Questions in the Mail we can answer

Google’s thousands of UK staff are paid an AVERAGE of £160,000 – so why are they only generating enough profit between them to pay £130million in tax?

Because they’re earning, and paying tax on, £160,000 a year each?

14 thoughts on “Questions in the Mail we can answer”

  1. Probably because they are not working in the part of the business that makes all the money (search engine/advertising) which is operated from Ireland and developed in the US. Google does a lot of software development work (Android/Google APIs) that eventually ends up in Google products but they are simply components of a larger offering and aren’t marketed by the parts of the group that produce them.

  2. Because they (Google) are spending all their (Google’s) money on paying their staff, so there’s nothing left over, and company tax is levied on what you have left after paying your running costs.

    I can’t understand how so many people fail to grasp this. Presumably, they want Google to pay their staff nothing so that they have plenty of surplus to pay tax on instead.

  3. Presumably, they want Google to pay their staff nothing so that they have plenty of surplus to pay tax on instead.

    This has been the Left’s bone-headed contradiction since the GFC: for decades they championed increasing workers’ pay and diminishing the profits left over for the Fat Cat owners. Now they’re complaining the workers are paid too much and the company doesn’t make enough profit.

  4. Because the £160k is largely share-based, which is related to the overall results of Google US (as reflected in the share price) rather than anything that’s happening in the UK.

  5. I think the fundamental problem is how much these workers “generate profit”. They aren’t really working on a discrete business unit that we can say is generating $X revenue (then we can subtract $Y of costs for this British unit and say Britain makes $Z of profit for Google). If they are just working on Google’s codebase how could anybody – including Google management – know exactly how much revenue particular bits of code are making?

    It is easyish to establish where a company’s costs are happening (transfer pricing being the trickiest part from what I can gather) but for a complex product system like Google it is far harder to attribute revenue to those costs to allow you to construct a sensible “profit generated” for each cost centre.

    I think what people hate about the Google situation is that they can see Britain earns Google $A in revenue (even if it gets booked as sales in Ireland) while Google spends $B here, so Google nets out a profit of $C from Britain. But those figures A and B have really got very very little to do with each other.

    Moreover we would be severely ticked off if a major British-based exporter ran with the argument “our revenue from Britain is a mere $A, since most of our sales are exports and should morally count as revenue in the country of destination. Since we export so much of our produce, highly successfully, then $A is far lower than our production costs in Britain of $B, so Britain is a net negative $C for us and we would like to skip the corporation tax this year thanks”.

    Which is why we don’t structure things that way.

    But the more I think about it, I can see how we might track revenues and can see how we might track costs but because it is essentially impossible to tie them together in complex cases, I’m not sure it even makes sense to talk about the “true” profit generated by a multinational in a given country. One could calculate a profit figure based on a particular accounting system, or get a quite different figure based on a different system, but I don’t see how you can find one that is philosophically coherent about its attribution.

    I admit that the technical aspects of this are well over my head.

  6. Google has a largish development group in London (so a cost-centre). This is probably why France/Italy managed to squeeze more tax out of them, in the UK they subtract that cost and if the UK tries for more they just move those jobs else where (they have offices in Geneva and at least some London based developers who where employed in the early years and made a bundle have moved there for tax reasons).

  7. The Wail may have been inadvertently clever here, squeezing in a bit of hatred of people who earn £160k a year on top of the usual two minute hate of Google.

  8. @myburningears

    And yet Murphy and others are declaring the proposed introduction of Country by Country reporting to be a major win and that it will massively increase transparency.
    The reality is along the lines of what you referred to and it will contain all sorts of allocations and adjustments to make it work, the sort of stuff that isn’t going to be easily explainable or will be too detailed to report on.
    When I pointed this out to Murphy and the current issues from a management accounting perspective of trying to do this he just brushed it off of course and claimed he knew much more about management accounting and that I didn’t understand it.

  9. BNIC

    I’d be quite interested to hear the management accounting side of this… I understand that some management accountants like the idea of splitting a business into “profit centres”, and in principle the sum of the profits of all the profit centres comes out at the group’s profit.

    But in practice some business units are merely “cost centres” – without them the company wouldn’t function properly, and there’d be no revenue generated or at least rather less, but on the other hand there is no revenue stream that is specifically “caused by” or “owned by” or “allocated to” that unit. (I understand there is a whole taxonomy of “investment centres” and so on. And that a lot of strategy people are pushing alternatives like “balanced scorecard” rather than judging managers of such units based on the profit they theoretically are generating, or for cost centres, purely in terms of how much cost they are avoiding. The problem with cost centres slashing costs is an obvious one – there’s no revenue stream directly attributable to them, but if they start cutting corners e.g. on product support then revenue will sure enough start to fall once its knock-on effects are felt. Similarly, profit centres are not generally completely insulated from the rest of the business, and a manager can increase “his unit’s profits” by taking a course of action that can reduce group profits. So a balanced scorecard approach tries to realign their objectives closer to the company’s.)

    Anyhow, if management accountants don’t seem to have truly solved this problem, it looks to me (as an outsider without deep technical knowledge) that it may simply be an unsolvable one. As far as I can see, profit is not an inherently geographic phenomenon, so to talk in a definitive way about “this much profit being generated in country X” when dealing with a multinational corporation selling complex services might not be particularly meaningful.

  10. I mean, there is obviously an accounting basis on which taxes are paid, but I can’t see how companies can know the “true” (as opposed to “reported”) profit a given country is responsible for, in much the same way a company can’t really know how much profit is “due to” a given employee (which is basically a more granular version of the same fundamental problem).

  11. In simple terms id say that typically you want to seperate out your ‘profit centres’ and then look at a form of gross margin (revenue less direct costs) that is often referred to as contribution, from this you deduct all your cost centres to give net profit (contribution to fixed/admin costs being a fuller title).
    Then you can play allocation games to attribute those areas below contribution costs to profit areas usually along lines of some set figure (no. of staff, floor area, revenue, etc.) to derive a net profit for each area.
    So for example a R&D department might have its costs allocated on the basis of sales per country with the assumption that it is for general growth, alternatively you could break it down further so that say for Google all android development is allocated across countries by the number of reported android users per country and so on. Development could be a mixture of specific such as localisation charged direct to a an area and general based on customers etc. Corporate HR could be by employee and so on
    The point is that below contribuiton all your doing is playing games with the numbers to improve your understanding it isn’t going to be definitively correct.
    Just agreeing an allocation basis can be painful, then there’s the whole budget v actual issues, so if a cost centre goes over budget who is to blame and how is the cost shared? If allocation is based on actual numbers then underperforming profit centre means you receive a smaller share of allocations so someone else who is on target now has to foot a larger share of the bill and so it goes on and on

  12. This of course leaves aside of what is your revenue for a country, so for Google is it all customers based in the country (british advertisers) or all ads served in that country (users in Uk clicking on links) or some mixture of both, not as straightforward as some would have you believe. Just look at some of the issues around VAT and who pays it, where and when to see some of the problems

  13. BNIC

    That’s very informative. Thanks for taking the time.

    Re “This of course leaves aside of what is your revenue for a country”, there’s also the issue of whether a unit in Country A can export to Country B, which is part of the Google brouhaha of course.

Leave a Reply

Your email address will not be published. Required fields are marked *