How much does it matter where Google ‘books’ its sales?

28Jan16

A lot of focus in the UK has been on the question of whether Google is doing something artificial and abusive by “booking” revenues from UK-based advertisers in Ireland, rather than in the UK (the so called ‘permanent establishment’ question). This seems to me to be a red herring.

Many people have become convinced that the fact that Google ‘books’ sales of adverts across Europe in one place rather than individually in every country where it has a marketing operation is a move to avoid taxes in the those countries.

Richard Murphy, for example argues that Google’s UK revenues are the result of “British ads sold by British sales people aimed at British customers on a UK website that get value by clicks on British computers.” Seema Malhotra, Labour’s Shadow Chief Secretary to the Treasury, in a letter to the NAO says that Google UK ‘provides advertising for UK businesses on a website that is explicitly UK-focused and that most of the revenue that Google UK earns is entirely dependent on people in the UK clicking on these adverts.’

But this mental model of Google as a network of national companies with Dutch people selling Dutch adverts to be viewed by Dutch customers on a Dutch Website etc… is just not how Google works.

For example say someone in Germany searching for deodorant gets served an advert for Lynx. Here there is UK based multinational whose advertising campaign is supported by Google marketing executives based in the UK, but there are no British Customers making British Clicks on British Computers. Or say a UK teenager watching a video made by a Swedish vlogger, gets served an advert for Nike trainers. Here you have a British Customer making British Clicks, but the advert may have been bought in the US.

At the heart of Google’s business model is Ad-words, a sophisticated system for payment-by-results in advertising. Google’s marketing and sales support people do not negotiate prices with clients in the traditional way that ad sales in Soho, Madison Avenue or at a local newspaper work (apart from in the case of occasional big banner ads like Youtube takeovers). Advertisers are not charged when their ads appear on screen, but only if the viewer clicks through to their website or choses to watch a video ad without skipping it. The amount paid, and whether the ad was displayed in the first place, depends on the result of an auction that took place instantaneous in the moment between the time the user clicked ‘search’ or chose a video to watch, and the time it appeared.

The auction involves advertisers from anywhere in the world who have put in bids based on a combination of keywords, location and even time of day. Say a person searches for “Pizza” this might set off an auction involving a local Italian restaurant willing to pay 25p a click across a limited postcode, a national chain willing to pay 30p, and an international fast food brand willing to pay 30 Euro per click in several European countries.

The principles by which the bidding algorithm works are made very clear (See Google’s Chief Economist explain it in probably more detail than you want). They have to be. If the results are not seen as totally impartial, Google would have a major commercial problem (for an example of how seriously they take this do a Google search for ‘Ad-words’; the first ad that comes up is for Microsoft’s Bing).

There is a clear business rationale for why Google would complete contracts in as few places as possible, before running its real-time centralized auctions and then completing the sales- rather than separately in each European country. Trying to run Google as if it was a network of local newspapers would basically make it impossible to run Google.

Trying to force it to report its activities for tax purposes as if it was really a network of local newspapers buying and selling ad space, seems like asking it to organize its tax affairs in a way that is artificial and a recipe for unnecessarily complexity.

Nor would it necessarily change the amount of tax that might be due. Either way we are essentially asking the same question ‘how much value is created by the sales and marketing activities that take place in the UK’.

It seems a hell of a lot simpler for HMRC to look at the profit that Google UK makes from charging Google Ireland an annual fee for marketing, and judge if this is a reasonable arms-length rate for its services, rather than the Anglo-centric version of the same question: i.e. asking how much profit Google UK would have left after paying all the other parts of Google a fair price for their their contribution to the business.

 



5 Responses to “How much does it matter where Google ‘books’ its sales?”

  1. The problem is, I think, that people look at the phrase “Google books its sales in Ireland” as meaning something like Google arbitrarily recording them in Ireland regardless of what has actually happened. This then makes it seem as though the tax treatment, which is based on where the sales are booked, is arbitrary; and this is consistent with the narrative that Google is being allowed to make stuff up as it goes along.

