Google isn't alone in pursuing ways of reducing its tax bill. Everyone does it, and there's more than one way to skin a cat. So, are we kidding ourselves if we believe transfer pricing reforms will fix the problem?
In a way, Google can claim it incurs more expenses in Australia than many other web-based businesses — it has 600 staff here and a research arm that develops products for the global market, incurring costs without seeing all of the revenue. Meanwhile, advertising revenue from search, a big chunk of its global income, is administered by Google Ireland, a country with a far lower corporate tax rate and a relaxed attitude to transfer pricing.
Even so, Google's local corporate tax bill of just $74,176 might seem a bit unfair. But we'll see more of this in an increasingly online world. For example, is buying an advertising product from Google Ireland any different to getting a book online from Amazon UK, or buying cloud services from the US? These days, the question of who buys what and where, is hard to define. Surely, that makes the effects of any changes to transfer pricing regulations almost impossible to determine.
Google is just one of a flock of businesses that are taking advantage of this globalisation. Look through the latest full-year results for global, web-based businesses, and you'll see that the percentage of gross profit paid in tax around the world, rarely gets above 10 per cent. That will be sad news for the 600,000 micro-businesses in Australia that are paying an average of 41 per cent of gross profit in tax (download the figures here (PDF)).
Yet, reducing tax isn't just a question of transferring profits to countries with lower corporate tax rates. There are interest costs on loans to consider, and investments made for future growth. That's why the top 925 businesses in Australia pay tax totalling less than a quarter of their gross profit.
Transfer pricing is only part of a bigger issue. Big businesses are experts at paying the least possible tax. And it's not an Australian issue, it's a global issue. Except in Ireland, of course, because it gets tax revenues it would otherwise only dream of.
In Australia, we should be looking at the likes of BHP, pulling in $67.9 billion in revenue (in the financial year to June 2011) but paying just $6.4 billion in income tax. The reason? Massive investments in infrastructure. It is curious, though, how most big companies continue to make such investments, year on year, without producing the exponential growth that you'd expect as a consequence. Will it result in huge tax payments down the track? I wouldn't hold my breath.
We can single out Google for blame when it comes to tax minimisation, but it's just the tip of a tax-avoidance iceberg. And, no-one, it seems, has an answer. Companies will always have a list of excuses as long as their accountant's arm.