The ticking tax-bomb: is Google good for your country?

Ask someone to describe Google and they’ll most likely end up talking about a search engine that saved the web. If they’re a little more interested in tech, they might talk about its funky campus, its Android mobile operating system, or its “don’t be evil” corporate ethos. Few would describe it as a highly-efficient, profit-driven business machine.

The company is coming increasingly under fire for the amount of tax it pays, particularly in smaller countries where it rakes in the revenues, but is typically a relatively tiny job creator or investor in infrastructure.

Google’s unofficial corporate motto was an inspiring new standard the search giant set for the world. Although Google chairman Eric Schmidt once allegedly called the slogan the “stupidest rule ever”, it was a refreshing ethos and mindset, signalling a new type of role multi-national corporates could play in the world.

Thirteen years on, Google may have saved the web, giving us the ability to find just the good stuff among tons of useless rubbish, but the internet giant is now being criticised for creating a web of another kind — a web of offshore bank accounts and transactions spanning across multiple countries including Bermuda, the Republic of Ireland and the Netherlands. It is tax avoidance that is legal, but is raising moral questions about whether Google is in fact paying its fair share to society, particularly in the smaller countries it operates in.

People are asking the question just how un-evil is Google really?

‘Devious’, ‘unethical’, ‘evil’ tax avoider

In late 2012, questions began to arise about how Google pays tax in the UK after it emerged that it had paid just £6-million on £2.5-billion worth of sales in the country. The scandal hasn’t disappeared quickly. Just last week, a UK parliamentarian grilled Google on this behaviour, calling it “devious”, “unethical” and “evil”. A former Google UK executive meanwhile alleged that the company misrepresented sales to avoid paying tax.

Google is not the only multi-national tech company to face scrutiny. Amazon last week was revealed to have paid just £3-million in tax on over £4-billion of sales in the UK. It managed to do so by routing sales via a subsidiary in Luxembourg. UK Prime Minister David Cameron has spoken out against this kind of tax avoidance, calling it “aggressive” and “corrosive to the public trust”.

Smaller countries bearing the brunt

In smaller emerging market countries, it may be worse. Not only are there questions about how much tax Google is paying on the millions in advertising revenues it earns, but the search behemoth is often just a tiny investor in these countries. That raises questions: Is Google paying its fair share on the revenue it earns in some countries? Is Google, which competes with local traditional and online media for corporate ad spend, making a significant contribution and investment in these countries compared to local competitors? In a nutshell, is Google actually a good citizen in your country?

Take a mid-sized emerging market country like South Africa, one of Google’s biggest African markets. Memeburn sources estimate that Google pulls in around R1-billion (or US$80-million) in advertising a year in that country. That’s about as much as South Africa’s digital ad industry makes as a whole.

Here Google is in fact competing for ad spend with online media and traditional media. And so what? It’s a competitive, free market out there. But there is a key question: are multi-national tech companies, such as Google, contributing their fair share like local companies to the countries they operate in in terms of tax, infrastructural development and job creation?

For example, Google South Africa operates out of a small Johannesburg office; with just fewer than 30 people permanently employed (the company won’t officially confirm how many staff it has in the country). At the risk of oversimplifying, R1-billion in revenues for an office of just 30 is a fantastic margin by any standards.

It’s unlikely that Governments across the world will gain massive sympathy for moaning about not getting enough tax money. Who likes to pay tax? But, whether we like to believe it or not, tax pays for roads, highways, police and infrastructure that allow businesses like Google to operate and make profits. For example, it’s this very road infrastructure, funded by tax payers, that Google’s Street view cars zip around on to capture images for its Google Maps service.

But to say Google doesn’t invest in a country like South Africa would be unfair. In 2011, the company created startup incubator Umbono — now absorbed into Kenyan accelerator 88mph’s startup programme. In early 2012, the company launched Woza, a service that provides free websites to small businesses. It is also helping provide broadband to rural schools. It also indirectly provides jobs for the agencies and companies that place ads on its various services. These are all admirable projects, but are probably a drop in the ocean when compared to the revenues the search giant is bringing in. The worst of cynics would probably charge that these initiatives were in fact designed to deflect criticism that Google does not invest in the countries it operates in.

As is the case in the UK, multinational tech companies like Google are attracting attention from local government. South African finance Minister Pravin Gordhan denounced the policy of companies shifting their profits to tax havens, accusing them of undermining the country’s economy and calling their actions “unacceptable!”.

Memeburn asked Google about its tax policy in South Africa and its official response was, “We comply fully with the tax rules in South Africa as in every country in which we operate”.

Scalable profits don’t create jobs or infrastructure

It’s not just about Google. Facebook — which has no physical presence in South Africa — faces similar criticism. Much like Google, local companies pay to advertise to local consumers via a foreign platform. Is Facebook contributing to the country’s fiscus?

That’s probably one reason why Venture Capitalists love tech startups so much: they produce the most scalable profits ever without having to directly match this in infrastructure investment. It’s a great business model, but are Google and companies like it giving back to a country that makes them revenue?

