Mounting tensions came to a head last Tuesday when Police raided Google’s French headquarters in search of evidence of “aggravated tax fraud.”
The raid is but one of many signs of frustration on the part of European leaders regarding Google and other American tech companies’ amassing of huge amounts of money while reducing their tax bills through complex profit-shielding legal maneuvers.
In response to allegations regarding a less-than-exemplary tax strategy, Google issued the most recent of a long list of statements maintaining that the tech mogul’s finances are completely compliant with all existing and relevant laws. Alphabet Inc., the Mountain View-based tech company that owns Google, also issued a statement informing observers of its cooperation with the French investigation.
As previously mentioned, Google isn’t the first American tech company to come under European fire for suspiciously low tax bills. Apple and Facebook have also been investigated due to a perceived imbalance between their products’ widespread popularity and surprisingly low taxes paid by the companies.
According to a study conducted by Moody’s Investors Service, by the end of 2015, the U.S. technology sector had earned $777 billion in cash. That number accounted for almost half of the $1.68 trillion total held by non-financial companies in the United States. Only five companies accounted for almost two thirds of that $777 billion: Apple, Alphabet, Microsoft Corp., Cisco Systems Inc., and Oracle Corp. And of that approximately $504 billion, 90 percent of the cash is kept in overseas accounts.
American lawmakers have taken issue with this because those accounts keep the United States from making back the money it needs to reduce its overall deficit. However, finding ways for tech companies to cough up more of their profits has proven difficult.
Tech companies can legally lower their tax bills much easier than, say, manufacturers. This is because tech companies deal with products that fall in the realm of “intellectual property” such as patents and algorithms. Patents and algorithms are much easier transported than the kinds of plants needed by manufacturers to create products.
“When a company is making shoes, it’s pretty easy to tell where those shoes are being made,” explains Steve Gill, a Professor of Accounting at San Diego State University. “That’s not the case with intellectual property. It doesn’t really matter where a contract or algorithm sits. Tax laws have failed to adapt to this kind of environment.”
The raid in France was focused on an Ireland subsidiary that enables Google to do business with customers all over Europe while minimizing taxes on the resulting profits; the subsidiary assists Google with a process called “profit-shifting.” The widespread loss of tax revenue caused by private companies’ profit-shifting has led many European regulators to press companies to pay taxes in the jurisdictions out of which they operate.
These increased pressures have seen some success; earlier this year, England strong-armed Google into paying around $140 million in back taxes, plus the tech mogul was forced to make revisions in how it calculated its UK tax bill.
In Italy, Apple was forced to sing a similar tune, paying the country $350 million to resolve a tax dispute.