Google Strikes Deal With U.K. Tax Authority

DAVOS, Switzerland—Google said Friday that it has struck a deal with U.K. authorities that will settle a tax dispute and boost its corporate taxes in Britain, part of a broader effort by European governments to wring more out of big firms in the tech sector.

As part of the settlement, Google will pay £130 million ($185 million) in back taxes and interest covering the years 2005 to 2015. The company also committed to paying taxes based in part on the revenue it brings in from U.K.-based advertisers, a move that will boost its tax payments in what is the company’s second-largest market after the U.S.

“The way multinational companies are taxed has been debated for many years and the international tax system is changing as a result. This settlement reflects that shift,” said a spokesman for Google, a unit of Alphabet Inc.

HM Revenue and Customs, the U.K.’s tax authority, lauded the deal as a “substantial result,” adding that “multinational companies must pay the tax that is due and we do not accept less.”

Google’s tax deal in the U.K. is the latest sign that big corporations are moving to change their tax practices amid of a shake-up in global tax rules. The deal could serve as a template for other companies, as well as for other countries.

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Google is, for instance, in discussions with other European countries to settle tax disputes, a French government minister said Friday. A Google spokesman said the Mountain View, Calif., company remains in conversations in France and elsewhere.

Driving the change: The Organization for Economic Cooperation and Development last fall issued a series of recommendations aimed at stopping large companies in many industries from using complex but legal structures to avoid paying hundreds of billions of dollars in corporate income taxes every year.

At the same time, the U.K. passed a new “diverted profits tax” that would make companies pay a higher punitive tax rate for profit that a tax official determines to be inappropriately shifted to lower-tax regimes.

In response, executives at several technology companies have said they are considering relying less on some offshore tax havens, while declaring more income in countries such as France, Germany and the U.K. Amazon.com Inc., which is facing a tax inquiry at the European Union, last summer changed its European structure to begin collecting revenue and charging expenses from units in individual European countries, rather than selling everything in Europe from its Luxembourg headquarters.

However, it remains unclear whether the change will boost tax revenue for the countries because Amazon’s retail business has very thin profit margins. Apple Inc., which is also under EU investigation, late last year reached an agreement with Italy’s tax agency to settle a dispute stretching from 2008-13, agreeing to pay about €318 million ($343 million).

Amazon and Apple have said they pay all the tax they owe.

Google’s current structure has faced scrutiny as well. The firm collects the vast majority of its revenue from European clients at its Irish unit, irking tax authorities in countries such as France, where local clients generate billions of euros a year in advertising sales.

The company doesn’t generate much corporate profit in Ireland either because that unit pays hefty royalty fees that end up in a unit based in Bermuda, where there are no corporate income taxes.

In 2013, Google used the structure to send €9.84 billion ($10.62 billion) in royalties to a Bermuda-based company registered in Ireland, according to company filings.

Local Google units like those in the U.K. have until now generated revenue only from cost-plus contracts in which Google parent companies in Ireland and the U.S. pay the national entities for their expenses plus a percentage. But under the new tax deal, the U.K. unit will also be paid an additional fee based on advertising revenue in the country, boosting its taxable income, a spokesman said.

A spokesman declined to say how much extra revenue Google would allocate to the U.K., or how much its tax bill would go up. Google brought in $5.15 billion in revenue from the U.K. in the first nine months of 2015.

The deal comes after years of parliamentary scrutiny of multinationals’ tax affairs. Mark Garnier, a member of the ruling Conservative Party, welcomed the payment but said he doubts it will stanch public concern over how much tax big firms pay.

“I suspect an awful lot of people will think this isn’t very big amount of money,” he said.

Nonetheless, the U.K. deal could serve as a template for other countries.

Emmanuel Macron, France’s economy minister, said Friday that Google is talking with multiple countries, including France, about how to “normalize” its tax relationships with them, adding that he met in Davos with Eric Schmidt, executive chairman of Alphabet, Google’s parent company.

“I think it’s good to have a positive dynamic on that and the awareness that it has to find a solution with different country members following clear rules,” Mr. Macron said on the sidelines of the World Economic Forum’s annual event here.