Saturday, October 31, 2015

A question on Google

Usually we use Google to answer a question; here we answer a question about it.  Google CEO Sundar Pichai approaches you with the following proposal:

We are looking for someone to run our advertising services outside of the Americas.  What you have to do is provide the logistics and administration and deal with the customers; we will provide the technology from our engineers in the US.

Based on the most recent year we estimate that revenues will be about €18.3 billion.  Of this around €5 billion will go to various websites and organisations who host advertising on their websites.  You will also have to work with customers in the countries to ensure the services provided match their requirements.  It will cost you around €300 million to have these offices around the world.

We want to have the logistics, billing and administration and other functions organised on a centralised basis.  This will probably require around 3,000 staff and significant investment in buildings and facilities.  This will probably cost around €300 million a year.

This gives a cost of sales of €5.6 billion and an operating profit of €12.7 billion.  Obviously we’re not just going to let you keep €12.7 billion which is almost wholly earned from the technology we have created but we’ll split it with you.

We’ll charge you a fee that is equal to 98.5 per cent of the operating profit.  Based on the figures about you will pay us €12.5 billion and you will be left with a profit of €200 million.  If you keep that in a company you will probably pay around €25 million in Corporation Tax to the Irish government.  And for every extra €100 million in profit you generate you get to keep €1.5 million so we think the incentives are pretty balanced.

So what do you say: are you willing to be the servicer of Google’s advertising products outside the Americas in return for 1.5 per cent of the operating profit?

If this was offered it should surely be a question of where do I sign up. The technology is a market leader. OK, running an operation in Dublin with 3,000 people and dealing with offices and customers around the world will be pretty demanding but I will gladly take €200 million of compensation for doing something pretty demanding.

Anyone indicating displeasure at the amount of Corporation Tax Google pay in Ireland can only do so if they would refuse the above offer.  Who in their right mind would refuse the rights to Google’s advertising technology even if they have to pay over 98.5 per cent of the operating profit?

The issue with Google is not the €12.5 billion license fee that is paid out of Ireland.  The issue is where it goes.  The technology was developed in the US and the key decision makers for the technology are in the US yet the payment ends up in Bermuda.  The issue is that the payment ends up somewhere where the company has no substance.  That is what needs to be addressed.  We don’t need faux outrage from people who would all accept the above offer.

1 comment:

  1. Spot on! US needs to address the issues with its tax code that allows this to happen. Move on folks nothing to see here.