Taxing Times -Google and Tax

Google will pay 130 Million GBP in back taxes to the UK Government, in settlement of any potential dispute as to whether it should have paid more in the past. Whether Google has thereby established a new tax rate for the future I’m not sure. But if it has, it amounts to a derisory rate – about 3% on the real profit it obtains from its UK sales, some say.

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Large multinationals, especially those providing software or services, take enormous and conscious advantage of the lack of clarity surrounding concepts that we too easily take for granted – such as the concept of a sale.

I am no tax expert, but I would presume that the idea of corporation tax, the tax on a company’s profits, is to tax economic activity in the country where that activity is carried out. This is fair recompense for the physical infrastructure, legal protection, and military protection that the taxing government provides.

But how do you define economic activity and its location?

In determining profit, there is on the one side revenue (usually a company’s sales) and on the other side there is cost. In general a company will want to record its revenue in the most lenient tax jurisdiction it can find.

So that’s why, if you’re a British entity you may well find that when you buy services from Google, you are actually buying them from Ireland. You will receive an invoice from an Irish company, and you will pay to an Irish company (let’s put aside the issue of whether an Irish company can run a bank account in the UK – that’s probably another complex matter, but we won’t go into it here). Your contract for the provision of services (an agreement that services will be supplied in return for money) is with an Irish company. This means that revenue is booked in Ireland. Google will then subtract costs and pay tax at a relatively lenient corporation tax rate on the difference.

In some circumstances you can imagine that Google needn’t even run a company in the UK. It might operate entirely in Ireland, and its forays into the UK might be confined to the occasional salesman’s visit. Indeed some companies operate in this way. They simply provide goods or services from another country. If you buy contact lenses, for example, from a Czech company and receive them in the UK, the Czech company’s costs will amount only to delivery costs, but even these would be contracted with a logistics firm in the Czech Republic. Fair enough? Possibly.

But of course Google does incur costs in the UK, and some of these, one might argue, are related to the services it ‘sells’ from Ireland. There may be a marketing, or sales department based in the UK, whose job is to cajole British companies into using Google’s services. And I would imagine that Google does indeed offset these costs against Irish revenue, by subcontracting ‘marketing and sales’ services from the Irish entity to the UK one, with a mark up on costs for the UK company. Thus a small profit is made in the UK on services provided by the UK entity to the Irish one. But the main profit is made in Ireland where customer revenues are booked, and where tax is lower.

But I also know for a fact that Google does incur other costs, such as marketing costs, in Ireland. I regularly receive calls from Czech (and also English) speakers based in Ireland who explain to me that by spending more on Google’s Adwords services I will sell more of my own company’s software and services.

The conceptual difficulty lies in the definition of a sale and where it takes place.

The Shorter Oxford English Dictionary (the 8,000 page version) defines a sale as:

the action or an act of giving or agreeing to give something to a person in exchange for money

Putting aside ‘agreeing to give’, a stage in the process (signing a contract) which doesn’t allow a company to book revenue, this definition is woefully inadequate for our purposes. Whilst it does cover the giving of goods (as in a shop), services (‘giving’ consulting, whether at a client’s offices or remotely) and the granting of a right to use software, it doesn’t help us to clarify where the ‘act’ takes place.

Many companies regard the ‘act’ as simply that of printing a bill (an invoice). Even if vast costs are incurred in the UK by sales representatives, in marketing, and so on, the ‘act of sale’ happens in another country because that is where the bills are created (and you could even imagine that these bills might be created by accounting clerks in the UK using software running on UK-based servers). In the end what it comes down to is that the ‘act’ is often generously defined solely in terms of the legal location of the company into whose accounts the bill will be booked.

If you broaden the concept of the ‘act’ to include all the surrounding precursor activities, such as marketing, business management, warehousing, even manufacture, then you might go a long way, with some kinds of company, towards capturing a larger taxable profit.

But take Amazon. Amazon does, indeed, do many of these things in the UK, but it’s one of those large international companies currently under scrutiny for its low taxable profit.

In any case, this approach doesn’t work well with software companies such as Google or Microsoft, or any of those whose marketing, products and delivery mechanisms are all digital. It isn’t easy to say where the ‘acts’ of sale occur. Underlying software (including its development), databases, support teams, even marketing teams, may be located outside the jurisdiction of the companies that are buying the company’s services. So, where should profit be taxed?

