French appeals court upholds Google PE decision

The multibillion-dollar search engine won another round in its fight with the French tax authorities. The court may have saved the company from flipping a bill for €1.1 billion ($1.2 billion) in back taxes.

The French administrative court of appeals upheld the July 2017 decision on Google’s tax affairs. The tax authority claimed the company had illegally dodged tax in France by routing its sales through its subsidiary in Ireland.

In an official statement, Google suggested the civil court decision confirms that its arrangements are in line with French law and the international tax system. “However, we understand it is necessary to upgrade the international taxation system,” the US company added.

Google has been selling online advertisements for years in France, but these sales are booked through Google Ireland and not the French subsidiary. The dispute is over whether or not Google Ireland has a permanent establishment (PE) in France given the company’s reach in the country.

If this were the case, the French tax authority would be entitled to claim more than a billion euros in unclaimed corporate tax and VAT from 2005 to 2010. This issue goes to the core of the debate on how to tax the high-tech sector. The story is far from over for Google.

Not only is it possible that the tax authority will pursue yet another appeal, the online platform may also face the brunt of the new digital services tax (DST). The Macron government is busy trying to turn its proposals into action and make tech companies pay more to do business in France.

The plan will apply a levy of 5% to companies with global sales of more than €750 million and at least €25 million in France itself. The scope would capture three kinds of online service, including targeted advertising, the sale of user data for advertising purposes and the provision of a platform to connect users and sellers.

The DST will be backdated to January 1 2019 and will be payable in twice-yearly installments with the first due in October this year. It is clear why this proposal has sent shivers down the spines of tax directors.

How much tax does Google pay?

Much like other US multinationals, Google has subsidiaries in low-tax jurisdictions like Bermuda, the Netherlands, Hong Kong and Singapore. Yet the company’s double Irish-Dutch sandwich structure has drawn the most scrutiny.

Despite this, Google shifted $23 billion in cash to an Irish-owned affiliate in Bermuda through its Dutch holdings company in 2017. At the time, the company stressed that its global effective rate was 26% over a 10-year period.

“Google pays corporate income tax globally, but the vast majority of our income tax is paid in the United States,” the company told the press.

The search engine was not betting on a dramatic change in fortunes. The Trump administration was rushing to get US tax reform through congress before the end of the year.

Once in force, the Tax Cuts and Jobs Act (TCJA) hit the company with a one-time transition tax on accumulated foreign earnings and deferred taxes. These earnings were previously untaxed and the reform package added $9.9 billion to the company’s tax bill in the fourth quarter of 2017.

As a result, Google’s effective tax rate spiked at 53% at the end of 2017 only for it to fall to 12% in 2018. The company had an effective rate of 19% in 2016 thanks to its earnings being “realised” outside the US. However, there is little certainty in tax anymore.

“Our future effective tax rate could be adversely affected by earnings being lower than anticipated in countries that have lower statutory rates and higher than anticipated in countries that have higher statutory rates, changes in the valuation of our deferred tax assets,” the company said in its 2018 financial statement.

The Irish government has moved to dismantle the double Irish structure, though it remains functional until 2020. Many US tech companies will have to find a new way to structure their tax affairs for the coming decade. The search is on.

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