This $2 billion that which Google makes by selling advertising services to Australian people and companies advertising to other Australian people and companies is not booked to Google Australia though. It is booked through Singapore to Google Asia-Pacific. Photo: Reuters

How much tax does Google really owe Australia? Its submission to the parliamentary inquiry into corporate tax avoidance says Google doesn’t owe this country a zac.

In fact, we should be thankful, because it is doing us a favour.

Google not only says it complies with the laws of this country but, because it is such a terrific employer, it creates economic growth too.  It also fuels innovation, in a country that really needs it.

The submission is not as complimentary about Australia as it is about the munificence of itself, Google.

On our layman’s figures, however – and in light of Google’s sketchy public disclosures – it is making off with at least $130 million a year that belongs to the Australian taxpayer, and rising.

How do we get to $130 million and rising?

The sales that Google Australia makes in Australia are not the same as the sales it records in its financial statements. This company is an edifice of artifice.

The sales in its financial statements hail from three parties only – three Google entities overseas that contract with Google Australia to do research and development.

Thanks to this lurk, Google Inc helps itself to millions each year in tax deductions under Australia’s generous research and development tax scheme. If you thought the intellectual property arising from this taxpayer-subsidised work stayed in Australia, you would be wrong.

On the flip side of this accounting chicanery is the reality of Google’s business in this country – it sells advertising services.

Local advertisement sales are estimated – and Google does not deny this – at $2 billion-plus. This $2 billion that Google makes by selling advertising services to Australian people and companies advertising to other Australian people and companies is not booked to Google Australia though. It is booked through Singapore to Google Asia-Pacific.

Google Australia deems for accounting purposes that its Australia business is actually a Singaporean business. The Australian Tax Office is apparently yet to challenge this.

Turning now to statements made by Google Australia’s ultimate parent company, Google Inc. Google Inc does not disclose the percentage of revenue or profit the group sources from Australia. It does, however, disclose that 45 per cent of its revenue is sourced from the United States.

Using some comparative data from the public domain, it is possible to estimate Google’s Australian-sourced income on which it pays no Australian tax.

Australia’s population is about 7.2 per cent of the US (22.7 million versus 313.9 million). The per capita GDP of both countries in 2013 was about the same ($A44,000 versus $US46,000). Spending patterns and spending per capita on Google services are likely to have been similar.

Based on the consolidated revenue disclosed in Google Inc’s financial statements, it is reasonable to estimate that Google Inc’s consolidated revenue from Australian sources was about $2 billion – that is, 7.2 per cent of 45 per cent of $US59.8 billion.

Applying the same formula to Google Inc’s $US14 billion consolidated profit before tax, you would expect that Google Inc’s consolidated profit before tax from Australian sourced income is close to $454 million.

If that profit had been taxed at source in Australia, it would have required Google to contribute $136 million in 2013 as tax expense to the Australian government.

Compare this to the $4.3 million tax credit Google Inc secured through Google Australia in 2012 and the 467,000 tax expense Google Australia declared for 2013.

That is correct – it should be paying $136 million, at least, but is actually paying less than $500,000 in tax.

Its financial statements for 2014 are due to come out in April. No doubt, while helping itself again to R&D tax breaks, Google Australia will pretend again that its Australian advertising business ought to be considered Singaporean, so it pays less tax (rates are lower in Singapore).

No doubt it will also pay a bit more tax this year to dress up – via a large percentage increase, as did Apple recently – its noble and generous contribution to the Australian polity.

This will be interesting to watch, given the company is yet to distance itself from its own claims, espoused in glossy magazine features, that it “paid” $7.1 million in tax in 2013, when it actually paid less than $500,000.

Another, far more credible submission to the parliamentary inquiry was filed last week by Dr John Millar, formerly senior partner of Hungerfords, which became part of KPMG, and president to the precursor body of CPA Australia.

Millar advocates changing the tax laws to require directors and advisers such as auditors to act in the public interest.

“It appears doubtful that today the profession’s leaders would or could act with the force of some 30-plus years ago, when the professions were confronted with the widespread use of the ‘Bottom of the Harbour’ tax schemes unearthed in the Costigan QC Royal Commission,” he said.

“The profession’s then leaders, myself included, banned the use or promotion of such schemes … where the sole aim was tax minimisation and was without any commercial motive, transactions or relevance.

“Today it would appear that artificial tax minimisation, within the law, is now seen as a commercial strategy. Under the earlier dictum this clearly would not be permissible.”

Too true.