What you need to know about the Google UK tax settlement

SUMMARY:

Google’s UK tax settlement has implications for software buyers for both on premise and as a service consumers.

taxLate Friday, an FT story emerged that Google has finally settled its long running UK tax investigation. The deal means that Google will pay £130 million in back taxes and interest for all periods in dispute up to June 2015.  You don’t have to be a financial wizard to figure that looks like a very good deal for a company that recorded sales of $3.35 billion in the UK and enjoys a global operating margin of 25%. The FT notes:

Google is paying £46.2m in taxes on UK profits of £106m for the 18 months to June 2015, together with back taxes and interest going back to 2005. The new formula increased its 2014-15 taxes by £13.8m, according to its UK accounts to be published shortly, and it will now pay a higher rate of tax.

HMRC, the UK’s tax body hailed the result a victory but critics were far from impressed. Richard Murphy, who has long campaigned on the topic of international tax avoidance said on his blog that:

Now it is said that Google is going to pay more tax. The settlement for the past decade is £130 million, which however I look at it is a very small part indeed of what I thought should be owing. That is annoying, but much more worrying is the implication that this deal may be the basis for Google’s future UK tax bills.

Murphy takes the view, among other things, that the deal struck between HMRC and Google continues to legitimize long running practices that allow large international companies to avoid paying taxes where sales and margin are truly earned. In Google’s case, the effective UK tax rate remains incredibly low,based upon what we know about the overall margin Google reports on a global basis. Like Murphy, I see the deal as ‘bizarre.’ But that’s not the point and I long gave up my own evisceration of this topic in favor of Murphy’s more trenchant style and deep digging. However, the deal will make it much harder for the French tax authorities to press their €1 billion claim or, for the US, to enact legislation that forces a degree of profit repatriation.

My concern is more around deal negotiation and what this might mean for future technology buyers.

Just like Google, it is common practice among software vendors to reroute high margins to low tax rate countries. Now that Google has achieved a settlement, you might expect HMRC will go after the many companies that have set up shop in Ireland, Benelux, Bermuda and other exotic locales as a way to have their Double Dutch and Irish Sandwiches. The reality, I suspect, is that while there may be cases that are settled at higher rates than Google’s advisors negotiated, those same companies will negotiate similar sweetheart deals based upon what will now be seen as an established precedent.

The bottom line is simple. If you are doing a deal in the UK (for example) with any sizable software vendor, don’t be surprised when the final sales contract has you signing a contract in another state, most likely Ireland. If you do, then you know why.

There is an interesting side note to this as it relates to vendors that provide software as a service and which provide remote implementation services. It is perfectly reasonable for those companies to argue that their service is being provided at the location where their servers are located and where their consultants carry out the work. Given what we know about data sovereignty and the ongoing arguments about Safe Harbor, the Google settlement makes a much stronger case for locating data centers in places like Ireland and ensuring that consultants are located in the most favorable tax regimes. Beach work in Bermuda anyone? 😉