Avoiding Avoidance: How to Put an End to Google’s Circumvention of Corporation Tax
Christian Fuchs
In the UK Public Accounts Committee’s recent session on tax avoidance, Chair Margaret Hodge spoke of Google’s “devious” behaviour and that the search engine in contrast to its philosophy does evil because it uses “smoke and mirrors to avoid paying tax”.
Google’s executive chairman Eric Schmidt argues that companies’ reinvestments tend “to lead to job creation, further economic growth and, ultimately, more tax” and that “people we [Google] employ in Britain are certainly paying British taxes”. Schmidt makes typical neoliberal arguments: companies create growth and employment and should therefore not be taxed. Google should not pay taxes because its employees do. Google in 2011 made a UK turnover of £395 million, but only paid £6 million in UK corporation tax.
Image: Google’s executive chairman Eric Schmidt who is proud that “Google is a capitalist country”
Schmidt’s Freudian slip “Google is a capitalist country… er, company” tells much about how he seems to think about his company: He is proud to be a capitalist in times where people are getting evicted because of social security cuts that are implemented as part of austerity measures for reducing the budget. Whereas employees are paying more and more taxes and are getting less and less out of it from what was formerly known in some countries as the welfare state, there has been a long tendency that large corporations pay no or almost no corporation tax. The consequence is a rise of inequality: companies become economically as powerful as many countries, whereas more and more everyday people struggle to survive. Google’s worldwide revenues were more than US$46 billion in 2012. These revenues are larger than the 2011 Gross National Product of more than 100 countries, including Tunisia (US$42 billion), Lithuania (US$39 billion), Albania (US$12 billion), Armenia (US$10 billion), Mali (US$9 billion), Nicaragua (US$8 billion) or Rwanda (US$6 billion). Schmidt’s pride in being a capitalist means nothing else than being proud of capitalism’s global inequality. The global mobility of capital has allowed large multinational companies to put pressure on nation states to lower corporate taxation as well as welfare and employment standards. It has also supported the transformation of nation states into competition states that compete for capital investments by advancing neoliberal policies that deregulate employment regulations and dismantle the welfare state.
Google’s Vice-President for Sales and Operations in Northern and Central Europe Matt Brittin argued in contrast to Margaret Hodge in the Public Account Committee’s inquiry that the search engine’s British employees do not execute transactions or trade. The sale would rather be concluded via an online auction algorithm. He also argued that the rights for Google’s platform are owned by Google Ireland and that the UK employees therefore “can’t sell what they don’t own” and that the “trade is executed with Ireland where the intellectual property is owned”. In the November session of the Committee, Brittin said that Google’s 17 000 engineers in the USA “create the economic value for Google”, that one needs to “pay tax where the economic value is created” and in contrast to last week’s session that Google Bermuda “holds the rights to our intellectual property” and that it therefore is liable for paying taxes there.
Google draws from these arguments the conclusion that it is not legally obliged to pay corporation tax in the UK. The Income and Corporation Taxes Act 1988 specifies that a company not resident in the UK must pay corporation tax if it “carries on a trade in the United Kingdom through a branch or agency”, which means obtaining “income arising directly or indirectly through or from the branch or agency, and any income from property or rights used by, or held by or for, the branch or agency” (§11). Location is a central issue in this definition that brings up the legal question what it means to operate an online business in the UK.
For setting up a targeted ad on Google, a customer first selects if the ad shall be run on Google and/or partner sites and in which countries the ad shall be presented. S/he also specifies the maximum bid in the advertising space auction and the maximum amount to be spent per day. In the next step one designs the ad and identifies associated search keywords.
If a user conducts a search, the Google AdWords’ algorithm determines which ads are associated with the entered keyword(s) and conducts an automated algorithmic auction between these ads in order to determine their screen positions. The auction price is set as the amount the customer has to pay when a user clicks on its ad. This means that in the pay-per-click mode, a payment is executed if a user who has searched for a specific keyword clicks on an ad that is targeted to him/her and associated with her/his entered keyword. Let’s assume there is an ad client who resides in the UK. And the ads are targeted at users in both the UK and Ireland.
