Pensioners, uni students, workers, families; we have all been told the age of entitlement is over. For Google, though, the halcyon days of entitlement remain in full swing.
The dominant purpose of this company appears to be to exploit the R&D tax regime.
Not only does Google Australia feel it is entitled to pay virtually no tax in this country, it also feels entitled to avail itself of tax breaks under Australia’s generous research and development incentive scheme.
So majestic is this company’s sense of entitlement that it has no qualms taking intellectual property that has been developed in this country and transferring it to Google entities elsewhere, despite claiming these R&D breaks.
This sense of entitlement is by no means matched by a sense of obligation to the countries in which it operates. Indeed Google felt entitled to ignore a set of detailed questions put to it by Fairfax Media on its fancy tax structure, instead releasing a PR statement, which I will outline and address below.
There is little surprise in this. Google Australia is not what it appears to be. The Google that receives money from Australian advertisers – estimated at $2 billion a year – is in fact Google Singapore. This business is done through third-party resellers in Australia.
By dealing with Google, Australian customers are actually contributing to the roads and hospitals and public works of Singapore, where the tax rate is lower. In line with its cynical approach to tax, it doesn’t collect GST on these services either.
The unique thing about Google Australia is that not a single dollar in revenue appears to come from … wait for it … Australia.
Rather, the dominant purpose of this company appears to be to exploit the R&D tax regime. Google Australia’s revenue comes from contracts with three Google companies overseas: Google Inc in the US, Google Ireland and Google Asia Pacific.
Briefly to the numbers. Google Australia reported $357.7 million in revenue, a profit of $46 million and a tax expense of just $466,802. It actually paid $295,727 in tax.
It recorded $4.5 million in tax offsets for R&D but it is hard to work out why Google feels entitled to claim this as it declined to respond to questions about its R&D.
It is known that a large part of Google Australia’s business had been linked to Google Maps, technology invented in Australia and acquired by Google 10 years ago. Was this intellectual property still in Australia? No response from Google. Had it been transferred to Bermuda? Again, no response.
Like any multinational, Google will have availed itself of expensive and sophisticated tax advice. Yet the question remains: are Google’s tax structures legal?
Should the government and the Australian Tax Office begin to exercise a sense of entitlement on behalf of Australian citizens who derive virtually zero benefit from this aggressive tax dodge?
Take the R&D claims. For tax purposes, Google Australia paints itself as a research lab. A cursory look at the accounts, however, shows no trace of capitalised software development costs. It doesn’t include a statement about accounting for software development. Surely the auditors, Ernst & Young, would have pushed for some disclosure if the development of software for ownership by Google Australia was part of its business model. Did Google Australia ever intend to own the intellectual property that its technicians here are busy creating?
And for whom are these R&D activities conducted? Is the Tax Office effectively giving Google tax breaks when Google Australia conducts contract work for the benefit of Google Inc in the US? The explanatory memorandum for the R&D scheme says R&D activities ought to deliver benefits for taxpayers.
Another area of secrecy and paranoia is the issue of whether Google Singapore and Google Asia Pacific should be classified as a ”permanent establishment” in this country and therefore be obliged to pay the 30 per cent corporate tax rate. The answer should be yes.
Yet Google Australia declined to respond as to why Google Singapore, for instance, should not be classified as a permanent establishment when it effectively runs a business in this country via resellers (who sell Adwords), it has staff here and has servers here. It is high time the government and the Tax Office demanded this company pay its way.
Here is the statement from Google Australia:
“Google contributes to Australia through employment, investment, and helping to create economic opportunity for businesses and individuals. Over the last five years, Google has tripled its R&D workforce in Australia, investing more than $1 billion through our local office, jobs created, and in paid taxes. We employ more than 900 people locally, including 450 highly skilled engineers in Sydney. Google’s office in Australia supports the local technology industry, including partnerships with schools and universities, and this year we will take on more than 70 paid interns, providing valuable technical job training.”
As described earlier, the company declined to respond to specific questions about its financial statements and its tax treatments, particularly in regards to the issue of R&D concessions and the matter of “permanent establishment”.
It is telling that the Google response leads with the word Google rather than Google Australia Ltd. It indicates how the “mind and management” of the local subsidiary is really located offshore.
The reference to an investment of over $1 billion in five years (including any transfer pricing add on) presumably concerns the total spend by Google rather than its actual investment. Actual investment, in an accounting sense, is low. Money spent on behalf of other Google entities offshore is not an investment in Australia. The cash-flow statement for the Australian entity shows investment of just $17.4 million over the past two years.
The company does have a point on employing locals. There is a benefit to Australia from Google employing local staff. Perhaps only half are engineers however support the contract work with Google in Ireland and Singapore. What the rest do is left unsaid.
In any case, the taxes foregone by Australia would generate even more jobs for a whole range of prospective employees.
In line with its policy of disclosing the bare minimum to satisfy corporations law requirements (if that), Google Australia has deemed its accounts not to be “general purpose” accounts. So there is no disclosure of related party transactions, that is, detail on the deals the company does with other Google entities. There is no telling, for example what “service fees” might have been paid (this is where transfer pricing is often evidenced, running up costs in high tax jurisdictions such as Australia while siphoning out profits to low-tax climes such as Ireland or Bermuda).
On the matter of permanent establishment, there appears to be little to distinguish Google’s “resellers” from employees of Google Asia Pacific. The fees or commissions these “resellers” get are probably designed to compensate for cost of their labour, computers and ancillary equipment needed for the job, but their “agency” contracts would likely allow Google to avoid paying superannuation, Workcover insurance and other overheads – or to collect PAYG taxes from the “resellers” on behalf of the ATO.
It would be interesting to know in which country the law of these contracts is based, which jurisdictions are permitted to hear disputes under that law. If is the law of Singapore, why would an Australian business accept it? Surely this amounts to an abuse of economic power on Google’s part in an effort to try and say there is no permanent establishment in Australia. If the law is Australian, then it would add weight to the view that Google Asia – if that is the counterparty for the resellers – is doing business and entering into contracts through a permanent establishment in Australia.
If it is Google Asia that is charging for and physically delivering an advertisement in Australia, a proportion of its cost of running its business model incurred outside Australia may be deductible, as would be the costs it reimburses to Google Australia, but the revenue from Australian advertisers should be currently taxable in Australia.
What is missing is the obligation for advertisers to withhold corporate tax from their payments to Google. If a withholding tax system was in operation it would force Google Asia to lodge a tax return in order to get credit for its costs incurred and that would allow the ATO to make a proper assessment of the tax it should pay in Australia (including unpaid taxes in previous years).
The critical issue for Australia, and indeed other nations cursed by the Google tax dodge, is that other multinationals are following in Google’s path.
While Google has gone to extreme lengths to concoct an entire global corporate framework specifically designed to avoid (if not evade) tax, other multinationals have gone down the same path, to varying degrees, in recent years in an effort to also reduce what tax lawyers refer to as “leakage” (tax).
Avoidance is gaining momentum and Western governments are looking hapless in the face of it. If any tax lawyers – or retired tax lawyers with no skin left in the game – would care to contribute to the debate by proffering a view on Google’s R&D claims and the matter of permanent establishment please contact the author of this story.