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Wednesday, October 31, 2012

Google and the French Fisc

Once past the headlines about the hurricane in the U.S. there is another interesting article in this morning's Le Monde about Google's effort to "optimiser leur fiscalité" (optimize their tax burden) and the French tax authorities' attempts to do something about it.  

Le Monde picked up the story from another French weekly called Le Canard enchaîné.  Google's sales in France, according to estimates, were on the order of 1.25 to 1.4 billion Euros but Google only ended up paying about 5 million Euros in taxes to the French government. Now how did they manage that?  Looks like it was a combination of fancy accounting and shipping the money out of the country to a place that was a bit more fiscally friendly.  That doesn't seem to have sat well with the French government.

Le Canard enchaîné claimed that the French now want 1 billion Euros from Google for a series of transactions they identified where the company took money allegedly earned in France, declared that revenue in Ireland and then transferred it to Bermuda, a "paradis fiscal."

It's headlines like these that fuel public anger over "tax evaders" be they companies or individuals. The average French citizen reading that article is going to find that grossly unfair and his/her feelings will only be exacerbated by the fact that it's an American company doing the dodging.  (Hell, I'm only a resident of France and my visceral reaction was pretty negative too).

It's worth, however, taking a step back and widening the lens through we we see and judge Google's actions.  There are actually three actors here:  France, the U.S. and the countries that facilitated the transactions.  All three have very different interests.  France wants her tax money and that doesn't seem an unreasonable demand.  The U.S. also has an interest here because it is a U.S. company and there are a lot of Americans who think the money earned abroad by companies like Google ought to be brought back to the United States to create jobs and fill the American government's coffers in a time of fiscal crisis.  As for the countries that serve as intermediaries, well, they want revenue too and have every interest in encouraging businesses to move money to their jurisdictions where they can take a slice before it's invested locally or ends up in the Caymans or any other fiscal paradise.  One international company doing cross-border business and three sets of interests to either satisfy, work around or work with in accordance with its interests.

Is this kind of competition between different countries for foreign investment, and the use of tax regimes to encourage it, a good or a bad thing?  It kind of depends on where you sit, doesn't it?  If you live in a country that is eager for foreign investment, the tax code is one way to encourage it and that is something that benefits everyone in that country, citizens and government alike.  The U.S. has done this for years with very favorable terms for foreigners who place their money in U.S. banks.  France certainly doesn't complain when foreigners decided to place substantial amounts of money in French banks or businesses.  According to the France Diplomatie website France was  "the third-leading recipient of foreign direct investment in the world in 2009, according to UNCTAD, receiving US $65 billion in foreign investment flows, second only the United States (US $136 billion)."  For a country that is relatively small compared to the United States that's a lot of foreign money coming in.

Do the French use their tax code to encourage this?  You bet they do.  This article entitled The French Tax System: Promoting Competitiveness and Investment describes a system of tax credits and exemptions that make France a very warm and welcoming environment for outside investors.   That money didn't come out of thin air - it came from other countries who were probably not terribly happy about the outbound flow of capital since it reduces the amount available for local investment and is no longer around to be taxed in the country of origin.

The point I want to make here is that one country's welcome foreign investors are quite often another country's evil "tax evaders" - highly sought after job creators and entrepreneurs in one jurisdiction, unpatriotic villains in another.

Does this mean that I think Google should get away with paying only 5 million Euros in French taxes? Not at all.  If the French authorities think that Google did something shady to wiggle out of the cost of doing business in France, then of course Google has to face the music.  Le Monde implies that there will be a negotiation between Google and the French government and I'm sure they will work it out.  As for the US and its interests in Google's revenue, Americans would do well to recognize that the company (which is not really an American company anymore) is already paying taxes locally (though perhaps not enough according to the local tax authorities) in the countries where it operates which means that if the US really wants a piece of that action, it's going to have to stand in line.

But it is a bit hypocritical for either country to complain too loudly about other countries using their tax codes to promote a positive incoming flow of capital. If it's good for France and good for the U.S. why shouldn't countries like Ireland or Bermuda play the same game?  If you don't want other countries doing this to you, mes amis, then perhaps you need to stop doing it to them.

Or, and here's a radical idea, perhaps tax competition and the chase for foreign investment among nations is actually a good thing.  Some people do make that argument and clearly both the US and France have been beneficiaries of this competition.  The citizens of both just might want to take that into account before getting too enthusiastic about tax harmonization or worldwide taxation schemes.


Christophe said...

Interesting... It seems unrelated to the recent articles I read on regarding the "Google tax", which is more like an "author's tax", which is designed to be paid back to the authors that Google references.

My huntch is that Google is going to get away with that. The threat of not referencing French media is big enough for the French to abandon the idea. Just like the threat of 30% withholding is good enough for the rest of the world to say amen to the US on FATCA.
Sorry about being negative. This whole FBAR issue has traumatized me.

Victoria FERAUGE said...

Hi Christophe, Interesting stuff. I think Google will negotiate but I don't think this tax will save the French papers. They are going to have to change their business model and that's going to be really hard. I hardly know anyone any more here in France who buys the paper - it's all on-line so why bother?

Anonymous said...

"My huntch is that Google is going to get away with that. The threat of not referencing French media is big enough for the French to abandon the idea."

Don't agree. Another site - probably French - will just take over the torch. What Google is doing is not difficult technically.