Definition of Google Tax
A Google tax, or diverted profits tax, is an anti-avoidance tax that addresses diverting earnings or royalties to nations with lower or zero tax rates. For instance, Alphabet Inc.’s (GOOGL) Google paid minimal taxes in the U.K. by doing transactions in Dublin, Ireland, although earning $6.5 billion in the U.K.
Dissecting Google Tax
Although associated with Google, diversification of earnings is prevalent in other industries. U.S. technology giants like Meta, previously Facebook (META), Apple Inc. (AAPL), Amazon Inc. (AMZN), and multinational businesses (MNCs) like Starbucks Inc. (SBUX) and Diageo PLC (DEO) have been employing similar tactics to reduce their tax payments. A mobile app like Meta’s WhatsApp or a game like Clash of Clans may earn money from local users through online advertisements and in-app purchases without employing a single person in that nation. Companies were allowed to account for sales and earnings wherever they were, frequently in low-cost U.S.
The U.S. Securities and Exchange Commission (SEC) requires American companies to disclose global revenue details, enabling authorities in countries like the UK and Australia to identify potential tax avoidance strategies.
The U.K. and Australia changed tax legislation to ban similar tactics. In response to widespread outrage, the U.K. implemented a 25% diverted profits tax in 2015. Between 2012 and 2021, the U.K.’s RC successfully challenged corporations’ transfer pricing strategies, resulting in an extra £6.5 billion (about $8.33 billion) in taxes. It secured £853 million ($1.09 billion) in 2015-16, £1.62 billion ($2.08 billion) in 2016-17, and £1.68 billion ($2.15) in 2017-18, according to its data.
In 2015, Australia introduced a diverted profits tax in July 2017 that taxes tax evasion tactics at 40%.
After Google’s tax, worldwide companies are willingly paying back past dues and settling with tax authorities to avoid disgrace. Diageo, the maker of Tanqueray gin, agreed with the HMRC to pay an extra £190 million (approximately $244 million) in corporate tax to prevent brand harm from the Google tax. Google also agreed to pay $1U.K.illion in overdue U.K. taxes.
