Google ended its use of the high-profile ‘double-irish’ tax structure in 2019. We have been tracking the impact of the revised structure in Ireland’s balance of payments data and in the consolidated accounts of Alphabet, the name of Google’s parent company. A detailed examination of these changes is provided in this technical paper.
The financial accounts for Google’s subsidiary in Ireland, Google Ireland Limited, are now available and this allows us to see the impact the ending of the ‘double irish’ had on Google in Ireland.
And we can see that it had no impact. The outcomes in 2020 are pretty much inline with the outcomes in 2019. Turnover rose to reach €48.4 billion with a reduction in the cost of sales leading to a gross profit of €36.4 billion.
The main cost of sales for the company are payments to third-parties with websites on which Google’s advertising is displayed. These increased in 2020. The reason for the reduction in cost of sales was “a reduction in certain operating fees paid to fellow group undertakings.”
From gross profit, €33.6 billion of administration expenses are deducted which, after other operating income and expenses, leaves an operating profit of €3.0 billion. The administration expenses include the operating costs of the company such as €750 million of staff costs and will include other running costs.
However, the main element in this item is the expenses Google Ireland Limited incurs for the right to sell advertising using Google’s platforms and technology. This technology is developed elsewhere and the Irish subsidiary pays for the right to use that technology. This right is transferred through a licensing agreement and in return for that right Google Ireland Limited pays a royalty fee to the owner of the intellectual property.
A breakdown with the royalty payment is not provided. The accounts of a Google subsidiary in The Netherlands, the “dutch sandwich”, show that the royalty payments made by Google Ireland Limited in 2019 were €19.4 billion. Given the increase in administration expenses shown in the accounts, the royalty payments in 2020 were probably around €22-23 billion.
At the 12.5 per cent of Corporation Tax, the tax on Google Ireland Limited’s €2.85 billion of profit would be €357 million. The total tax charge for the year was €622 million with the following table setting out the reasons for the difference.
In its financial accounts, Google Ireland Limited had around €250 million of expenses which are not deductible for tax purposes. This increases the tax charge by €32 million relative to what it would be if tax was levied on financial profit rather than taxable income. The company also incurred withholding taxes, possibly in other jurisdictions, of €15 million.
The largest item is the result of the conclusion of a tax audit which resulted in an additional tax liability of €218 million (with a further €127 million of interest). In its 2020 annual report, Alphabet Inc. noted that its “tax years 2011 through 2019 remain subject to examination by the appropriate governmental agencies for Irish tax purposes.” It is likely that the above figures represent the conclusion of this examination and thus are unrelated to the ending of the ‘double-irish’ structure.
The ‘double-irish’ has ended and Google Ireland Limited continues to receive tens of billions in revenue from the sale on online advertising in markets across Europe, the Middle East and Africa (EMEA). Some of this revenue goes to third-party sites that host the advertising, some goes to cover the staff and running costs of the Dublin office but the main cost of Google Ireland Limited continues to be the royalty expense it incurs for the right to sell advertising using Google’s technology. None of this has changed with the ending of the ‘double-irish’.
There has been no impact, or additional tax liability, in market countries and there has been no change in how the Irish subsidiary operates. From our previous analyses we do know that what has changed is where the royalty payments are going to. Previously they went to Bermuda, via The Netherlands. The 2020 accounts of the company that was in Bermuda are also now available.
Here there is a change. The company had a turnover of nil in 2020. In 2019, the company in Bermuda had a turnover of $26.5 billion comprising the royalties paid out by Google Ireland Limited in Dublin and also by Google Asia Pacific Pte. Limited in Singapore which covers markets in Asia for Google. After administration expenses of $14.1 billion (the bulk of which was a $10.4 billion contribution to the R&D costs of the group’s US parent) the company in Bermuda had a profit of $13.7 billion. With no turnover, this was not repeated in 2020.
The reason is that the royalties are now paid to the United States.
There is only one thing that has been impacted by the end of the ‘double-irish’. That is in how the company is taxed in the US. And that is really only a change in the provisions under which the company is taxed (from GILTI to FDII) rather than a dramatic increase in the amount of tax paid by the company.
There has been a decade of headlines about the ‘double-irish’. The pantomime villain stopped using the structure almost two years ago. There has been no impact on the taxation of Google in Ireland or on the taxation of Google in the markets where it sells. Doubtful we’ll see a slew of headlines about that though.
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You failed to mention that GILTI was only introduced in 2017 which is a glaring omission. No doubt the result of the change would have been much greater had it happened prior to the US acting. With the IP residing in Ireland, we would have been taxing these profits at 12.5% prior to the introduction of the CAIA in 2009. Not sure what effective rate would have looked like post CAIA but to analyse the change now, long after the schemes usefulness has ended, is ignorant at best and malicious at worst.
ReplyDeleteYes, GILTI was introduced by the TCJA. The Act also introduced a deemed repatriation tax on pre-2018 foreign profits. The IP was never in Ireland so S291A would never have applied. A fuller discussion of the US changes was provided in this earlier piece
Deletehttp://economic-incentives.blogspot.com/2021/02/further-evidence-of-end-of-double-irish.html
It was in an Irish incorporated company and that is the crux of the whole issue. Being Irish incorporated meant that this company could charge royalties in the entire single market and they were allowable as expenses for tax purposes in other jurisdictions. If they had been charged by a true Bermudan company instead of a hybrid Irish Bermudan one, then they wouldn't have been allowable in other EU countries.
DeleteHard to tell if you are being deliberately disingenuous or if you just don't understand the subject very well.
Being Irish incorporated had nothing to do with the "charge of royalties in the entire single market". The royalties were paid by a company in Ireland to a company in Bermuda. It is sales revenue that flows from other countries to Ireland.
DeleteAnd now even though there is no longer an Irish-incorporated company in Bermuda the payment flows still exist. Sales revenues flows to Ireland and royalties are paid from Ireland. Stating that the Irish-incorporated company was the crux seems contradicted by the fact that the flows are same but now are being paid to a company in the United States. Suggests being Irish-incorporated was so crucial.
A very helpful analysis.
ReplyDeleteStrange that no one seems to care what happened after the end of the "double-Irish". Surely the IRS must be pleased to tax Google's royalties? Biden needs all the revenues he can muster, especially from Billionaires.