It’s not easy. If you go so far as to say that a company should be taxed in the country where its customers are you open up a Pandora’s box of complexity. My companies, LLP Group and systems@work, sell software and consulting services in seventy or so countries around the world. How would we go about declaring profits in each of these?

Some of these countries, it is true, charge a withholding tax on invoices we send to our customers. So, if we bill 100 to Albania, we might receive only 80. This mechanism, I suppose, is designed to prevent the movement of profit from Albania to the Czech Republic, and if we furnish proof of this payment to the Czech tax authorities, we can reduce the profits we pay here. But this mechanism is generally and rightly regarded as obstructive and most countries abandon it when they are fully integrated into the global economy. It is a huge disincentive to business, and more often than not simply results in fees being uplifted by the selling company to compensate for the frequent failure to make all the paperwork work.

It isn’t easy to set policy, but certainly something needs to be done. It seems obvious to the man in the street that Google ‘acts out’ its invoices in Ireland to reduce its tax bill in the UK.

But does the solution lie in the harmonisation of tax policy, or in taxing sales activity using a broader definition, one that reaches as far as the location of the customer?

Sorry, it is a dull topic, but it’s a hugely important and difficult one, and it concerns billions in taxes.

Sweetening the Pill

‘People buy from people,’ we’re told, again and again, if we’re in the business of sales. It’s not about the product: it’s about YOU.

I say this myself to our sales staff in LLP Group and systems@work. We write and sell software, and provide the consulting days that make the software work. Of course, I don’t mean to imply that the software product and what it can do is irrelevant, but rather that in making our software work for a customer it’s only partly about the product, and as much about the skills of the people involved in the sale and implementation, including their personal skills of persuasion and determination. Assuming, of course, that during the sales process our sales staff are selling as if they are honest and realistic consultants, which, often, they have been.

People buy from people. And people buy from people they like. And sometimes people like people because they give them things.

Sales has always been a muddy business. The trick of making people like you should be about what you’re bringing to them ‘professionally’ rather than ‘personally’, but sometimes it isn’t. There are the dinners, the gifts, the ‘training’ trips, the nightclubs, the seats at sporting fixtures, all those benefits that oil the wheels of sales. They’re often above board, completely visible, accountable (even tax deductible) and bring no long-term personal benefit to the recipient, but sometimes they’re not.

The rule in my company is that anything we give to a client or a potential client (and we set a very low maximum) the recipient must be able to declare to his or her boss. We give bottles of wine at Christmas, and we take our visitors out to dinner.

Sales is certainly cleaner than it was, but we’d be lying if we suggested that the reason we are generous to potential clients and existing clients has nothing to do with wanting their business. There are grey areas.

In the world of business-to-business software sales in the private sector it is not complicated. But it all gets much more difficult in areas where ethics and public money are involved, such as in the purchase of pharmaceutical products by publicly funded health services. Pharmaceutical products must be good for the patient, and affordable for the tax payer.

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Over the last few years the practices of pharmaceutical sales teams have come under the spotlight and, as in China recently, pharmaceutical companies have been prosecuted and fined for ‘bribing’ doctors to buy their products.

I don’t know if there has ever been direct under-the-table bribing, such as cash in brown paper bags, but the tentacles of pharmaceutical companies go so deep into the institutions they sell to that it’s difficult to disentangle the ethical from the unethical. They sponsor research, they provide samples, they run training courses, they pay for doctors to go to, and speak at, conferences, they run educational seminars, and often entertain on a lavish scale. It is no wonder that the objective independence of those who recommend and prescribe particular products is undermined, consciously or otherwise.

So great have been some recent scandals that regulation has now begun to intrude on these practices. One consequence is that pharmaceutical companies must now track and report on all the ‘benefits’ they provide to Health Care Professionals (HCPs). This reporting is enforced both internally but also by statutory bodies. The value of all benefits must be reported by expense type, by organisation and by individual (and by the role they perform in the organisation).

This is where expense@work comes in. I’ve recently been engaged in trying to sell our expense management software to a pharmaceutical company that’s under pressure to provide exactly this kind of HCP reporting. It’s easy for us, and I can easily configure the system to track expenses not just by the elements that are needed for accounting purposes (expense type, description, gross value, VAT value and net value, in transaction and local currency) but also by organisation and particular health care professional (if appropriate) and by pharmaceutical product area and product.

I can picture the sales representatives assiduously entering these data into our system and I don’t suppose they would like doing it, but transparency in the slightly murky area of pharmaceutical sales is long overdue.