    What I think it really means is that Google has arranged its operations such that the sales *have* to be booked in Ireland – that is, the choice is over the underlying operations, not around the recording of the sales.

    As you say, the language just doesn’t help the public perception of the situation.

    Saying something like “Google makes sales in Ireland” would be clearer – although I imagine it might then confuse people who aren’t sure how a sale to a UK customer can be made outside the UK (a moment’s thought gives you the answer, of course, but it’s not necessarily self-evident).

    it is of course trivially easy to use language to affect perceptions like that. I had an amusing few minutes reading a site the other day that had US current affairs written in the style of a Fox News reporting on foreign affairs – things along the lines of “Obama, who took power in the US several years ago in what the country’s media claim was an open and democratic election, is the unchallenged head of the armed forces and is known to be on first-name terms with many leading military and industrial figures. Although many areas of the country are currently suffering from severe weather, reported food shortages, and what many commentators regard as extremely high levels of violence…”

    • 2 Maya

      Yes I agree. The language of ‘booking sales in Ireland’, ‘rooting profits through Ireland etc’ I think sets off our emotional response to someone pulling a fast one – in ‘Thinking, Fast and Slow’ style it sets off our System 1 snap responses and gets in the way of slower thinking.

  2. 3 Andrew

    What this comes back to, I think, is that it is hard to make definitive statements about Google’s tax position without a detailed understanding of how its business actually operates, and a functional analysis of who does what and where, and what value those operations add to the whole. Not that that will stop people pontificating on either side.

    As Andrew says, the loaded language does not help, and some of that is deliberate, I am sure, like the mythical 3% tax rate, or £200m of UK tax due each year – repeat them often enough and everyone thinks they must be true when they are at best guesstimates based on broad assumptions with little foundation.

    If there was a PE – if there were people in the UK concluding contracts – then it becomes easier to argue that more of the sales price was attributable to the activities in the UK, and some sort of profit split is required. If there was not, then the question can be reframed as asking what Google UK needs to be paid on an arm’s length basis for what it does, on a cost-plus basis. Is the UK merely a cost centre? Or does it take risks and add value for which it should be rewarded commensurately?

  3. 4 iain

    Maya,
    I’d echo these calls for much more willingness to step back and not rush to judgement on the basis of miscalled “facts”. For instance, it seems to be a fact that HMRC never tested PE, or want to exclude DPT, simply because of comments in Times articles.
    Equally, it now seems agreed that this £1bn profit must be true because it has been calculated by reasonable people using reasonable assumptions. In fact, nobody knows what the taxable profits were, apart from Google and HMRC. We do not know if there were any things like R&D tax credits, losses b/f, what GPRs were on different parts of the business, and so on.
    It is ironic that those on the TJN side of the world forgot all about apportioning group profits according to their own formula of sales, assets and employees in favour of just sales. I wonder what FA would have produced (e.g. UK staff of say 2,300 versus 53,600 overall, UK assets of X versus overall hundreds of billions..).
    But that FA approach uses, in my view, an arbitrary formula because it is hard to allocate costs, incomes and profits. I do not see how it gives a better or more accurate result. To me it makes as much sense as allocating the winners’ bonus to a football team on the basis of how many Km each player ran, how many tackles made, how many passes and how successful they were.

  4. 5 Andrew

    Iain, just to be clear, I take it your “FA” is “formulary apportionment”? (not “functional analysis” or some other FA)

    Hmm, so, say 10% of revenues in the UK, about 4% of employees and say a few % of assets. How are the three weighted? A third each? On the very broad assumptions that other commentators have been using (£4bn of UK revenues, and 25% profit margin, and 20% tax rate) that would still give approaching £100m of corporation tax in the UK each year. Is this the “right” answer? Or just another wild stab in the dark?


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