DEFINITION of Google Tax
A Google tax, also known as an adiverted profits tax, refers to anti-avoidance tax rules enacted in numerous countries to address the practice of earnings or royalties being diverted to other jurisdictions with lower or zero tax rates. For example, despite earning $6.5 billion in sales in the UK, internet giant Alphabet Inc.’s (GOOGL) Google paid no tax in the UK by completing its transactions in the low-tax capital city of Dublin, Ireland.
BREAKING DOWN Google Tax
Despite the fact that the word incorporates the name of the corporation (Google) that became the poster boy for the practice, profit diverting is noted to be widespread across numerous industrial sectors. Specifically, technological behemoths such as Meta, previously Facebook (META), Apple Inc. (AAPL), and Amazon Inc. (AMZN), as well as other multinational companies (MNCs) such as Starbucks Inc. (SBUX) and Diageo PLC (DEO), have used similar tactics to reduce their tax payments. For example, a mobile app like Meta’s WhatsApp messaging or a game like Clash of Clans may not employ a single person in a certain nation, but it may nevertheless make a lot of money from its local user base, which generates income for the firm via online adverts and in-app sales. Companies had the ability to account for such revenues and profits anywhere they wanted, and they often diverted them to low-cost countries.
The Securities and Exchange Commission (SEC) of the United States requires American businesses to publicly report details on where and how much revenue they generate around the world, allowing authorities in other countries such as the United Kingdom and Australia to obtain more concrete data on any potential tax avoidance measures employed by American businesses.
Tax regulations in the United Kingdom and Australia have been changed to discourage firms from engaging in similar methods. In response to mounting public outrage, the United Kingdom enacted a 25% diverted profits tax in 2015. Between 2012 and 2018, Her Majesty’s Revenue and Customs (HMRC), the United Kingdom’s tax collecting agency, collected £6.5 billion (about $8.33 billion) in extra taxes through contesting corporations’ transfer pricing methods. According to its own numbers, it received an additional £853 million (about $1.09 billion) in 2015-16, £1.62 billion (approximately $2.08 billion) in 2016-17, and £1.68 billion (approximately $2.15 billion) in 2017-18.
Australia started developing steps in 2015, which resulted in the implementation of a diverted profits tax from July 2017 onwards, which imposes a 40% tax on such tax evasion methods.
In response to the changes, worldwide corporations are now voluntarily paying back taxes and entering into agreements with tax authorities in order to avoid being humiliated by a Google tax. Diageo, the renowned beverages conglomerate that produces Tanqueray gin, has agreed with the HMRC to pay an additional £190 million (about $244 million) in corporation tax to prevent the possible harm to its brand name caused by the Google tax. Google has also agreed to pay around $185 million in overdue taxes to the United Kingdom.
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