The chairman of Google responds to criticism that companies such as his are not paying their fair share of taxes
At a time when families are having to tighten their belts and funding for vital public services is under pressure, corporate taxation is rightly a hot topic. And as a company that has always aspired to do the right thing, we understand why Google is at the centre of that debate. In the interests of moving the argument forward – away from accusation and toward action – here are three principles we hope most people can agree upon.
First, corporation tax should be paid on a company’s profits, not its revenues. When a company only operates in one country, it’s obvious where its profits are generated and thus where its taxes should be paid. But for multinational companies with a global presence, it’s much more complicated. To pay the right amount in taxation, you need to determine where the profit is actually created. So most developed countries, including the UK, have worked together to create a set of tax treaties. These are based on the principle that corporate taxes are levied in the country where a company conducts the economic activity, and takes the risk, that generates its profits – not where products are consumed.
Most of Google’s engineers are based in the US and that’s where much of our product development takes place. So we pay more taxes in the US than in any other country – around $2bn in corporate income taxes to the US government in 2012. It’s the same for UK-based technology or pharmaceutical companies, which pay the majority of their corporation tax in the UK, as that is where most of the activity that generates their profits takes place. Equally important, this system ensures that the same profits are not taxed twice, or even more than that, across different countries, something that would reduce any company’s ability to invest in future research or new jobs.
Second, politicians – not companies – set the rules. As the head of Revenue and Customs said in the House of Commons last week: “We are duty-bound to collect and investigate under regulations set out by lawmakers, not on what you’d [ie politicians] like us to collect.” When legislators are doing the lobbying and companies are articulating the law as it stands, it’s a confusing spectacle for everyone.
Third, given the intensity of the debate, not just in the UK but also in America and elsewhere, international tax law could almost certainly benefit from reform. It’s why the Organisation for Economic Co-operation and Development (OECD) will be publishing a hotly awaited paper in July on how to make these rules simpler and more transparent. Change won’t be easy because it will require the renegotiation of international tax treaties, not just action by individual nation states. And many of those countries will doubtless have competing interests.
For example, it’s tempting for every government to assume that they will benefit if and when the current structure changes. But in reality, it’s probably only a significant increase in corporation taxes globally that would make every country a “winner” – and the consequences of that would likely be less innovation, less growth and less job creation.
That said, the UK government has the perfect opportunity to take the lead in shaping this complex debate at the G8 summit next month. We hope George Osborne seizes the initiative and makes meaningful tax reform one of the top items on the agenda.
Finally, while profit has become something of a dirty word, it’s important to remember that many corporations reinvest their profits in research and product development, which in turn tends to lead to job creation, further economic growth and, ultimately, more tax. For example, Google has just announced plans to invest more than £1bn in new offices in London’s King’s Cross. It’s been estimated that this investment will generate some £80m a year in new employment taxes and £50m in stamp duty. This is in addition to the significant amounts we already pay in UK tax through corporate, local and employment taxes.
Our hope is to move the debate forward, with everyone engaged constructively in developing a clearer, simpler system – one in which companies that abide by the law know that the politicians who devised the rules are willing to defend and commend them.
Eric Schmidt is executive chairman, Google