Eric Schmidt, the chairman of Google, has been visiting London to promote his new book, The New Digital Age. But public attention in the UK has focused less on the astonishing and outlandish array of Google projects that Schmidt describes in that book than on the sober matter of taxation. And, in particular, on how Google pays next to nothing in the way of taxes. In interview after interview this week, Schmidt was asked whether he was ashamed about the fact that, in the UK, Google pays £6 million ($9.3 million) in tax on revenues of £2.5 billion ($3.9 billion).
It used to be that Schmidt was quite cool about this issue. Last year, when the UK House of Commons published a report on this topic, he replied: “It’s called capitalism. We are proudly capitalistic. I’m not confused about this.” Yet that didn’t come across very well.
Google’s chairman has now changed tack. “We are doing nothing wrong,” he says, pointing out that if politicians were to change the rules on corporate tax, Google would comply with them. For good measure, he throws in a couple of lines about all the exciting projects Google sponsors in the UK and the many jobs it creates.
Schmidt has a point. Ever since a House of Commons committee ferreted out last year that Google, Starbucks, and Amazon pay the square root of very little in taxes in the UK—their largest market in Europe—the reputation of all three has taken a battering.
Starbucks was the most vulnerable because, in a city like London, it is easy for the consumer to act on a Twitter-inspired whim and say things like “I’m outraged about Starbucks and tax, so I’ll make the sacrifice of walking the extra ten yards to Costa Coffee.”
In the wake of the recent press furor and a vociferous Twitter campaign, Starbucks has offered to pay another £20 million ($30.9 million) to the UK tax authorities. But neither Amazon, which uses low-tax Luxembourg as its European headquarters, nor Google, which has its European head office in Ireland for the same reason, has made such a gesture.
The reason is that Amazon and Google are very different from Starbucks. The former are online companies, and they have understood the root cause of the Internet’s success: it is unbelievably convenient. The success of Google’s integrated services is based in part on consumers’ sheer indolence and the fact that we can’t be bothered to log in and out of different content providers. We want everything here and now, and if we don’t get it, we start behaving like frustrated children. Just think of what happens when the Internet goes down in your house or apartment.
Consumers may feel the same sense of outrage about Amazon and Google’s tax avoidance, but they are much less likely to do anything about it than in the case of Starbucks. Is anyone going to switch from Gmail or start using Yahoo! as their primary search engine to protest against these schemes? No. Will anyone go into a physical bookstore or electric appliance store instead of ordering online from Amazon? Well, there aren’t many bookstores left in Britain anyway, so probably not.
Margaret Hodge, the chair of the House of Commons committee that authored last year’s report, explained to the head of Google UK that she was concerned not about the legality of Google’s avoidance scheme, but about its morality.
Ducking tax is pretty immoral. But, as we have seen in the cases of Google and Amazon, reputational damage is less important in the online world. So let’s get back to Schmidt’s primary point that “we are doing nothing wrong.”
What he means is that individual European countries are competing with one another in offering tax regimes that encourage corporations to shop around for the best deal. Google’s largest office outside the United States is in London. But when British businesses buy advertising space from that London office, they actually pay an entity registered in Ireland. That entity pays taxes there, but only a miniscule sum, £8 million ($12.4 million). The revenues are then transferred to Caribbean tax havens, where they can enjoy the sunshine until shareholders call them in for a party.
The EU is meant to be a competitive space for companies that produce and trade. It is not supposed to be a competitive space for tax regimes. In the UK, the upshot of this is, regrettably, to deepen still further the popular hostility to the EU, which has now embedded itself in the political culture.
So, while Google, Amazon, and the others are behaving in a cynical fashion, at the core of this behavior is a fundamental and significant failure of the EU. Brussels and the member states would be well advised to think about fixing this.
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