On New Year’s Eve, Google announced via the medium of a corporate filing in Dublin that 2019 would be the last year in which the company would use the notorious “double Irish” loophole to avoid paying tax.
Google has used the scheme since 2004. In the 15 years since then the company has diverted vast sums away from tax and into its own investments. By 2017, Google Ireland Holdings Unlimited, a company tax resident in Bermuda, disclosed that it owned $55 billion in marketable securities. These investments, mainly in government debt, were funded by the tax-free profits it had made from its operations around the world.
The announcement by Google did not come as a result of any ethical awakening or desire to be, as the company stated in its 2004 IPO, “a company that does good things for the world”. It has only made the change because the Irish government was forced to change the law in 2014 following widespread outrage over its tax haven behaviour. Helpfully for Google and other multinationals, the Irish government gave companies until 2020 to reorganise their affairs. Google’s announcement has come at the last possible moment, five years and many billions in unpaid tax after the original announcement.
What difference will it make, now that the loophole is closed? For governments in the UK, Europe, and indeed most of the countries in the world where Google operates, the answer is probably very little.
Here’s how Google’s structure works: customers in Europe, the Middle East and Africa are invoiced by a company in Ireland. A similar company in Singapore is responsible for the company’s Asian customers. These companies operate on a licence from Google, which allows them to sell Google products. That licence was, until this year, held by another Google company – Google Ireland Holdings Unlimited – which was physically located in Dublin but resident for tax purposes in Bermuda.
That licence is hugely expensive. Google Ireland and Google Asia Pacific pay billions of dollars a year for the privilege of using Google’s intellectual property. This ensures that those companies are left with little profit on which they can be asked to pay tax, despite having been responsible for all of Google’s sales outside of the US. Google’s Bermuda-resident company, which received the royalty payments, has zero employees and is vastly profitable; in 2018 it made a profit of $15bn.
The fiction behind this structure is the idea that the thousands of Google employees in Dublin, London, Paris and other locations, as well as their millions of customers, generate almost no profit for the company, while the filing cabinet with a Bermudan flag stuck on the front makes billions.
Now, Google has announced that the filing cabinet is being shipped back to the United States, where much of its intellectual property is actually produced by Google engineers and developers. On one level this is to be welcomed; by more closely aligning the company’s structure with real economic activity, the company’s tax strategy looks much less like avoidance.
However, unless the company significantly changes its internal market, all that will happen is that the large royalty payments currently being sent to Bermuda will be diverted to the US. In the UK and many other jurisdictions where the company operates, profits will continue to remain low, whereas the economic activity in the US will be deemed to be much more profitable.
In the past, this would have meant much greater tax revenues for the US government, at least. But in December 2017, President Trump slashed the corporate tax rate. This is likely to offset any increase in tax liability in the US Google may have faced.
Over the last ten years, Google says it has paid an effective tax rate of 23 per cent on its global profits. During most of this time the US Federal tax rate was 35 per cent. The US Federal corporate tax rate is now 21 per cent. So, even by bringing all of its profits under the jurisdiction of the US government, the amount of tax Google pays as a proportion of its global profits is unlikely to change much. It may even fall.
All that is happening on a practical level is that profits from Europe and the rest of the world are being moved to America, where they will help to compensate the US government for revenue losses generated by Trump’s tax cuts. At a time when governments around the world have been seeking to reform the international tax system, this development has the potential to cause problems.
When companies moved their profits into tax havens, reform was in the interests of all governments, including the United States.
Now, as companies move their profits back to the US, the debate becomes whether the allocation of corporate profit between the United States and other countries is fair. Whatever the views of the rest of the world on the answer to that question, the aggressive economic nationalism of the Trump administration means that it is not a question that the US government cares to engage with. And for a UK government desperate for a trade deal, it is unlikely to be answered in our favour.
George Turner is the director of Taxwatch UK.
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