Is Google dodging tax in South Africa?

Google‘s tax controversy is less about legalities and more about sentiment, according to a tax law expert, but is the Internet giant running its business in a grey area?

Google’s tax affairs have come under global scrutiny as British regulators and politicians grill the international Internet giant for allegedly dodging income tax through various loopholes in European tax law.

While Google drew in billions in revenue from UK residents between 2006 and 2011 – GBP11.9 billion – the company paid a relative pittance (GBP10 million) in taxes.

In November 2012, Reuters reported that Google’s Northern Europe boss, Matt Brittin, had explained that this was because all UK sales were conducted from Ireland – where it pays significantly less income tax – and that no sales took place from Britain.

This technical loophole, British lawmakers and politicians argue, means that while Google is able to tap into the British population for billions of pounds in revenue, the country gets back very little in return.

Google, however, is only one of many multi-national corporations which is currently under scrutiny for its tax affairs.

Apple, Microsoft and even Amazon.com are currently being eyed by the UK regulators for similar tax practices.

But the question remains: are these companies actually doing anything wrong?

Google CEO, Larry Page
Google CEO, Larry Page

A question of illegality

In South Africa, things for Google are no different.

Andrew Wellsted, a director at “Big Five” law firm, Norton Rose, explains to BusinessTech that in South Africa, as in the UK, tax residents are subject to South African tax on their worldwide income.

However, Wellsted points out, entities which are not tax resident in South Africa are only subject to income tax in respect of income which arises from a “source” within the country.

“The laws in South Africa are very similar to the laws in the UK with the result that it is possible that a company may earn revenue which is generated in South Africa or paid by South African residents, without it being subject to South African tax.”

“This is because the income in question may not fall within the “source” rules specifying when non-residents are subject to tax in South Africa,” Wellsted said.

If a non-resident company like Google is able to structure its business in such a way that its revenue streams are not “sourced” in the country – like it does in the UK – that revenue will not be subject to tax, regardless of whether the people who pay the company may be residents of that country.

In a nutshell, this means that even though Google is getting money from South Africans for ads, because the business is not “sourced” at Google South Africa – which directs the business off-shore – the company is not taxed accordingly.

“For Google to be taxable, not only would it have to earn income from UK [or SA] residents, but that income would have arisen from a source within the [country],” Wellsted said.

So in legal terms, Google and companies which operate their business similarly, are not doing anything illegal.

Andrew Wellsted
Andrew Wellsted, director, Norton Rose

A question of ethics

Google is notoriously silent on its operations in South Africa, with no confirmation coming from the company as to how many people it officially employs (most reports say 30 permanent staff, based in Johannesburg), or how much the company actually makes locally.

According to a Memeburn report, sources peg the revenue Google earns from the South African ad space at around US$80 million (over R761 million).

“In our view, we do not have sufficient information on Google’s operations in South Africa to definitely say whether or not it is operating within any grey areas, locally,” Wellsted said.

“That said, it appears that the furore which has erupted in the UK is based more on public sentiment and politicking, than a technical analysis of the tax laws.”

Google South Africa responds

BusinessTech asked Google South Africa for clarity on its position within the South African market, but a Google spokesperson skirted the queries, saying that the company does not break up revenues by country (except for the US and UK) and simply stated that it complies fully with the tax rules in South Africa, as in every country it operates.

The spokesperson highlighted that Google has invested in numerous initiatives in South Africa as part of giving back to the country, including assisting small businesses with its Woza Online intiative; issuing $2.5 million in grants for the digitization of the Desmond Tutu and Nelson Mandela archives; as well as boosting startups with tech hubs like JoziHub and 88mph.

More on Google’s tax affairs

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Google to be grilled over tax

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Google tries to downplay tax controversy

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Is Google dodging tax in South Africa?