headquarters for Europe, the Middle East and Africa. As such it bears the bulk of the tax liability on Google’s profits from sales in Britain and other big European markets.

The internet search and advertising giant use the double Irish arrangement, a tax mechanism that makes use of the different definitions of corporate residency in Ireland and the United States. Companies are taxed in Ireland if they are controlled and managed in Ireland, while the definition of tax residency in the US is based on where a corporation is registered.

Companies using this double Irish mechanism put their intellectual property into an Irish-registered company that is controlled from a tax haven such as Bermuda, while the US considers it to be a tax-resident in Ireland. The result is that when royalty payments are sent to the company, they go untaxed, unless the money is eventually sent home to the US parent company.

In 2014 Google managed to move €10.7 billion through the Netherlands to Bermuda using the double Irish Dutch sandwich structure [a complex measure that involves transferring money through different European subsidies]. Accounts for Google Netherlands Holdings BV show the unit transferred almost all of its revenue, mainly from its Irish affiliate to a Bermuda-based, Irish-registered affiliate called Google Ireland Holdings. Bermuda charges companies no income taxes meaning Alphabet, Google’s newly formed parent company, enjoyed an effective tax rate of just 6 per cent on its non-US profits in 2014.

More than a decade ago, Google moved a large proportion of its software patents offshore using the double Irish mechanism. Most of its worldwide earnings get credited to a Bermuda mailbox. In 2010 the State passed a law intended to counter such arrangements, though existing arrangements were exempt. In 2013 it was announced that companies operating in Ireland must also be a tax resident here. This measure took effect in January 2015 but for companies with existing operations in Ireland it will not take effect until 2020.

A spokesperson for Google said the company follows the tax rules in all the countries where it operates: “Governments make tax law, the tax authorities enforce the law and Google complies with the law.”

Tax calculations

The UK’s tax authority HMRC agrees that Google’s tax affairs are legal, but for reasons of confidentiality will not reveal how it calculated Google’s tax liability. The tax is based on a fee that its UK operations receives as an agency of its Dublin office. As the office based in the UK is working for the Dublin office, the fee is based on the value of the work along with costs such as rent and salaries.

Speaking about how the fees are calculated at a parliamentary committee in 2013, Google’s President of EMEA Business and Operations, Matt Brittin said: “The way we come to a conclusion on that is, if we went outside and hired other firms to do those kind of things, what would we pay there.”

With a corporation tax level of 12.5 per cent, Ireland taxes businesses a lot less than most EU countries. UK corporate tax is 20 per cent, in France it is 33.33 per cent and in Italy it is 27.5 per cent. There have been proposals to harmonise corporate tax rates across Europe, supported by Germany and France, however both Ireland the UK have rejected this idea.

Although there is no change to the corporate structure arising from the British settlement, it is understood that the agreement to pay more tax in Britain involves a substantial change to the methodology both companies deploy to calculate how much they pay there. This will reduce future Irish taxes as a result, but it is understood the settlement has no impact on taxes paid in the past in respect of profits made in Britain.

Speaking about the agreement Google’s spokesperson said: “We have agreed with the UK tax authority a new approach for our UK taxes and will pay €168 million covering taxes since 2005.

“We will now pay tax on revenue from UK-based advertisers which reflects the size and scope of our UK business. The way multinational companies are taxed has been debated for many years and the international tax system is changing as a result. This settlement reflects that shift and is in line with recent OECD guidance.”

Despite these decisions and the hit Ireland’s tax bill will take as a result, Wall Street analysts remain confident that due to the low level of corporation tax on offer both Google and Facebook will remain based in Ireland for years to come.

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