What Is a Google Tax?

A diverted profits tax, commonly known as a Google tax, is an anti-tax-avoidance measure implemented by certain countries. Its purpose is to prevent multinational companies from shifting their profits or royalties to jurisdictions with lower or zero tax rates. One notable example is Alphabet Inc.’s Google, which paid minimal taxes in the United Kingdom despite earning $6.5 billion in revenue by conducting its transactions in Dublin, Ireland, a low-tax city.

KEY TAKEAWAYS

  • A Google tax, also called a diverted profits tax, aims to prevent multinational companies from diverting their profits to countries with lower tax rates.
  • Countries like Australia and the United Kingdom have implemented the Google tax.
  • While Google gained notoriety for its tax avoidance strategies, other major companies like Amazon, Apple, Meta (formerly Facebook), and Starbucks have also employed similar tactics to reduce their tax liabilities.
  • Some tax loopholes, including those used in the “double Irish Dutch sandwich” strategy, have been closed.
  • Several countries have also introduced digital services taxes specifically targeting tech giants, and efforts are underway to reach a global agreement on fair taxation and revenue distribution.

Understanding the Google Tax
Although the term “Google tax” is associated with the company that became synonymous with profit diversion, this practice is prevalent across various industries. Technology giants like Meta, Apple, and Amazon, as well as multinational corporations such as Starbucks and Diageo, have utilized these strategies to minimize their tax payments.

For example, even if a mobile app like Meta’s WhatsApp messenger or a game like Clash of Clans doesn’t have any employees in a specific country, it can still generate substantial profits from its local user base.

Australia initiated measures in 2015 that resulted in the implementation of its own diverted profits tax starting from July 2017. This tax aimed to combat tax avoidance practices by imposing a 40% tax on such activities.

In response to these developments, multinational corporations are now choosing to proactively settle their outstanding tax liabilities and reach agreements with tax authorities to avoid the negative consequences associated with the “Google tax.” For instance, Diageo, the London-based beverage giant responsible for renowned brands like Johnnie Walker scotch and Tanqueray gin, entered into an agreement with the HMRC to pay an additional £190 million (approximately $244 million) in corporation tax. This decision was made to safeguard their brand reputation from potential damage caused by the Google tax.

Similarly, Google agreed in 2016 to pay approximately $185 million in back taxes to the U.K. as a response to similar charges.

In France, Google faced comparable allegations and ended up paying fines and additional taxes amounting to nearly 1 billion euros (around $1.1 billion) to the French authorities in 2019. At that time, the company expressed its belief in the necessity of a coordinated reform of the international tax system to establish a clear framework for companies operating globally.

A digital services tax (DST) refers to a tax imposed by certain countries on the revenues generated by large multinational companies offering online goods or services. As of October 2023, 38 countries worldwide had either enacted or were contemplating DSTs. Examples of countries implementing DSTs include Austria (with a 5% tax), France (3% tax), Italy (3% tax), Spain (3% tax), and the U.K. (2% tax).

Simultaneously, the Organisation for Economic Co-Operation and Development (OECD) has been working on an international agreement that aims to address the taxation of these companies and distribute the resulting proceeds among different nations. This initiative aims to eliminate the need for separate, unilateral DSTs.

The double Irish Dutch sandwich strategy was a tax avoidance scheme previously employed by Google and other companies. It involved channeling profits through an Irish subsidiary, then a Dutch subsidiary, and ultimately to a second subsidiary.