Google Is Preparing To Pay A Huge Fine For Tax Noncompliance In France

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France’s equivalent of the IRS (Direction générale des finances) has been investigating Google for tax noncompliance. With only €138 million of revenue reported in France in 2011, something wasn’t right.

Le Canard Enchaîné first reported in 2012 that the company owed $1.3 billion (€1 billion). Le Point confirmed this number in 2014. Google will probably end up paying less than that, but the FT spotted that the company is finally admitting that the tax man has come knocking.

“In March 2014, we received a tax assessment from the French tax authorities,” the company wrote in its earnings release. “We believe an adequate provision has been made and it is more likely than not that our tax position will be sustained. However, it is reasonably possible that resolution with the French tax authorities could result in an adjustment to our tax position.”

This story has been going on for years. Most of Google’s revenue in France goes directly to Google’s European headquarters in Ireland where the corporate tax is only 12.5 percent. In 2012, French news website Owni obtained Google Ireland’s 125-page financial statements for 2011 in order to find out what’s going on with Google’s French revenue.

In 2011, the company reported €138 million in revenue in France compared to €12.4 billion in Ireland. It only paid €5.5 million in tax in France. According to Google, the company has an office in Paris, but doesn’t sign any French adverting contracts in France.

Yet, you can find multiple job openings in Paris related to sales operations. According to the DGF investigation, the company only sends Google Ireland contracts, but they are written in French with French clauses, and therefore considered French contracts.

But Google denied the accusation in 2011. At the time, the company told the AFP “we will continue to cooperate with French authorities, as we’ve done until now. Google complies with all the laws of the country in which the company operates, and with the European legislation.”

Google is doing the usual European tax optimization scheme. It’s perfectly legal. Many other tech companies report very low profit in France and use the same kinds of tactics. It shows that there is a greater problem regarding corporate taxes in Europe as a whole.

Here’s a glimpse into the DGF investigation. Google’s European HQ is called Google Ireland Holdings. It is the owner of Google Ireland Limited. Google Ireland Limited receives the revenue from European subsidaries. But, in order to lower the tax rate, Google Ireland Limited pays billions of royalties to Google Ireland Holdings. In 2011, it was $4.6 billion. It drastically lowers the profit of Google Ireland Limited.

Despite the name, Google Ireland Holdings’ cost center is in Bermuda and is called Google Bermuda Unlimited. In Bermuda, corporate tax doesn’t even exist. But there is a tax if you want to transfer big sums from Ireland to Bermuda. That’s where the Netherlands comes in.

If you transfer money from Ireland to the Netherlands, then to Bermuda, there is no tax. Google Netherlands Holdings BV, you guessed it, is a subsidiary that has the sole function of transferring money from Ireland to Bermuda.

Again, none of this is illegal. The main issue in France is that some Irish contracts could be French and could be subject to French taxes. That’s why Google is now provisioning to pay a fine in France, but it’s still unclear how much that fine will be.