Pharmaceutical companies are essential. Where would be without them? And it is legitimate that they should actively advertise and promote their products. This means relationships with HCPs at all levels. The provision of education and training is part of the process too. But even if there’s complete transparency, it’s still important to be nice. People will always buy from people.

The Art of Consulting – Selling

For many consultants the idea that they might sell their skills is anathema. They prefer to delegate such activities to sales staff, who, supposedly, aren’t offended by the grubby world of money – of price, of fee rates, of raising invoices, handling disputes and getting paid.

Consulting, they like to believe, is about ideas, about working in a collegiate, almost academic, atmosphere, with clients who are almost friends. And when do friends ever need to talk about money?

Your idea of a salesman?

Such consultants (and I have been one of them) will work extra hours without payment, and are motivated by their fascination with the work they do, rather than by the material rewards that follow. Their clients love them, and their work is often, but not always, profitable.

But the idealistic approach is ultimately dangerous. Your client may love you, but you’ve still got to pay the rent. If there are consultants of this kind, doing far too much for their clients, willing always to accommodate additional demands, to extend the scope of a project without commercial discussions, I can only think that this must reflect some kind of insecurity, as if they are uncertain of the value of the analysis and advice they are delivering. It certainly isn’t the basis for a healthy relationship between consultant and client.

And if a consultant thinks of sales activities as in some ways contemptible, this merely reflects a misunderstanding of sales staff and what they do.

My own experience as a manager and entrepreneur is that the best sales staff are those who have formerly been consultants, though I shared some of these ‘uncommercial’ views when I was a young consultant. Like consultants, sales staff must listen more than they speak, ask penetrating questions and demonstrate knowledge, wisdom and pragmatism. The good ones don’t sell the impossible, don’t promise more than their consulting team can deliver. They know what they are talking about, and they will only convince a client to buy their services if the client recognises that knowledge. After all, you can’t sell ideas if you don’t understand them.

Selling consulting services is a difficult task. You must be proficient, not only in the technical matters of your profession, but also in the particular skills of selling, which include:

Qualifying – determining if the potential client is serious, has a budget, needs the services you are offering, has the time to devote to the project you are proposing, and ensuring that the people you are talking to are in a position to make a decision
Scoping – agreeing as precisely as possible the scope of services being proposed, shaping them into affordable packages, especially if there’s a need to prove your value
Pricing – determining the price that a potential client is willing to pay (this is the area where the timid consultant is most likely to fall short!)
Persuading – understanding and overcoming the particular objections of those involved in the decision to buy
Demonstrating Competence – showing deep understanding of the client’s needs, and demonstrating competence by fielding all the appropriate skills the company has to offer
Providing References – using strong relationships with current clients to gain the confidence of the potential client

..and there are many more.

The point is that almost all of these are skills that are close to the non-technical skills that all consultants must possess. They are the usual consultants’ skills, simply extended by techniques such as ‘solution selling’. If you are a good consultant you can be a very good salesman.

But beyond the special task of working on a sales opportunity, there are sales skills that all of us must demonstrate daily as consultants. We must always be ready to promote our company, our brand, our special knowledge, our methods, or any of those other things which differentiate us from our competition. This doesn’t mean parroting slogans or nagging our clients for additional work, it means confidently supporting and promoting our skills whenever opportunities arise, and, through good questioning, seeking them out. After all, if the client is rational, he or she is buying your services because the benefits outweigh the costs.

A certain kind of diffidence is understandable. Many of us see every side to a question, and when we put forward advice to our clients we do so in the circumstances and with the view that on the balance of probabilities the course of action we suggest is the best. We are not always certain and we often lay out the risks as well as the options. But this doesn’t mean we should not be confident in our skills, and if we are confident in our skills we should be confident of the value that we offer to our clients, and reasonably expect payment for what we do.

In fact, we usually find that our clients want us to be successful, that they respect us well enough to want to pay us for our time. It isn’t a zero sum game and most clients don’t negotiate as if our gain is their loss.

If ‘selling’ means identifying opportunities that will bring benefit to our client as well as to ourselves, then we must all be ready to ‘sell’. And if someone suggests you might be a good sales person, don’t be offended. It can be a good career move into a very respectable profession.

Adam Bager

Occasional thoughts on IT, Business and Other Matters

Tag Archives: sales

Taxing Times -Google and Tax

Sweetening the Pill

The Art of Consulting – Selling