You have heard about currency risk, market risk and plain old business risk, but for bosses of multinational companies, there is a new terror looming on the horizon: fiscal risk. We are not talking about see-sawing tax rates but the risk that the chairman will be subjected to a public water boarding until his company agrees to cough up some random millions of dollars in back taxes, money that his advisers insist is not owed.
If you think that sounds unlikely, consider Google, which has, after a six-year tax audit, agreed to hand over £130-million ($187-million U.S.) to the U.K. Exchequer. Google also faces a similar amount in Italy and is currently being pursued for three times as much in France.
Tax collectors everywhere want to shake down the company that owns the world's most successful Internet search engine and that means more than tense meetings with a few people in grey suits. In Britain, public loathing of Google and its founders is now widespread. Uproar over the token sum extracted by George Osborne, the U.K.'s Chancellor of the Exchequer, for a decade of back taxes since 2005 has gone beyond a row in Parliament. A cartoon in The Guardian newspaper depicts Eric Schmidt, Google's executive chairman, as a grotesque inflated head covered in acne pustules with a tiny Mr. Osborne in a gimp suit, milking pus from Mr Schmidt's pimple.
It is going to get worse for Google and the other so-called "tech" companies, including Facebook, Apple and Amazon. Even dyed-in-the-wool Tories, such as Boris Johnson, London's mayor, said the Google tax "deal" was not enough and urged the British government to go further and pry more cash out of the Internet giants. In his column in the Daily Telegraph, he wrote: "It has never seemed fair that some of these companies – no matter how wonderful the service they provide – should be paying so much less in tax than the high-street tea rooms and bookshops they have pulverized."
He might have been thinking of Facebook, which, according to its accounts, paid £4,237 in corporation tax in the U.K. in 2014. For Tories like Mr. Johnson, there is an urgent need to get tough with multinational tax avoiders.
Without a tighter squeeze from Mr. Osborne, Google faces the prospect of a judicial mugging by Brussels. In response to the cries of "sell-out" in Westminster and in the U.K. press, Margrethe Vestager, the European Union's Competition Commissioner, said she would consider investigating the U.K. government's tax deal with Google; she is already investigating Apple's tax deal in Ireland that could hand the U.S. company a multibillion-dollar bill in back taxes. Meanwhile, the Organization for Economic Co-operation and Development in Paris announced this week a tax co-operation agreement; 31 nations have agreed to share information collected from business taxpayers to help prevent multinational tax avoidance.
There is little doubt that Google, through its hugely complex and apparently legal corporate structure, is avoiding colossal amounts of tax in Europe. Consider that in 2014, Google's accounts showed a provision of $3.3-billion (U.S.) for income taxes, of which just $774-million was owed outside of the U.S. However, 58 per cent of Google's revenue in that year was earned overseas and its biggest market outside of America is the U.K., where it had revenue of $6.4-billion, almost a 10th of Google's worldwide income. It is therefore no surprise that there is outrage that the U.K. government has collected a paltry £130-million from Google for a decade's business activity, a tax rate that some reckon is about 3 per cent.
Google is able to get away with this because, although it does most of its European advertising sales in the U.K., the business is booked in Ireland, which has a corporate tax rate of just 12 per cent. Google then reduces its tax further by charging its Irish subsidiary a huge royalty that is paid to Google in the Netherlands, another low-tax location that then in turn pays a Google subsidiary in Bermuda. This popular tax avoidance scheme, known as the "double Irish," is under attack from competition authorities in Brussels that assert it allows some companies to gain preferential tax treatment to the detriment of others.
Google insists that it pays tax based on "the value added by the economic activity of our staff," not on location of consumption. It is a fair point, until you begin to ask how economic value is calculated. Google employs thousands in Britain and is building a headquarters in Central London at a cost of £1-billion, a project that has recently been enlarged with the purchase of another expensive plot of land. Indeed, Google's expansion plans for London may have formed part of the negotiations with the U.K. government; some comfort that a small part of Google's offshore cash pile of $40-billion might end up spent in the U.K.
It is only a matter of time before the game of multinational tax avoidance through transfer pricing, royalty payments and interest schemes is banned. Sweetheart deals, such as that struck by Mr. Osborne, will be exposed to scrutiny. It will happen, not because of a new law but because public tolerance of tax avoidance is approaching nil.
Google must know that it cannot afford to be the object of public hatred because the patience of its shareholders may also run out. This company has yet to pay a dividend and criticism of the no-payout policy is beginning to be voiced. If shareholders begin to wonder whether governments will get their hands on Google's cash before investors, there is only one direction left for the Google share price.
Carl Mortished is a Canadian financial journalist based in London.
Carl Mortished