As any parent will tell a child, the problem with lying is that you may have to lie again to cover up the lie you told in the first place and, before you know it, you are all tangled up in lies and then you get into trouble.
This appears to be happening to the ubiquitous Google, whose offspring Google Australia is yet to fully resile from the public relations line that it ”paid” $7.1 million in tax in this country last year. It paid nothing of the sort.
Like a young child, Google Australia has been told by its parent in California that it must not talk to strangers (that is, strange journalists asking rude questions about tax instead of lauding it about its technological brilliance). Hence it still refuses to answer questions put over one month ago.
A small but interesting thing has happened since however. Google sent out an online flier for a conference last week: ”Join us at Atmosphere Sydney for inspiring ideas on culture change, collaboration, agility and innovation in the new digital workplace.”
In this flier, the title of its local boss appears to have changed. Maile Carnegie has now been anointed ”country director Australia and New Zealand”. Previously she had been referred to as ”managing director Australia and New Zealand”, until it was pointed out that in fact she was not actually a director of Google Australia, let alone ”managing director”. Carnegie is accomplished enough. She was formerly the managing director of Proctor & Gamble Australia/New Zealand but her role at Google Australia is not a statutory one.
This legal role of director falls to the mysterious Mark Stewart Tucker, Google’s sole Australian director, who lives on Sydney’s northern beaches and refuses to respond to questions. The other two directors live in California, where Google Inc, the puppet master for its web of tax-conniving global entities, pulls the strings.
Google Inc is one parent that is in complete and utter control of its children. The reason that Carnegie is treated as a corporate child has everything to do with tax and the way that the Californian parent runs its global empire of smoke and mirrors.
A poor choice
Yet this new title for Carnegie is perhaps not the wisest choice. Carnegie has a marketing background; the perfect bona fides for running a company that makes money by selling advertising services. But this is ironically not how Google Australia makes money. The estimated $2 billion that Google Australia earns in advertising revenue is booked through a Singapore entity.
Google Australia actually earns its income from three other Google entities overseas that pay it under contract for research and development services. Hence it claims tax breaks under Australia’s generous R&D schemes while booking its ad sales, via resellers, in the low tax territory of Singapore.
Tax lawyers would call this structure an effective way to manage ”leakage” (tax), as would Google’s auditors Ernst & Young.
A layman though might deem it a big fat lie on behalf of Google Inc. The lie is that Google is pretending not to run a ”permanent establishment” in Australia – that is, a real business in this country selling ads. The lie is that roughly $2 billion that Australians pay for its advertising services really belongs in Singapore and that is where Google should be paying its tax, helping fund roads and bridges in the tiny Asian country.
As ”country director” and already having admitted her marketing role (we now know she is not limited to managing the R&D group Google Australia), Maile Carnegie is even more clearly part of a permanent establishment for Google’s Australian advertising business. While the advertising business may be legally owned by Google’s Singapore incorporated company (Google Asia Pacific), the business is managed by her and her team out of their Sydney office under the direct control of the board of Google Inc in America – not that this will be a problem for Google while the government continues to strip the Australian Taxation Office of resources, thereby ensuring that ordinary salary and wage earners continue to foot the bill for the approximately $150 million a year that Google should be paying in Australian income tax.
To be fair, it ought to be said here that we have picked on Google as the model for new age multinational tax dodging. This company is not one iota worse than other tech giants such as Apple. For its part, Apple has shifted almost $9 billion in untaxed profits from its Australian operations to a tax haven structure in Ireland in the past decade. Last year it reported pre-tax earnings in Australia of $88.5 million after it sent an estimated $2 billion of income from its Australian sales to Ireland via Singapore.
Nevertheless, the Google example serves well to illustrate how Australian taxpayers are being blatantly dudded – and at least in the opinion of this observer and others far more capable of analysing financial accounts, Google is probably not obeying the law. It ought to be paying income tax on the ad revenues it earns in Australia and the government ought to be pursuing it.
The general anti-avoidance provisions of Part IVA of the Tax Act have it that the ”dominant purpose” of a transaction should not be to reduce tax. And it is crystal clear that the dominant purpose of the Google structure is to dodge tax in this country.
Revisiting Google Australia’s accounts – in the remote expectation that one day the loins of the Tax Office might be sufficiently girded – it appears that there are some capital gains reported directly in movements in equity instead of in the profit and loss statement.
It seems Google may, in addition to harvesting R&D tax benefits, be working another tax dodge by using Google Australia’s equity account to fund tax deductions for its employee share scheme. In light of Monday’s revelations about auditing deficiencies in the accounts of Clive Palmer’s company Mineralogy, it is mildly interesting that E&Y is auditor of Google Australia as well.
One cautionary note however is that Google Australia’s accounts refer to its dependence on service revenues generated under service agreements. The terms of those agreements are not known. It is unlikely that they are – though these agreements should be on arm’s-length commercial terms. Service agreements that are not even based on cost recovery are a sign of intention to transfer price. If you then overlay a need for the parent and service recipient to also prop up Google Australia financially, the transactions have a distinctly piquant aroma.
