Spanish tax authorities raid Google: Why are tech giants under scrutiny?

Less than a month after officials raided Google's office in Paris, authorities in Spain conducted a similar raid in Madrid to investigate suspected tax evasion.

First Look

On Thursday, just a month after Google was investigated for suspected tax evasion in France, Spanish officials raided Google's offices in Madrid, authorities said.

A spokeswoman for the search engine giant, which is part of the holding company Alphabet Inc, said in a statement that the company complied with tax law in Spain and other foreign countries, Reuters reports. Google was actively cooperating with authorities in the tax probe, she added.

In recent years, many American firms that operate extensively overseas have faced scrutiny in Europe over their tax practices, with tech firms particularly coming under the microscope because of their lucrative online advertising arms.

Some actions the firms take, such as funneling profits through subsidiaries in Ireland, which has one of the lowest corporate tax rates in Europe, may be legal. But regulators' scrutiny – and the resulting public outcry – is also reflective of a growing wave of populist anger about rising inequality.

"We are in an age of deep public spending cuts and real austerity," Stuart Roper, a corporate reputation expert at Manchester Business School, told the BBC in 2013. "And this [tax avoidance] is not a victimless crime, if you like. If this was six or seven years ago, pre-financial crisis, I don't think it would have had the same impact it's had now."

That concern contributed to public outrage over the release of the Panama Papers, the massive trove of documents from the Panamanian law firm Mossack Fonseca in April that implicated a variety of prominent politicians and celebrities from around the world in setting up shell corporations to avoid paying taxes.

In France, the raid on Google's Paris offices focused on whether Google's arm in Ireland has a permanent office in Paris, and whether it was meeting its French tax obligations, Reuters reports.

In a twist, the investigation was conducted mostly offline. For secrecy, Google was given the codename "Tulip," a reference to the unofficial national flower of the Netherlands, where Google had registered its operations, The Christian Science Monitor’s Lonnie Shekhtman reported.

"Through Google France – which employs about 700 people – they strike advertising deals with industrial and economic operators, yet this company is a front," Eliane Houlette, who directs France's financial prosecutors, said in an interview on French radio station Europe1, according to Bloomberg.

The company's scheme is complex, notes Ms. Shekhtman:

International filings show Google is moving money from one subsidiary in Ireland to another one in the Netherlands, and finally to a different Irish subsidiary that is physically based in Bermuda, the land of zero corporate income tax.

Google's main European arm is located in Dublin, Ireland, where a loophole in international tax law allows the tech company to pay little tax because staff in Dublin complete the company's sales contracts, Reuters reports.

For Google, it paid off: by moving $12 billion international revenues to a shell company in Bermuda, the tech giant saved $2.4 billion in taxes across the globe, according to filings Google’s Dutch subsidiary filed with the Dutch Chamber of Commerce in February.

Some observers say the increased scrutiny offered by the Panama Papers and other investigations could also potentially lead to financial reforms.

"It's interesting how crisis can be a catalyst," Tom Cardamone, managing director of Global Financial Integrity, a research and advocacy group in Washington, told the Monitor in April, referring to the way the 9/11 terror attacks prompted actions to improve transparency in the global banking system. "Hopefully these revelations will also be seen as a type of crisis."