Google Tax

Google Tax: What it is and how it works

A “Google tax” is an informal name for measures—officially called diverted profits taxes—designed to stop multinational companies from shifting profits earned in one country to jurisdictions with much lower or zero tax rates. The term arose after major tech firms, notably Google (Alphabet), routed significant UK revenues through Ireland to reduce their UK tax bills.

Why it was introduced

Digital and multinational businesses can earn large sums in countries where they have few or no physical employees (for example, through apps, online ads, or digital services). Historically, companies could attribute those revenues to subsidiaries in low-tax jurisdictions, reducing their tax liabilities where the sales actually occurred. Governments introduced diverted profits taxes and related rules to:

• Protect domestic tax bases
• Ensure profits are taxed where economic activity and value creation take place
• Deter aggressive transfer pricing and profit-shifting schemes

Key features and examples

• Diverted profits tax (DPT): The U.K. introduced a DPT in 2015 (set at 25%). Australia followed with its own DPT in 2017 (40%).
• Enforcement outcomes: The U.K.’s tax agency pursued transfer-pricing arrangements aggressively and recovered additional tax revenues totaling billions over recent years. Several multinationals have settled past liabilities rather than face public challenges—examples include Diageo agreeing to pay extra corporation tax and Google settling back taxes in the U.K. and France.
• Broader impact: Other large corporations—Amazon, Apple, Meta, Starbucks and others—also used profit-shifting techniques, prompting similar responses from tax authorities worldwide.

Digital services tax (DST)

A digital services tax targets revenues generated from digital activities (advertising, online intermediation, user data monetization) rather than corporate profits. Dozens of countries have considered or implemented DSTs; examples of headline rates include Austria (5%), France (3%), Italy (3%), Spain (3%) and the U.K. (2%). DSTs are often unilateral interim measures while international consensus is negotiated.

The “double Irish Dutch sandwich” explained

This was a multistep tax strategy used by some multinationals to move profits through an Irish subsidiary, then a Dutch entity, and finally to a second Irish company based in a tax haven (e.g., Bermuda). The structure exploited mismatches in national tax rules to minimize or defer taxation. Most of the loopholes enabling this arrangement have been closed in recent years.

Tax avoidance vs. tax evasion

• Tax avoidance: Legal strategies that exploit gaps or mismatches in tax laws to reduce payable tax. Often perceived as aggressive or unfair but not criminal.
• Tax evasion: Illegal actions—such as falsifying records or hiding income—to deliberately avoid tax obligations. Criminal penalties can apply.

International coordination

The OECD and many countries have been negotiating multilateral solutions to allocate taxing rights more fairly in the digital economy and to reduce unilateral DSTs. These efforts aim to provide a consistent framework for taxing large multinational firms and distributing tax revenues among jurisdictions.

Takeaways

• “Google tax” refers to diverted profits rules targeting cross-border profit-shifting by multinationals.
• Countries such as the U.K. and Australia have enacted DPTs and recovered significant revenues.
• Digital services taxes have been used as an interim tool while international consensus is pursued.
• Prominent avoidance techniques, like the double Irish Dutch sandwich, have largely been closed, but global coordination continues to evolve.