Google Australia’s accounts include, as movements in equity, transactions between itself and Google Inc that relate to the granting of Google Inc ”equity instruments (options) and Restricted Stock Units (RSUs)” to staff of Google Australia. Note 2q in Google Australia’s accounts last year state that payment of these benefits are ”equity-settled”, which presumably means Google Australia staff will end up with exchange tradable shares in the US parent Google Inc. The probability of this not occurring would now be considered as remote.
Prior to 2012, Google Australia – let’s call it GA – had accumulated losses. Essentially, this company was spending more than the Google companies it contracts with were paying it to provide development of Google IP and support services for their (so far) tax-free Australian advertising business. Another way of looking at the same situation is that the other Google companies were not paying their fair value for the full cost of GA’s services (particularly in relation to GA’s cost of participating in the share scheme).
As Google was underpaying GA, it was causing GA to build up tax losses (alternatively it was causing the group to avoid or delay paying tax on the fair value of GA’s services). However, the 2012 and 2013 accounts have seen GA deriving enough income to finally declare sufficient profit to trigger a tax expense of $466,000 last year (as distinct from the $7.1 million it has purported to pay).
The fact that Google companies have been paying below cost for services is clearly indicative that this is not an arm’s length arrangement. However, the below fair value (or even cost) revenue stream also seems to have caused a funding problem for GA.
By the end of 2011, the parent found it necessary to contribute a further $68.8 million to GA (supposedly as equity) to make up for GA’s shortfall in after-tax income. The parent has since recovered some of these contributions (during 2012 and 2013) so that by the end of last year it was only propping up GA to the tune $62.1 million. Why would it do this instead of paying fair value for services?
The share scheme seems to have resulted in GA entering into a contingent commitment or liability to its employees with regard to employee benefits it has undertaken to equity-settle. Google used the Black & Scholes method to reliably estimate the cost of its option obligations and market values for its restricted stock unit obligations. Given the present market sentiment for Google stock, the probability of settlement and therefore liability determination is most likely similar to the profiles of annual leave and long service leave obligations. This suggests that GA’s share contingencies probably qualified as a liability that should have been fully provided for in the profit and loss account as an employee benefit expense. The balance sheet only appears to include annual leave and long service leave provisions. There is no disclosure of a provision for expected share benefit obligations.
Note 2q lacks clarity on the timing and amounts Google actually books as an expense in relation to these obligations, but the note appears to say that it expenses the fair value of employee services received in exchange for the grant of the options and restricted stock units (not the fair value of the options and RSUs themselves that it has granted its staff). It then says that the total amount expensed is recognised over the vesting period that ranges from between one and four years following the grant date. While not exactly cash accounting, this accounting policy seems to be unduly conservative. It is probably also inconsistent with the terms announced to employees. Otherwise, why would Google Inc feel obliged to ensure the obligation is funded at the granting date rather than the vesting date?
The purpose of this conservative accounting approach seems to be to delay recognition of the true cost of services year on year, which in turn seems to allow Google companies to delay when they actually pay GA for services it has already provided – seemingly up to four years ago. The tax dodge is based on Google Inc’s funding method for GA, for which Google is relying on the Australian Accounting Standards Board definition of ”revenues” contained in SAC4.
This reads: ”Revenues” are inflows or other enhancements, or savings in outflows, of future economic benefits in the form of increases in assets or reductions in liabilities of the entity, other than those relating to contributions by owners, that result in an increase in equity during the reporting period.
Instead of paying fair value for GA’s services, Google Inc has arranged for Google companies (including itself) to pay fees that are below GA’s costs and for Google Inc to temporarily fund GA’s shortfall with regard to its employee liabilities with so-called contributions to equity. Prima facie, lending the money to GA would appear to be an alternative, but it is hard to believe that Google Inc is able to lend money to GA for it to buy the Google Inc shares needed to settle with employees.
Attention ATO: Is this illegal?
Ultimately GA needs to receive about the same amount of money in the nature of taxable income for it to be able to expense the cost of the shares for tax purposes. The objective of Google’s unconventional manipulations seems to be driven more by tax matching considerations than commercial terms – further evidence this company is flouting Part 4a of the Tax Act.
In the meantime, it seems fair to say that the equity contributions are nothing more than a non-arm’s-length sham specifically designed to avoid or delay the payment of income tax.
In reality, these pseudo equity contributions are in the nature of revenue to Google Australia and expense for Google Inc. To qualify as a contribution it would need to be non-reciprocal. In this instance, the payments fail to qualify as a ”contribution” because Google Inc already had a present intention to demand their return to fund an increase in service fee revenue.
GA clearly accepted those terms and both parties have acted in accordance with that arrangement (even though it may only be verbal). It seems more likely from the nature of the events that Google Inc’s only purpose in attempting to classify these transactions as equity was to cause a delay in revenue recognition for GA and that it had a present intention and understanding with GA, at the time of payment, that these sham equity contributions would be returned on demand, to fund future service agreement payments.