For years, multinational companies like Google, Apple and Microsoft have been thwarting attempts by government authorities abroad to plow through complicated tax structures and pin down profits for purposes of determining corporate tax liabilities. In 2011, French tax authorities gave those companies pause when it raided the Paris office of one of the world’s most visible and profitable companies: Google.
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Claiming “presumption of fraud,” French revenue officers visited Google’s Paris headquarters in an effort to determine whether the company’s tax maneuvers were appropriate. Google got their answer last month when they were slapped with a reportedly massive tax assessment. The company disclosed the existence of the assessment last week in a filing made with the Securities and Exchange Commission but did not reveal a dollar (or, perhaps more accurately, Euro) figure.
There are two things that we clearly do know about the assessment:
1. Google expected the hit, writing:
In March 2014, we received a tax assessment from the French tax authorities. We believe an adequate provision has been made and it is more likely than not that our tax position will be sustained. However, it is reasonably possible that resolution with the French tax authorities could result in an adjustment to our tax position.
2. The number is big. French media is reporting that the number is between €500 million and €1 billion ($693 million – $1.3 billion U.S.). That’s in the ballpark of the number most tax pundits had placed the liability at last year, based on information reported by Le Monde.
For its part, Google has continued to stick to its script, maintaining that it has paid all the taxes it owes. Last year, in a similar battle with tax authorities in the UK, Google stated, “As we’ve always said, Google complies with all the tax rules in the UK and it is the politicians who make those rules.”
An appeal is expected. But how successful Google would be at appeal is a good question. Tax, trade and transparency have been major themes across Europe of late and were key consensus issues at the 2013 G8 Summit. With that, governments across the world have renewed efforts to step up compliance against companies that are said to be dodging taxes and France is at the forefront of the charge.
Earlier this year, fast food giant McDonald’s was visited by tax authorities in Paris on allegations of shifting over €2.2 billion ($3.01 billion US) in income to companies set up in Switzerland and Luxembourg for the purpose of tax avoidance. McDonald's claims it did nothing wrong, saying, “McDonald’s firmly denies the accusation made by L’Express according to which McDonald’s supposedly hid part of its revenue from taxes in France.”
While France has cleared stepped up its game in the war on tax evasion (the President of France, François Hollande, was elected based largely on a platform of economic equality), investigations into tax schemes aren’t restricted to companies operating in France. In Italy, fashion houses Prada and Dolce & Gabbana were dinged for tax bills in the millions.
In the UK, Starbucks became the target of public outrage when it was revealed that since 1998, the company only paid a total of £8.6m ($11.5 million US) in corporate income taxes. Since that time, the company has changed course, making a pitch directly to the public about its new tax strategies which include not claiming “tax deductions for royalties or payments related to our intercompany charges for interest and mark-up on the coffee we buy.” The company called the move “unprecedented.”
The strategy that Starbucks is alluding to is exactly what companies like Apple, Dolce & Gabbana and Microsoft have been accused of doing. It’s a tricky arrangement involving transfer pricing, or how multinational corporations pay for goods and services within its own network. Typically, a parent company sets up a number of subsidiary companies all over the world and moves goods, services and assets from one to another. Those transactions are supposed to be “arm’s length” meaning that the goods, services and assets are transferred for the same price as they would have between unrelated parties. But that’s not what happens: transactions are structured in order to shift profits from high tax countries to low tax countries to cut their tax bills. These allegedly abusive schemes have become part of an overall tax strategy for multinational companies – and one that taxing authorities, including the IRS, have made a priority in investigations.
It’s tough enough to follow the money from parent to subsidiary when dealing with tangible goods and services. But when assets might be intangible or difficult to value it’s even more difficult. That’s what companies like Apple count on when they channel funds through multiple countries in an effort to lower corporate taxes. The computer giant paid just 1.9% corporation tax on profits outside the US last year by using contrived and controversial – but legal – tax measures. The most common version of those tax schemes, referred to the “Double-Dutch sandwich,” made über delicious by companies like Twitter, allows companies to route profits through low tax countries to avoid paying tax in higher tax countries. Popular countries to layer into the sandwich include the Netherlands, Ireland and Luxembourg.
Ireland, in particular, is a popular target for Google, including Google France. Google France channels its revenues to Google’s European headquarters in Ireland; the corporate tax is only 12.5% in Ireland compared to 33% in France – and nearly 40% in the US. That works out to drastically lower reported profits in the higher tax countries. For 2011, Google reported €138 million in revenue in France as compared to €12.4 billion in Ireland – nearly ten times more. Yet, in 2012, Google France paid €6.6 million in corporate tax while Google Ireland paid €33 million in corporate tax – just five times more.
If this doesn’t eventually break down in Google’s favor, don’t cry for Google just yet. Even if the company did cough up more than $1 billion to satisfy its tax liabilities, it’s doing just fine. For the last fiscal quarter, Google’s revenue was $15.4 billion, up 19% year on year. With respect to international operations, revenues totaled $8.76 billion, representing 57% of total revenues in the first quarter of 2014.
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