Tax police in Milan have launched a special investigation into Google Italy for a suspected tax evasion scheme involving affiliates in several countries.
Details of the investigation came to light following an inquiry from a Democratic Party deputy in the Italian Parliament and a detailed investigative report in the Irish Times. The investigation has established that between 2002 and 2006 Google Italy avoided paying ¬96 million (US$125 million) in value added tax on undeclared revenue of ¬240 million, Economy Ministry Undersecretary Vieri Ceriani said Wednesday in a written response to the question from Deputy Stefano Graziano.
Italian tax authorities were working to identify other multinationals active in the electronics and e-commerce sectors believed to resort to aggressive international tax planning strategies for a heightened level of fiscal monitoring, Ceriani said in his response.
Italian media identified Amazon, Apple and Facebook as being among the candidates for closer scrutiny but an Economics Ministry spokesman declined comment.
In his parliamentary question, Graziano said Google avoided declaring its Italian revenue to the Italian tax authorities by presenting sales as marketing services to Google Ireland.
Graziano said Google's Italian revenue had grown significantly since 2006 and was estimated at ¬400 million in 2009, ¬550 million in 2011 and as much as ¬700 million this year.
"The current deep economic crisis calls for more vigor and determination," Graziano said in a statement published by the Corriere della Sera Thursday. "Otherwise there is a risk that Italian companies will find themselves at a distinct disadvantage relative to companies based in countries offering greater fiscal advantages. It's a matter of social justice that cannot be overlooked."
The use of international tax havens by major multinational corporations is currently under investigation by authorities in Britain, France, Germany and at the European Commission in Brussels.
Google's use of the "double Irish Dutch sandwich" to minimize its tax burden was explained in an article published by the Irish Times at the beginning of November.
"The system takes advantage of low corporate tax rates in the Republic [of Ireland], the Netherlands and various jurisdictions such as Bermuda and the Cayman Islands," the article said.
"The California-based parent licenses its advertising software and technology, the company's main revenue earner, to a subsidiary, Google Ireland Holdings, an Irish company controlled from Bermuda, and thus based there for tax purposes," the Irish Times said.
Google Ireland Holdings in turn licenses the technology to a Dutch-based shell company, which licenses it back to Google Ireland Ltd, which employs a staff of 2,000 in Ireland. Google Ireland Ltd collects all advertising revenue generated outside the U.S., pays part back in royalties to the Dutch subsidiary and then passes the bulk of the revenue to Google Ireland Holdings in Bermuda, where there is no corporation tax.
The passage through the Netherlands was needed because a direct transfer to Bermuda would incur Irish withholding tax, the Irish Times said. Google Ireland Ltd generated ¬12.5 billion in revenue last year, paying ¬8 million in Irish tax and a further ¬12 million in foreign withholding tax, the paper said.
"We respect the tax laws in all the countries where we operate and we are convinced we respect Italian law as well," Google said in a prepared statement. "We will continue to collaborate with the local authorities to answer their questions in relation to Google Italy and our services."
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