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Google shows its true colours – and they’re not the colour of money

would-you-pay-a-google-tax

By Simon Davies

Last Saturday, Google’s Executive Chairman, Eric Schmidt, had an interesting comment piece published in Britain’s Guardian newspaper that caused some readers to choke on their breakfast cereal.

Based on global revenue as a proportion of overall profit this means Google probably made a “real” profit from the UK of  £2.4bn ($3.6bn) over the period – and paid less than one half of one percent tax on those profits.

The article was placed as a response to recent revelations that Google has for years evaded the payment of UK taxes. With irony mischievously dripping from every word, the headline reads: “At Google we aspire to do the right thing. So we welcome a debate on international tax reform”.

The author fantastically argues that the entire global corporate taxation regime – together with all its associated elected governments – is wrong-footed, and that Google’s actions were entirely proper. This in itself is an an entertaining assertion, but the most interesting aspect is that Schmidt issued the challenge one day after the Chair of the UK Parliament’s most influential body – the Public Accounts Committee – accused the advertising giant of conducting “devious, calculated” and “unethical” tax avoidance.

Between 2006 and 2011 Google paid a token amount of UK corporation tax – just over £10m ($15m) on sales of nearly £12bn ($18bn). Based on global revenue as a proportion of overall profit this means Google probably made a “real” profit from the UK of  £2.4bn ($3.6bn) over the period – and paid less than one half of one percent tax on those profits. UK local businesses are required to pay around twenty percent tax. Google achieved this avoidance by intentionally diverting local sales through overseas offices.

The Parliament’s outrage was inflamed the following day by a series of articles in the Sunday Times featuring a former Google employee who disclosed devastating evidence that the company had meticulously planned the avoidance over many years. “Any way you Google it – it’s wrong”, the paper’s editorial bluntly declared.

Over recent years Google has made an art form out of political warmongering by sending its executives to throw petrol on the flames of such controversies but this time they may have taken this adolescent tactic a step too far. It’s one thing to irritate a parliament, but quite another to further infuriate an already angry population. That well-established barometer of British public opinion – the Pub Conversation Index – has swung viciously against Google. The company is on the nose. Time will tell how many countries are on the crest of a similar wave of anger.

Over recent years Google has made an art form out of political warmongering by sending its executives to chuck petrol on the flames of such controversies but this time they may have taken this adolescent tactic a step too far.

One of Google’s more bizarre justifications for tax evasion is that it already creates value to the UK and so the requirement to pay tax is somehow morally groundless. Google has stated that it therefore has no intention of paying any more tax to the UK. The point that has inspired such anger in Britain is that local businesses and individuals would never be allowed to make such a claim.

However none of this should imply that Google is pivotal to the global economy and should therefore be treated as a special case. Far from it. Some misguided press reports assert that the company is now too wealthy and powerful to ignore the law, but this perception is far from the truth.  Google makes it to  only 277 on the Fortune 500 company ranking. It is dwarfed by the established oil companies, banks, retailers and communications companies – most of whom manage to stick at least vaguely within the law. The world is big, its corporations are vast – and in the view of many people Google needs to learn some respect and humility.

Google’s contempt for national law is not restricted to tax evasion. The company has already signalled clearly to the EU that it has no intention of respecting local privacy laws. The company has repeatedly defied lawful instructions to reform its data handling practices, indicating it believes EU laws are archaic.

Combined, these circumstances are a profound insult to UK people. Google’s revenue comes from advertising – and that advertising is enabled predominately by the behavioural and personal information provided by its users. That mine of personal data is what gives Google its edge in the advertising market – and hence its profit.

Combined, these circumstances are a profound insult to UK people. Google’s revenue comes from advertising – and that advertising is enabled predominately by the behavioural and personal information provided by its users.

This isn’t a case of revenue being derived from Business to Business transactions, nor is it a classic retail arrangement where a company makes profit by selling a product. This is a case of taking data from people and then monetising that information as the company’s core business. This puts Google almost completely in a class of its own.

How much is Britain’s data worth to Google? Well, Google’s product is its users, and each has a defined monetary unit value. It’s difficult to calculate exactly how many people use Google, but it’s probably safe to round it to a billion. That means the company derives $50 revenue per year, per user, and makes $10 profit from every user.

In the case of the UK, with perhaps 35 million Google users, this would equate to a profit of around $350m (£230m) throughout the previous year. This figure is globally averaged, and doesn’t take into account the proportionately higher profit the company makes from UK users.

This remarkable situation presents the UK – and Europe – with both a challenge and an opportunity. EU governments can continue to complain about Google’s violations, they can stop letting the company get away with its transgressions – or they can simply impose a proportionate fee on all overseas advertising companies that derive profit from data generated by their local users. This new fee would not interfere with the delicate taxation arrangements which the majority of industry respects.

The imagined tax would in effect be a licence fee for the use of people’s information, levied on the public’s behalf in the same manner that taxes are currently raised against corporate profits. There are many precedents for such an arrangement, from mandatory television licence fees that people pay to view broadcasted material, to copyright fees paid by radio stations. That would still a drop in the bucket for Google, but perhaps it could be used as a legal fighting fund to keep the company in check as it grows larger and more reckless.

This may not be the solution, but some measures are needed as a matter of urgency. The transaction cost alone of dealing with Google is becoming onerous. On top of mounting data protection and privacy concerns are questions over violations of competition law. There is an emerging view that the entire Google operation is little better than a global identity hijacking operation fueled by exploitative and one-sided user agreements.

If Google thinks that’s an unfair assessment its executives need to get out more and check the pub conversation barometer.