Google’s taxes explained
There are numerous newspaper articles out there about multinationals and whether they are paying their fair share of taxes in Australia.
The simple analysis is to look at their tax bill and ask why it is so low, and simply assume that these multinationals are not paying their fair share of tax because the number looks too small.
Let me demystify this for you.
I’m going off the publicly available senate hearing transcript here (attach link) and I’ll explain the tax structure to you based on the facts set out in the senate transcript. These facts in particular:
“So the way to think about us like an external agency. Google Australia gets revenue from two places. We get revenue from Google Inc. because of our R&D services, and we get revenue from Google Asia Pacific, based in Singapore, for our marketing and sales and service support that we give. Now, in order to calculate how much revenue and how much profit Google Australia should receive, we use something called the cost-plus basis, and we ensure that the revenue and the profit Google Australia gets is absolutely comparable to what an external agency or an external company would get if they provided the equivalent services. So, specifically for 2013, Google Australia was paid $358 million in revenue and we generated profits of just over $46 million, and as a result we paid $7.1 million in taxes. So that is the context.”
Google sells products internationally, a good example of this is google ad-words, and so they are making money from people all over the world.
This poses a very simple question – who do they pay tax to?
There are a series of tax treaties between different countries (Australia has entered into numerous tax treaties with other countries) that divide up the tax pie between the different countries.
If there is no treaty, we go down to our domestic rules on residency and source. These are explained in another post, but suffice it to say if you or your company is an “Australian resident” you pay tax on every dollar you earn regardless of where you earn it, but if you are not an Australian resident, then you will only pay tax on income that is Australian sourced.
The treaties override this a little. Imagine you had two countries with the same rules – the company conducting international operations would be paying tax twice – first on a residency basis in their country of residence and again on a source basis in the country in which the income was derived.
So the concept of a tax treaty is basically this – a resident of a country with which Australia has tax treaty (lets call them “foreign resident”) will only pay tax in Australia on certain types of income and if the foreign resident has a “permanent establishment” in Australia. In that case the foreign resident pays taxes attributed to that permanent establishment. A permanent establishment could be an office or other physical location, it could be a piece of equipment, it could even by a guy working for the foreign resident out of his garage in Australia. The point is, the profits attributable to that permanent establishment get taxed in Australia.
There are a few exceptions, and marketing services is one of them. So if the foreign resident has a person in Australia just doing marketing for them this will not create a permanent establishment as long as the Australian customer signs its contracts directly with the foreign resident.
So lets use Google as an example. Google is a foreign resident, everyone knows that. When you buy google ad-words you are giving your credit card details on the internet and buying the ad-words from some foreign company. Google has Australian offices but these don’t create a permanent establishment as their role is to provide marketing services and other services that don’t create a permanent establishment. So they pay very little tax here…