SUMMARY
Google India remitted a total of $2.18 Bn revenue earned from India to its subsidiaries in Ireland and Singapore
It has categorised the remittance an expense towards “purchase of advertising space”
The Indian tax authorities have contended that such transfers are not cost or transfer of profit, but ‘royalty’, which is subject to tax
Google India may face a fresh tax liability on the $2.18 Bn (INR 16,119.6 Cr) of revenue it earned from India over the past five years, which it has remitted to its subsidiaries in Ireland and Singapore.
In a report, ET analysed five years of financial statements from the company, noting that Google India had remitted a total of $2.18 Bn (INR 16,119.6 Cr) towards expense on “purchase of advertising space”. This is the biggest cost item in Google India’s profit and loss statement under ‘Miscellaneous Expenses’ for the period 2013-14 to 2017-18, as per regulatory filings made with the Registrar of Companies.
These transfers amount to about 50-60% of the company’s total revenue in India over the five-year period.
The tax authorities have said that such transfers are not a cost or transfer of profit, but ‘royalty’, which is subject to tax.
For the uninitiated, in 2007, the I-T Department, Bengaluru, had raised questions over the company transferring its advertising revenues to its Ireland office without paying any taxes.
The development comes on the back of the ITAT’s October 2017 ruling for the assessment years 2007-08 to 2012-13 directing Google India to pay taxes on $199.85 Mn (INR 1,457 Cr) — the total amount that it had remitted to Google Ireland during that period. Google India appealed against the ruling in the Karnataka High Court (HC), following which it won an interim stay. The next hearing is scheduled for later this month.
According to the Google Adwords Program Distribution agreement, Google India was granted the marketing and distribution rights of its Adword programme to advertisers in India.
In its defence at the Karnataka HC, Google India had raised a number of points arguing that Google is merely a reseller of advertisement space wherein advertisers select keywords and place bids on the online auction.
In a fresh statement, a Google representative reportedly said, “We comply with all tax laws in India and pay all applicable taxes. The ITAT order was a clear departure from previous judgements on the issues and not in line with India’s double taxation avoidance agreement. We continue to represent the facts of the case at the high court as the ITAT ruling is based on an inaccurate representation of our business operations in India.”
The report cited tax officials as saying that Google India will be liable to pay tax on the transfers until 2016, the year in which an indirect tax in the form of an equalisation levy was introduced. From FY17, after the equalisation levy was introduced, Google does not have to pay a withholding tax on royalty.
The equalisation levy is a 6% upfront tax that advertisers have to pay to digital service providers, and is also known as the ‘Google tax’.
In FY18, Google India reported a 30% increase in its revenue at $1.28 Bn (INR 9,337.7 Cr) with profit after tax rising 33% to $55.88 Mn (INR 407.2 Cr). The amount transferred for “purchase of advertising space” rose 36% to $679.29 Mn(INR 4,949.6 Cr) in the same time period.
Google India also increased its salary and wages expenses by 91% while advertising and promotion costs increased fivefold.
During the same five-year period, Google India’s profit margin remained steady at 4-5%.
Big tech companies like Facebook and Google are bracing themselves for heavier taxes as dozens of countries are developing policies which could force such companies to pay taxes on the revenue generated in a region rather than on profits.
Google has been embroiled in controversies previously in India. Earlier this year, the Competition Commission of India (CCI) imposed a penalty of $21.13 Mn (INR 136 Cr) on Google for conducting “unfair business practices” in India for online search.
Similarly, the Indian tax department slapped a penalty of $11.8 Mn (INR 76 Cr) on Google on account of misleading tax assessments in FY 2008-09.
In 2016, Google faced a criminal charge in the country after its image search results showed Prime Minister Narendra Modi among the world’s Top 10 criminals.
Amid tax breakdown and backend issues, Google has been spreading its services aggressively in the country and betting on Indian startups as it taps into the ecommerce segment and digital payments via Tez (now Google Pay). Google has also agreed to abide by all data privacy requirements of the RBI but has sought more time for the compliance.
