Much ado about Google's tax

Although scenes of political "gotchas" between Communications Minister Stephen Conroy and his shadow counterpart Malcolm Turnbull have been in the forefront, there's been a lot of action around the taxation of Google and other IT companies .

The issue became inflamed when Google published its annual results to the Australian Securities and Investment Commission (ASIC), which showed that it had clocked a loss for its Australian business for the year (up to 31 December 2011), and had payed a total of $74,176 in tax. It had also made a loss the year before, although its tax bill was higher, at around $1.1 million.

Last year, too, there were questions about the fairness of Google paying so little tax when some have estimated that its Australian earnings could amount to around $1 billion.

Google, unsurprisingly, has commented by saying that it abides by all of Australia's taxation rules.

It isn't just Australia, though. Google New Zealand also posted a loss of $52,000 during its 2011 year, and paying income tax of $109,000.

And, it isn't just Google, or just the tech industry, that is being eyed suspiciously by governments.

Assistant Treasurer Bill Shorten said at the end of last year that the government intended to reform transfer pricing rules in Australia's income tax law, and its future tax treaties, to bring them in line with international best practices.

Transfer pricing is an amount charged when one part of a multinational company buys or sells products to another part of that company that is in another country. How much the company charges for the products within its divisions, will impact the profits in each country and, therefore, the amount of tax the divisions have to pay.

The pricing rules require companies to price the products appropriately, to reflect the contribution of the division involved, but, Australia is not in line of international best practices on these rules, according to the government.

The issue prompted Shadow Communications Minister Malcolm Turnbull to tell the Australian Financial Review that his party wanted to see global tech companies pay more tax, also pointing to the transfer-pricing issue.

He later clarified in his own blog that the problem was a long-term public policy issue, and not one that had changed for the Coalition in recent times. There had been a gradual erosion of the tax base, due to the growing significance of online commerce, he said.

"Many transactions, which previously generated economic activity and tax revenue in Australia, no longer do so," he explained.

"I am not proposing any specific change to the existing tax laws, or flagging a shift in Coalition policy. Nor am I suggesting that the global tax arrangements entered into by global digital businesses, such as Google, are anything but legal. The question is not whether the laws are being complied with (I assume they are), but whether they are adequate in a new, converging digital world."

As in other areas, technology has gone ahead of laws and policy, he said. How can governments and tax authorities shift their focus from taxing physical goods? A service might originate from a server in Ireland, but used here.

"All of this is entangled with free trade issues, and Australia is by no means unique. Just about every country in the world, or at least those with open access to the internet, is facing challenges and questions of this kind," he said.

And, although Turnbull attacked the government for not using reviews, like the media review, to look into tax, it seems action is close at hand. The AFR quoted Conroy as saying that the transfer-pricing legislation would be tabled shortly.

"This is a problem that goes across all sectors, so we're bringing across legislation because we think we've got to ensure Australians get a fair share," Senator Conroy said.

"[It's] just like with the mining tax, where we want to make sure Australians get a fair share of the wealth that Australians own."

So maybe, in a year or two, Google's financial results filing will look very different to now.

What do you think? Do we need to stop companies winkling their way out of tax?