What is a Google Tax?

A Google tax, also called a diverted profits tax, refers to anti-avoidance tax rules that have been enacted in several jurisdictions to combat the practice of Earnings or royalties being transferred to jurisdictions with lower or no tax rates.

For example, despite earning $6.5 billion in revenue in the United Kingdom, internet giant Alphabet Inc.'s (GOOGL) Google paid a minuscule amount in tax by completing its transactions in the low-tax Capital city of Dublin, Ireland.

A Brief on Google Tax

Even though the word includes the name of the corporation (Google) that has become the poster child for the practice, profit diverting has been reported in various industries. Technology behemoths from the United States, such as Facebook Inc. (FB), Apple Inc. (AAPL), and Amazon Inc. (AMZN), as well as multinational businesses (MNCs) such as Starbucks Inc. (SBUX) and Diageo PLC (DEO), have been employing such strategies to reduce their tax bills. For example, a mobile app like Facebook's WhatsApp chat or a game like Clash of Clans may not have a single employee in a given region.

However, it can still make a lot of money from its local user base, generating revenue through online adverts and in-app sales. The corporations were free to account for such sales and earnings in any jurisdiction they wanted, and they frequently chose low-cost locations.

The Securities and Exchange Commission (SEC) of the United States requires American businesses to publicly report where and how much revenue they generate around the world, allowing authorities in other countries, such as the United Kingdom and Australia, to gain more concrete information on any possible tax avoidance strategies employed by American businesses.

Tax regulations in the United Kingdom and Australia have been changed to discourage firms from engaging in similar methods. In 2015, the United Kingdom imposed a 25% diverted profits tax due to mounting public outrage. Between 2012 and 2018, Her Majesty's Revenue and Customs (HMRC), the United Kingdom's tax-collecting agency, secured about $8.33 billion in additional Taxes by challenging corporations' transfer pricing strategies.

According to its records, it received about $1.09 billion in 2015-16, roughly $2.08 billion in 2016-17, and approximately $2.15 billion in 2017-18. In 2015, Australia began developing procedures that led to implementing a diverted profits tax in July 2017 that imposes a 40% tax on such tax avoidance techniques.

To avoid being embarrassed by a Google tax, global corporations are already voluntarily paying past dues and entering into agreements with tax authorities in response to the developments. Diageo, the iconic beverages conglomerate behind Tanqueray gin, has reached an arrangement with the HMRC to pay an extra about $244 million in corporate tax to prevent any brand damage from the Google tax. Google has also agreed to pay the United Kingdom $185 million in overdue taxes.