What does it mean?
Google tax is essentially an anti-avoidance tax provision introduced in several jurisdictions after discovering the practice of profits being diverted to the jurisdictions with lower or zero tax rates to save itself from paying taxes.
Why is it named so?
The practice of avoidance of tax is nothing uncommon. Big companies like Amazon, Facebook, Apple have been involved in the same for an extended period. The companies report revenues and earnings wherever they choose, and they often divert profits to low-cost jurisdictions. For example, companies running apps like WhatsApp and games as Fortnite do not hire from countries with high tax rates but earn a fortune from users of the apps and games through in-app purchases and ads.
The unveiling of the practice
This practice came to attention for the first time when authorities found google completing its transactions in countries with low tax costs like Ireland, therefore saving millions in the U.K.
The Role of the U.S. SEC
The U.S. Securities and Exchange Commission (SEC) states that American businesses must publicly report information on where and how much revenue they earn across the globe, allowing foreign authorities to examine any tax avoidance measures that American companies may take.
Introduction of anti-avoidance tax
It led to the introduction of a tax on diverted profits in 2015. The U.K. was the first country to levy a 25% tax , followed by Australia with a 40% . Several corporations have now voluntarily paid the taxes rather than finding ways to avoid them after implementing them. In essence, they have done this to avoid being shamed by the Google Tax. For example, Google paid approximately $185 million in back taxes to Britain.
In 2016, India introduced a tax on digital transactions called the "Equalization Levy." Initially, the amount collected was extremely less, as it was levied just on the advertisement revenue. To compensate for the same, the government introduced a digital tax of 2%. The new provision expanded the scope of the existing equalisation levy beyond online ads to a range of digital services, including e-commerce shopping.