E.U. Tax Collectors Look Hungrily at Technology Giants' Cash Hoards

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PARIS -- Google reported sales of more than $4 billion in Britain last year. It paid less than $10 million in taxes.

Some tax collectors, lawmakers and competitors of Google in Europe see this as unfair. As governments throughout the region seek to close gaping holes in their budgets, they are taking aim at U.S. multinational companies, especially Internet giants like Google and Amazon.com, which pay little or no tax in Europe, despite generating billions of dollars' worth of revenue there.

"Why on earth do you manipulate your accounts so that you get away with not paying corporation tax in the U.K.?" a British member of Parliament, Margaret Hodge, asked representatives of Google, Amazon and Starbucks, the coffee shop chain, during a heated committee hearing last week.

In France, tax collectors have gone further. Amazon says it has received a bill for taxes and penalties related to the "allocation of income between foreign jurisdictions" from 2006 through 2010. Other companies, including Google, are also reportedly in the French authorities' sights.

"Even if the Internet is a zone of freedom, it shouldn't be a lawless zone," Najat Vallaud-Belkacem, a spokeswoman for the French government, said last week. "Fiscal rules should be able to be applied to those activities as well."

Google, Amazon, Starbucks and other American companies facing scrutiny over their taxes say they are doing nothing wrong. There are complex accounting strategies they use to exploit differences across Europe in corporate tax rates, which range from less than 10 percent in some countries to more than 30 percent, as well as other loopholes that can reduce their effective European tax levies to almost nothing.

Google, for example, records most of its international revenue at its European headquarters in Ireland, where the corporate tax rate is 12.5 percent. Across Europe, customers who buy advertising, Google's primary source of revenue, sign contracts with the company's subsidiary in Ireland, rather than with local branches.

Google ends up paying Irish taxes on only a fraction of the billions of euros that course through its Dublin office, because the company uses a variety of methods, including royalty payments to an offshore unit in Bermuda, to reduce further the amount of money that is actually exposed to tax liability.

So, while Google told the U.S. Securities and Exchange Commission that it had generated more than $4 billion in sales in Britain last year, it reported revenue of only £396 million, or $629 million, in its official filings in Britain. This total, the company says, reflected the amount that Google's British unit billed Google Ireland for promotional work, consulting and other activities. Google declared a profit of £31 million in Britain, resulting in a British tax bill of only £6 million.

"We pay the tax we are required to pay in every country in which we operate," Matt Brittin, Google vice president for North and Central Europe, told the parliamentary panel.

Ms. Hodge, chairwoman of the Public Accounts Committee, acknowledged that she thought Google, Amazon and Starbucks were probably complying with the law. "We are not accusing you of being illegal, we are accusing you of being immoral," she said.

In France, there is more than just morality at stake. In his testimony to the parliamentary panel, Andrew Cecil, director of public policy for Amazon in Europe, confirmed that the company had received a demand for $252 million from the French tax collection agency. He said Amazon was contesting the claim, which was originally disclosed in a U.S. regulatory filing.

Amazon, whose European headquarters is in Luxembourg, another small country with favorable tax conditions for multinational companies, reported €9.1 billion, or $11.6 billion, in revenue across Europe last year. It posted an after-tax profit of €20 million on those sales, and paid about €8 million in tax, Mr. Cecil said.

Mr. Cecil told the parliamentary committee that when customers across Europe bought books from Amazon, they were actually buying them from the Luxembourg-based Amazon entity, rather than their local subsidiaries. That response was met with incredulity by Ms. Hodge, who noted that when she ordered a book from the company, she used a British Web site, Amazon.co.uk, and the goods were delivered from a British warehouse via the British Royal Mail.

News reports in France note that the French fiscal authorities are also seeking back taxes and penalties from Google, to the tune of €1.7 billion. Ms. Vallaud-Belkacem told reporters that she could not comment on individual companies for privacy reasons. Google, in a statement, said the reports were premature.

"Google has not received any tax assessment from the French tax administration," Google said. "We have and will continue to cooperate with the authorities in France."

Europe is not the only place where U.S. multinationals' complex tax arrangements are being questioned. The authorities in Australia have sent Apple a bill for 28.5 million Australian dollars, or about $29.5 million, in back taxes, according to news reports Friday. Apple could not be reached for comment.

In an era of globalization, determining the tax liability of multinational companies has long vexed policy makers and tax collectors. International agreements generally state that commerce should be taxed in the physical location where profit-making activity occurs, not necessarily in the location where a customer is based or where a transaction takes place.

Determining the appropriate jurisdiction for taxation is especially difficult with Internet businesses, because of the intangible nature of many of the goods and services that change hands and the ease with which transactions can cross borders.

Google says most of the economic value it creates is generated in Silicon Valley, where its engineers toil away at the computer algorithms behind its search engine and other services. So the company says it is fair that most of what it pays in taxes goes to the U.S. Treasury, not its foreign counterparts.

While Google's U.S. taxes have come under scrutiny, too, the company pays substantially more in the United States. In 2011, the company's annual report shows, it made a provision of $2.6 billion for income taxes, all but $248 million of that going to the U.S. state and national treasuries. Based on pretax income of $12.3 billion, that amounted to an effective rate of 21 percent.

"If Google was a British business, if Google had been founded in Cambridge by Larry and Sergei, I think we'd be in a very different place here, because the profitability would rightly sit where all the technology and innovation take place, which is not here," Mr. Brittin said. He was referring to Larry Page and Sergei Brin, the co-founders of Google.

Though Google employees across Europe advise the company's clients on the use of the company's services, advertisers sign contracts with the company's subsidiary in Ireland. This has shielded Google from tax liability in France, Britain and other European countries, at least so far.

"Google is saying, 'We just float around freely above this useful aircraft carrier, Ireland,"' said Richard Murphy, founder of the Tax Justice Network, an organization that campaigns against what it calls tax "loopholes and distortions." "What France is saying is, 'We don't think you float around over Ireland, we think you are in France."'

If Google believes that its profit-making activity -- that is, its taxable work -- is taking place in the United States, Mr. Murphy said, then it ought to take its European earnings home and expose them to the Internal Revenue Service, the U.S. government tax agency. Yet like many other U.S. multinationals, it has been reluctant to do so.

Instead, Google said it had accumulated $24.8 billion dollars as of the end of 2011 outside the United States -- part of a cache of marooned U.S. corporate cash that Citizens for Tax Justice, a U.S. campaign group, estimates at more than $1.5 trillion. The money has been building up in Bermuda and other offshore havens since a 2004 U.S. tax holiday for the repatriation of corporate profits.

While some U.S. corporate leaders have been lobbying in Washington for a repeat of the 2004 relief measure, lawmakers in Europe are moving to collect a greater share of multinationals' taxes. Last spring, the European Parliament threw its support behind a proposal to create a single set of E.U.-wide accounting rules for calculating multinational corporations' tax liabilities. But policy makers are divided over whether the standards should be voluntary or mandatory.

Ms. Vallaud-Belkacem said last week that the administration of President François Hollande of France was discussing with other European governments ways in which to crack down on tax avoidance by international companies.

After a meeting this month, George Osborne, the British chancellor of the Exchequer, and Finance Minister Wolfgang Schäuble of Germany called for "concerted international cooperation to strengthen international standards for corporate tax regimes."

"We want competitive taxes that say Britain is open for business and that attract global companies to invest in and bring jobs to our country, but we also want global companies to pay those taxes," Mr. Osborne said in a statement.

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This article originally appeared in The New York Times.


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