A company not resident in the UK is liable to pay corporation tax in the UK if “it carries on a trade in the United Kingdom through a branch or agency”. The decisive legal question is therefore what it means to carry on a trade in the UK. A trade is an exchange of two goods or services in a specific quantitative relationship. In monetary economies commodity sales are mediated with the help of money, i.e. commodities are exchanged with money in specific quantitative relationships.
Google’s argument that the platform and algorithm is owned in Bermuda and that the sale of its UK advertisements therefore takes place there is mistaken because the search engine and the auction algorithm are not sold, i.e. they are no commodities. A specificity of a commodity is that you can only get access to it if you pay for it. The search engine can be used by anybody without payment. It is no commodity. Whenever I type keywords into Google, I not only see results, but also advertisements. I never click on these advertisements, so Google does not earn any money from me and Google’s clients who present these ads to me do not pay any money to Google for the presentation of these ads. The presentation of advertisements itself is not a commodity.
If I click on an advertisement, I am transferred to one of Google’s ad clients’ specific websites and give my attention to it. The ad client hopes that I buy a product there or conduct specific activities. This means that the actual commodity trade takes place the moment I click on the targeted ad. Neither the search engine nor the auction algorithm is sold or rented, but Google rather sells my attention to the client’s website as well as data about my location and interests. My search activity generates the data and my click activity and online behaviour the attention that I give to the client’s website. This means that without user activities there is no commodity that Google can sell. Users create large parts of Google’s value and profits by their searching, clicking and online behaviour. The sale of the users’ attention as commodity is executed by the users’ clicks.
Given that a user is located in the UK, which is determined and defined in the online realm by the IP address of the computer one uses, the trade between Google and its advertising client on whose ad the user clicks is executed in the United Kingdom. Google in this case carries on a trade in Britain because it trades the transaction data (my location, keywords, etc) and user attention that are generated by a user who is located in the UK. Users are located in specific countries at specific points of time. It is therefore feasible to use the location of the user who clicks on an advertisement as factor determining in which country Google achieves its profits. Google users are unpaid Google workers who create large parts of Google’s value and profits. More and more online businesses create value by relying on users’ distributed value-creating activities.
The Internet is a globally distributed technological space of information, communication and collaboration that naturally extends beyond national boundaries. Online interactions and business operations therefore tend to stretch across time zones and countries. Internet service providers, companies storing applications, users who are active by using such applications and businesses investing online are often located in different countries. Taxation operates mainly on a national basis, which creates an ambiguity between the global network and nation states that is expressed in the question, where Google and other companies should pay taxes. Internet users are not consumers or audiences, they are active creators, productive consumers (prosumers) and consumption workers, who create content, social relations, transaction data and attention. The specific nature of the Internet requires us to take users’ important role into account when determining in which country a trade takes place and where an online company such as Google should be taxed.
The conclusion from the point I have tried to make is that it is feasible to assume that Google should pay taxes in the UK for all profits it generates with the help of clicks conducted on computers that are physically located in the United Kingdom. Determining where Google would have to pay taxes on specific shares of its annual profits could either be accomplished by an exact breakdown of ad clicks per country or by dividing the overall profits by the average annual share of Google’s users in specific locations. Taking this criterion serious could help putting an end to online corporations’ tax avoidance strategies.
Christian Fuchs is Professor of Social Media at the University of Westminster’s Centre for Social Media Research. Twitter: @fuchschristian
Image sources:
Eric Schmidt. By Charles Haynes (Charles Haynes’ flickr account) [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons.
Googleplex Welcome Sign. By Coolcaesar (Googleplexwelcomesign.jpg) [GFDL (www.gnu.org/copyleft/fdl.html) or CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0/)], via Wikimedia Commons.
