Google has done nothing illegal. Just the same some British Members of Parliament (MPs) are angry and will likely call company executives (probably Eric Schmidt) to testify about why Google doesn’t pay its “fair share” of taxes in the UK.
According to published reports and company filings Google made £395 million ($620 million) in revenues in the UK in 2011 but paid £6 million ($9.5 million) in taxes. That works out to be about 1.5 percent of revenue.
According to a story in the UK Independent, some MPs and members of the public are upset by what they see as unfair tax avoidance. This frustration comes in part as a result of a difficult economic climate in Britain. This sort of “investigation” would be unlikely during a boom period.
The Independent explained that Google manages to avoid paying more taxes by having its headquarters in Ireland, which it collects its UK revenue, and then funneling money through Bermuda:
The company operates a scheme under which its Irish subsidiary employs Google UK as an agent, meaning the proceeds of sales made in the UK end up in Ireland. A commission of around 10 per cent is then paid back to Google UK. That fee is taxable once costs have been deducted.
Google Ireland then pays much of the money it makes to the internet giant’s Bermudan firm as a licensing fee, ensuring that a large portion of its turnover ends up in the tax haven. The process is entirely legal.
Google is certainly not alone in taking advantage of this kind of convoluted financial arrangement. Apple does similar things to minimize taxation and so does Amazon.
The Google-UK story is a microcosm of the larger challenge of national and local governments trying to regulate global corporations that can move money around the world to their advantage and avoid local tax rules. Google counters that it contributes significantly to the UK economy through job creation.
MPs said that Google would be asked to appear before Parliament at some point “before Easter.” It’s unlikely that there will be any penalties or legal consequences as a result. Rather it will likely be a venting and Google shaming session for the MPs.