Why the French are looking for tulips and not shamrocks

A while back we looked at some of the audits and investigations into Google’s tax structure and concluded that while it was definitely about Google it wasn’t necessarily about Ireland.

All the details are in the previous post but an additional little factoid here about the French investigation shows the description was on the right track: the French called the investigation ‘Operation Tulip’ with reference to the Netherlands rather than something like ‘Operation Shamrock’ which many might have expected.

The French authorities are investigating whether the company that sells Google’s advertising has a permanent establishment in France.  But that is only the first step in trying to establish that Google owes more tax in France.

Google’s sales operation has a permanent establishment in Ireland but the tax liabilities that arise here don’t result in anything close to what is been suggested for France.  The reason is that the Irish sales operation pays substantial royalties for the right to use Google’s intellectual property and to sell advertising on Google’s platforms.

Even if the French investigation does conclude that Google’s sales operation has a permanent establishment in France the presence of the outbound royalty means that the residual profit to be taxed would still be small.  And the reason why the French investigation is focusing on The Netherlands and not Ireland is because this royalty is paid to a Google holding company in The Netherlands (before passing to Bermuda and ultimately being owed to Google Inc. in the US).

If the French want to collect significant taxes from Google they must first determine that Google’s sales are carried out through a permanent establishment in France but more importantly they must address the issue of the royalty payment.  There are a number of approaches they can take.  They could argue that the outbound payment should be liable to a withholding tax payable to France; they could argue that the quantum of the payment should be much lower than is allowed in Ireland (which appears to be determined on a cost-plus basis) or they could try to disallow the payment altogether as a deduction.  It is not clear that any of these will succeed.

Of course, they may not even clear the first hurdle.  In the UK, HMRC concluded a six-year audit of Google and determined that Google’s sales operations did not have a permanent establishment in the UK. 

A difference of facts or a difference of interpretation could mean a different outcome in the case of France but that just gets us as far as the royalty payment which is obviously an issue that the HMRC audit did not address.  It is all very interesting (and no doubt our own Revenue Commissioners will have an eye on it) but with the French saying they have “several terabytes” of data to process hopefully we won’t be waiting too long for a conclusion.