Prompted by yet another economically illiterate tweet criticising Google for the relatively small amount of corporation tax paid in the UK, I decided to do a little research myself and find out a bit more about Google’s financial situation here.
Google is, of course, a multiheaded multinational, with a lot of different companies both in the UK and trading in the UK. But we’ll start with the most obvious, Google UK Limited.
You can get a full copy of Google UK’s financial statements as submitted to Companies house from that link, but you have to be registered and logged in to do it. So, for the benefit of those who can’t be bothered, there’s a copy of the most recent here. And here’s a summary of what you’ll find:
Google UK’s income for 2011 was approximately £396 million (£395,757,534 to be precise, but for the rest of this article I’ll stick to rounded numbers as they’re easier to take in at a glance. You can get the details from the linked documents) That’s all gross profit as Google UK doesn’t have any outstanding debts or liabilities.
However, Google UK’s expenditure for the year was £417 million. It doesn’t take a genius to work out that this actually makes Google UK unprofitable in a standalone sense. I’ll come back to that later, as the question of where Google is profitable is relevant. But, for now, here are some of the payments which account for that expenditure:
Payments to the parent company Google Inc: £62 million
Donations to charity: £76 million
Wages and salaries: £214 million
Social security costs: £22 million
Corporation Tax: £6 million
(I can’t be sure, but I suspect that the “social security costs” are things like SSP and Employer’s NIC contributions).
The rest is mostly things like marketing expenditure, pension contributions, rental and lease costs, etc. None of it is exceptional or unusual.
Google does have several other companies registered in the UK, but compared to Google Uk Limited they are all pretty small and, to all intents and purposes, fiscally irrelevant.
It’s pretty clear, therefore, that Google UK’s corporation tax liability is actually more than what would be expected. Any standalone company with these figures wouldn’t be paying corporation tax at all. So where is the money coming from?
The answer to that is Google Ireland Limited, which is the EU base for the majority of Google’s operations. In particular, if you are based in the EU and you use Google Adwords (which is Google’s primary income stream) to advertise your business, then you’re paying Google Ireland to do so.
Unfortunately, data from Irish companies isn’t as easy to get hold of as data from Companies House in the UK, but the Guardian has helpfully put a copy of Google Ireland’s financial statement from 2009 online at Scribd. It isn’t as up to date as the UK version, but it is, nonetheless, interesting. Here are some headline figures (in Euros now):
Turnover in 2009 was €7.9 billion (that’s US billions, ie, thousand millions, as this seems to now be standard in the financial world)
Of that, €2.4 billion was paid out as “cost of sales”, leaving just over €5.5 billion was gross profit.
(Most of that “cost of sales” is money paid out to website operators who display Google Adsense on their sites. Like this website for example. A teeny, tiny little bit of that pile of cash came to me for adverts on this blog. I suspect I spent most of it on beer.)
However, Google Ireland paid out just under €5.4 billion in administrative expenses, leaving a total operating profit of €45 million.
That may not seem a lot left, so where did all that money go?
This, unfortunately, is where the Irish accounts let us down a bit, because they’re nowhere as detailed as those from the UK. But there are a few interesting tidbits:
“Research costs”: €18 million
Wages and salaries: €100 million
Social welfare costs: €10 million
Asset purchases: €118 million
Depreciation: €87 million
Amounts owed to other Google group companies: €1.2 billion
That doesn’t add up to the total amount of expenses, but, again, I’d expect that most of the rest of it is normal corporate expenditure on things like rent, leases, consumables, etc. It’s that €1.2 billion which is interesting. Where is it going, and why?
The accounts don’t say, but media reports suggest that it’s going to Google Bermuda, which, contrary to what you might think, is the real financial HQ of the company. Bermuda’s tax rates are low, and Google has no significant expenses there, which means that practically all of the money which flows into Google Bermuda can flow out again to the shareholders without being taxed on the way. The shareholders will, of course, pay tax on those dividends in their local jurisdiction, but that’s unavoidable and, in any case, is of no interest to Google the company.
What’s also worth noting is Google Ireland’s final corporation tax situation. Initially, the assessed tax for 2009 was €17 million. But not all of that went to the Irish authorities. Further down the document, we see that Google Ireland owed €8 million in foreign withholding tax. Withholding tax is tax paid to the government of a territory in which a company operates, as opposed to the one in which it is based, and what that means is that Google Ireland owed €8 million to various non-Irish governments for that year. Some of that will have been the UK, as Google Ireland sells to UK-based customers. Checking a few other documents suggests that, in 2009, HMRC received £1.8 million.
So how much extra would we have got, had Google Ireland not sent €1.2 billion to Bermuda? Well, assuming it was all taxed at the same rate as the €45 million which was taxed, then Google Ireland would have paid something like €777 million in tax. In reality, it would have been lower, since that makes an effective tax rate of 37% and Ireland’s corporation tax rate is actually 12.5%. So something in the order of €263 million is more plausible. Of that, the UK would have received £59 million. Assume (which is always a dangerous assumption when it comes to finance, but what the heck) that broadly the same proportions applied last year, in 2011, when Google UK paid £6 million in tax, and that means HMRC would, instead have got around £197 million in tax instead.
(Apparently, Google’s own spokesman has said that the actual amount they have saved is around £150 million. That’s a bit less than my guesstimate, but it’s in the same ballpark. I’ll stick with my own figures, since I’ve already done the maths on them and it doesn’t affect the comparisons much, but it’s worth noting that I may be overestimating).
£197 million may sound a lot. And, of course, compared to £6 million, it is. But it’s less than Google UK paid in wages and salaries for the year. It’s also less than half what the government earns from fuel duty every single week of the year. It’s less than the government earns from alcohol duty every week. It’s about the same as a week’s worth of tobacco duty. It’s about eight hour’s worth of VAT.
In overall terms, therefore, the amount of corporation tax foregone by HMRC as a result of Google Ireland shuffling off revenue to Bermuda is trivial. And the same applies to pretty much every multinational. The reality is that Google is putting money into the British economy simply by being here – salaries paid to British workers, rents and leases paid for British properties, council tax, VAT, PAYE and even the money spent on pizza by its staff.
It would be open to the governments of both the UK and Ireland to legislate so as to force Google to retain more of its revenue here. But if that came at the cost of inducing Google to close its London and Dublin offices and, instead, sell to the UK and the rest of the EU directly from the US, then we would lose far more income in total than we are currently foregoing in corporation tax. Which, of course, is precisely why the British and Irish governments haven’t tried it, because they’re not stupid. And why those calling for such actions are.