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Google Tax: What It Means and How It Works

By Shobhit Seth
Updated December 01, 2023
Reviewed by Margaret James
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Daniel Rathburn
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Fact checked by Daniel Rathburn
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Google Tax

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What Is a Google Tax?

A Google tax, also known as a diverted profits tax, refers to anti-tax-avoidance provisions that have been introduced in some countries. Several jurisdictions implemented the provision to stop companies from diverting profits or royalties to other jurisdictions that have lower or even zero tax rates. For example, internet giant Alphabet Inc.'s (GOOGL) Google paid a negligible amount in taxes in the United Kingdom by completing its transactions in the low-tax city of Dublin, Ireland, even though it earned $6.5 billion in revenue in the U.K.

Key Takeaways

  • A Google tax is a tax on multinational companies aimed at preventing them from diverting their profits from a country where those profits were earned to one with a lower tax rate.
  • It is also known as a diverted profits tax.
  • Among the countries with a Google tax are Australia and the United Kingdom.
  • While Google became notorious for its tax avoidance policies, other major companies, such as Amazon, Apple, Meta, and Starbucks, have also used similar tactics to lower their tax obligations.
  • Some of the tax loopholes have since been closed, including those that figured into the so-called "double Irish Dutch sandwich" strategy.
  • A number of countries have also imposed separate digital services taxes on the tech giants, and efforts at a global agreement to tax them appropriately and distribute the proceeds are underway.

Understanding the Google Tax

Though the term includes the name of the company (Google) that became the poster boy for the practice, diverting profits is rampant across various industry sectors. Technology giants from the U.S., like Meta, formerly Facebook (META), Apple Inc. (AAPL), and Amazon Inc. (AMZN), as well as other multinational corporations like Starbucks Inc. (SBUX) and Diageo PLC (DEO), have all used such practices to lower their tax bills.

For instance, a mobile app like Meta's WhatsApp messenger or a game like Clash of Clans may not have a single employee in a particular country, but it can still derive a lot of profit from its local user base through online ads and in-app purchases. Companies enjoyed the freedom to account for such revenues and earnings at a destination of their choice, and they often diverted it to low-cost jurisdictions as a result.

The U.S. Securities and Exchange Commission (SEC) mandates that American businesses publicly report details on where and how much revenue they generate across the globe, allowing the authorities of other countries, such as the United Kingdom and Australia, to obtain more concrete data on any possible tax avoidance measures those businesses may be using.

In the U.K. and Australia, tax laws were modified to prevent companies from following such practices. Amid rising public anger, the U.K. introduced a diverted profits tax in 2015 which it set at 25%. Her Majesty's Revenue and Customs (HMRC), the U.K.'s tax collection agency, secured £6.5 billion (around $8.33 billion) in additional taxes by challenging the transfer pricing arrangements of multinationals between 2012-2018. Its own figures show that it took in an extra £853 million (around $1.09 billion) in 2015-16, £1.62 billion (around $2.08 billion) in 2016-17, and £1.68 billion (around $2.15 billion) in 2017-18.

Australia began implementing measures in 2015 that led to the introduction of its own diverted profits tax from July 2017 onward. It imposed a 40% tax on such tax avoidance practices.

Responding to these developments, global enterprises are now voluntarily paying up past dues and entering into settlements with the tax authorities to avoid being shamed by a Google tax. Diageo, the London-based beverage giant behind Johnnie Walker scotch, Tanqueray gin, and other major brands, struck an agreement with the HMRC to pay an extra £190 million (around $244 million) in corporation tax to avoid the potential damage to its brand reputation emerging from the Google tax. Google also agreed in 2016 to pay about $185 million in back taxes to the U.K.

Facing similar charges in France, Google paid French authorities nearly 1 billion euros (about $1.1 billion) in fines and additional taxes in 2019. The company said at the time, "We remain convinced that a coordinated reform of the international tax system is the best way to provide a clear framework for companies operating worldwide."

What Is a Digital Services Tax?

A digital services tax (DST) is a tax imposed by certain countries on the revenues of large multinational companies offering goods or services online. As of October 2023, 38 countries around the world had either enacted or were considering DSTs. They include Austria (with a 5% tax), France (3% tax), Italy (3% tax), Spain (3% tax), and the U.K. (2% tax). At the same time, the Organisation for Economic Co-Operation and Development (OECD) has been working on an international agreement that would provide for taxing these companies and distributing the proceeds among the various nations, eliminating the need for separate, unilateral DSTs.

What Is the Double Irish Dutch Sandwich Strategy?

The double Irish Dutch sandwich strategy was a tax avoidance scheme practiced at one time by Google and other companies. It involved funneling profits to an Irish subsidiary, then a Dutch subsidiary, and finally to a second Irish subsidiary based in a tax haven, such as Bermuda. The result was to eliminate or indefinitely postpone any taxes due to the United States or other countries where the profits actually originated. The loopholes that made this possible were effectively closed as of 2020.

What Is Tax Avoidance vs. Tax Evasion?

Tax avoidance involves various tactics to reduce a company's or an individual's tax obligations, often by taking advantage of loopholes in the law. Tax avoidance is perfectly legal but sometimes sneaky-seeming. Tax evasion, on the other hand, occurs when a company or an individual attempts to reduce their tax bill by illegal means, such as concealing income.

The Bottom Line

A Google tax is one that's imposed on companies that divert their profits from a country where the money was earned to another country with lower (or no) taxes. While some of the most egregious tax avoidance practices have been curtailed in recent years, individual countries and global bodies continue to work on ways to tax multinational companies, particularly digital ones, in a fair manner.

Article Sources
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  1. HM Revenue & Customs. "Diverted Profits Tax," Page 1.

  2. HM Revenue & Customs. "Transfer Pricing and Diverted Profits Tax Statistics," Page 1.

  3. Parliament of Australia. "Diverted Profits Tax Bill 2017."

  4. U.S. Securities and Exchange Commission. "Diageo Form 6-K, Aug. 7, 2020," Page 31.

  5. BBC News. "Google Agrees £130m UK Tax Deal With HMRC."

  6. Reuters. "Google to Pay $1 Billion in France to Settle Fiscal Fraud Probe."

  7. Bipartisan Policy Center. "Taxation in the Digital Economy: Digital Services Taxes, Pillar One, and the Path Forward."

  8. OECD. "Two-Pillar Solution to Address the Tax Challenges Arising From the Digitalisation of the Economy," Page 4.

  9. California Management Review. "Doubling Down on Double Sandwich Tax Schemes."

  10. Internal Revenue Service. "Worksheet Solutions: The Difference Between Tax Avoidance and Tax Evasion."