Tax officials perplexed by Google (Photo: CoolCaesar)
If 2013 was the year public opinion turned solidly against the tax avoidance strategies of large technology companies, 2014 promises to be the year lawmakers actually address the schemes.
In late December, Italy became the first European government to pass legislation aimed at curbing the funneling of corporate earnings to tax havens. The so-called Google Tax will require Italian companies to purchase Internet ads from locally registered companies instead of from enterprises based in shelters such as Ireland, Luxembourg and Bermuda.
Google, like many virtual businesses, sells nearly all its European advertising from an Irish unit, leaving little taxable earnings in the countries where its customers are actually based. The unit, in turn, pays royalties to a second Irish subsidiary domiciled in Bermuda. Google last year moved nearly $12 billion—the bulk of its worldwide income—to the outfit on the small island nation. The move shaved more than $2 billion off the company’s global tax bill. For the search-engine giant and its shareholders, that’s found money.
Google’s so-called “Double-Irish” scheme, which is completely legal, takes full advantage of the absence of a single European law governing virtual transactions. Indeed, current tax rules on the Continent were not designed with e-commerce or multinationals in mind.
Italy’s legislation is aimed at ending the tax dodge—that is, if it ever goes into force. Experts say the country’s planned Internet tax is not only behind the curve but almost surely violates existing EU laws. And a few days after the Google Tax was passed, officials postponed the rollout for six months.
Still, Italy and France, which is preparing to extend its "culture tax" to Facebook, YouTube and other Internet giants, are throwing down the gauntlet. The EU is at it as well. Its attempt to close a tax loophole by boosting information sharing between member states, however, was thwarted in December by Austria and Luxembourg. Officials in the two countries refused to sign any deal until agreements about banking secrecy between the EU and tax havens Switzerland and Liechtenstein are worked out. Italian Minister for Economy and Finance Fabrizio Saccomanni reportedly described the stalemate as an "embarrassment" for the EU.
Likewise, the OECD’s Action Plan to tackle “stateless” income looks doomed to failure. The proposal, which identifies 15 areas that need to be addressed to end, among other things, tax avoidance, is not legally binding.
Obviously, that will vastly undercut its effectiveness.
Indeed, until tax jurisdictions around the world are bound by an agreement whereby companies are taxed on what they do and where they do it, everything else is just talk.