It’s not black and white. Amazon, which has been slammed for it tax contribution in the UK, makes no revenue in South Africa and is in fact a net job creator. The ecommerce giant has a sizable development arm in Cape Town, South Africa, which played an important part in the development of its cloud-computing products EC2. It subsequently built a customer service centre in Cape Town, which employs over 1 000 people. Amazon certainly isn’t blemish-free, but its investments in the country are just more tangible to the casual observer.

Google under fire in the UK

In the UK there are questions around how Google had managed to pay just £6-million on £2.5-billion worth of sales, revealing just how complex the company’s tax avoidance network is.

According to UK newspaper The Guardian, the internet giant defines its staff and operations in a number of countries as “service arms”, using its Irish subsidiary to collect advertising revenues. This subsidiary then funnels the funds through another subsidiary, which passes its payments to a holding company in the Netherlands with its tax base in Bermuda. This is a combination of two tax-avoidance strategies known as the “Double Irish” “Dutch Sandwich“.

Attempts to defend the legitimacy of this practice — by claiming that none of its UK staff actually closed sales deals for example — were apparently refuted late last week when a former Google UK executive came forward, saying that the internet giant had misrepresented made sales in that country.

Further investigations revealed that other big tech players including Amazon and Apple were avoiding tax in the UK through offshore accounts.

These revelations led to a UK parliamentary investigation where one MP labelled Google “devious, calculating and unethical”. “You are a company that says you do no evil,” said Margaret Hodge, chairman of the committee investigating Google. “I think that you do do evil. You use smoke and mirrors to avoid paying tax.”

A global crackdown

UK Prime Minister David Cameron meanwhile called for a global crackdown on companies avoiding tax. Speaking at the World Economic Forum in Davos, he said: “There are some forms of avoidance that have become so aggressive that I think it is right to say these raise ethical issues, and it is time to call for more responsibility and for governments to act accordingly,” adding that “when some businesses aren’t seen to pay their taxes, that is corrosive to the public trust”.

Countries including France, Germany, Australia and South Africa have responded to his call by vowing to crack down on companies that shift their profits to tax havens.

That kind of political attention hasn’t stopped Schmidt from defending his company’s tax practices. In fact he said that he was “proud” of the way Google had avoided paying taxes. “It’s called capitalism,” he said, “We are proudly capitalistic. I’m not confused about this.”

More recently, his position appears to have shifted. Writing in the Observer this past weekend, he said Google “has always aspired to do the right thing” and that “international tax law could almost certainly benefit from reform”.

Sure, shifting profits makes good business sense. Other major tech players wouldn’t do it if it didn’t, but does that make it right?

A question of ethics

Yes Google, and companies like it, can legally avoid paying taxes with the help of clever lawyers and accountants, but that does not automatically mean they’re paying their fair share. Determining the ethics of what counts as a fair share however is far from simple.

As an ideal, tax works on the principle of a virtuous circle. The more tax a country collects from companies and individuals, the more it can plough into infrastructure and projects that help build the country. Without contributions from tax payers, emerging market countries wouldn’t be able to build projects like South Africa’s Gautrain and Brazil wouldn’t be able to execute its plan to pull 2.5-million people out of poverty. Ultimately a company should eventually benefit from paying its fair share of taxes.

That might not seem like a valid argument for multi-national companies, but it still applies. As a country grows economically, Google can only benefit, especially as more and more people come online. It is an ideal view though and, given that Google appears to be operating within the bounds of the law, it has to balance the business and moral benefits it would gain from changing its tax policies.

From a moral standpoint, it might actually claim that by legally avoiding tax, it’s doing more good than if it didn’t. The more profits it has, the more money it can spend building products that its global user-base can enjoy and benefit from.

Schmidt actually used this argument when defending the company’s UK tax record in an interview with the BBC. “We empower literally billions of pounds of startups through our advertising network and so forth,” he said. “And we’re a key part of the electronic commerce expansion of Britain, which is driving a lot of economic growth for the country.”

You could also argue that Google has a duty to pay tax. From the state’s point of view, Google is only bound to the duties imposed on it. There are times however, when that duty comes into conflict with the duties it has to its shareholders.

Traditionally, looking after shareholders has been the overriding duty of multi-national companies. In this respect at least, companies like Google seem to be aware that it has other duties: according to Schmidt, “It will be harder and harder for corporations simply to be focused on shareholders”, the main beneficiaries of these tax-avoidance practices.

The focus in these massive companies, he says, will shift to their employees: “In Google, we’re there because we all talk about a shared vision of making the world a better place. Employees work in a company not for shareholder value but because they feel a need to be there. That model is how corporations everywhere are going to have to work.”

More likely though is that big corporates will continue stretching the laws to their limits and continue using countries with favourable tax laws to their advantage. If companies like Google don’t take advantage of those, they will suffer at the hands of competitors who do. And as long as countries like that exist, companies will always be more willing to do business with them.

At the moment it may be legal, but is it the right thing to do?