Australia has become the latest nation to decide it wants tech companies to pay more tax, after David Bradbury, Assistant Treasurer and Minister Assisting for Deregulation, declared Google uses a “Double Irish Dutch Sandwich” to pay as little tax as possible on its Australian operations.
Google paid just $AUD781,471 of taxes in Australia, on estimated revenue of $AUD1bn.
Bradbury’s declaration came in a speech romantically titled Towards a Fair, Competitive and Sustainable Corporate Tax Base in which he explained how Google minimises tax.
The Minister’s explanation of Google’s tax affairs is as follows:
“While the day-to-day dealings of Australian firms advertising on Google might be with Google Australia, under the fine print of contracts Australian firms sign with Google, they are actually buying their advertising from an Irish subsidiary of Google.
It is then argued that the source of this income - and therefore the taxing rights under our tax treaty - would be with Ireland rather than Australia. Despite Ireland's relatively low company tax rate of 12.5 per cent, we have just started to build the sandwich.
The next step is to route a royalty payment from the Irish operating subsidiary of Google to a Dutch subsidiary of Google, which is then paid back to a second Irish holding company subsidiary of Google that is controlled in Bermuda, which has no corporate tax.
The first Irish subsidiary receives a tax deduction for the royalty payment to the Dutch subsidiary, substantially reducing the income subject to the 12.5 per cent Irish company tax rate.
Under Dutch law, and because EU member countries do not charge withholding taxes on transfers within the EU, the transfers to and from the Netherlands are essentially tax free.
And under Irish tax law, the second Irish resident subsidiary is not taxed on the royalty payment because it is controlled by managers elsewhere.
The profits from the sale of advertising to an Australian firm then sit in a tax-free jurisdiction - possibly indefinitely.”
Bradbury said his explanation of Google’s affairs was not intended to single the company out as a particularly poor corporate citizen. Indeed, he added that the techniques described above are thought to have been pioneered by Apple. The Minister therefore went out of his way to label Google “ an important innovator” that has played “a significant role in our economy, and … engaged with the Government constructively on many issues”.
Google has issued a statement to the effect that it observes all Australian taxation laws. Other multinational vendors with operations in Australia have – among them Microsoft and eBay – have said more or less the same thing over the years when their tax arrangements have been questioned.
Bradbury used his speech to flag changes to those laws. During his speech he defended his exploration of Google’s affairs by saying it was intended “… to highlight how the digital disruption brought about by the internet and changes in technology have transformed the way economic activity is occurring- and these changes are putting pressure not only on businesses but also on the corporate tax system in Australia and around the world.”
Australia’s response is new tax rules aimed at “countering multi-nationals who seek to defeat Australia's taxing rights by artificially altering the source or character of profits they generate from economic activity in Australia.”
Bradbury also reported that, around the world, “There is an increasing recognition that rules designed to prevent double taxation have in some cases resulted in double non-taxation instead - where income is not taxed in any jurisdiction.”
Calling that situation “unsustainable”, Bradbury said the issue has been recognised internationally and “it is clear momentum to address these issues is building and that the focus of multilateral attention is now squarely on addressing situations of ‘double non-taxation’.”
All of which may just mean there’s not many bites left to be had from the sandwich. ®