“The Internship” isn’t exactly a movie that you’d expect to get into complex issues of international tax.
But the dopey, crude comedy--in which Owen Wilson and Vince Vaughn play two out-of-work salesmen who try to cut it at an internship with Google—actually touches on some complex technological issues that have confounded tax authorities around the globe. And, critics allege, have allowed big tech firms—including Google—to park millions of dollars of profits in offshore tax havens.
The central joke of the movie is that although Wilson and Vaughn’s characters are affable and slick salesman, they’re hopelessly out of date and out of touch in the new, digital economy. They’re talented salesmen—“I could sell prosciutto to a rabbi, and I have,” Vaughn brags—but those skills are useless in an age where products and information are always a click away.
“It’s cheaper for machines to tell companies how much to order than for you guys,” their former employer, played by John Goodman, yells at them before letting them go.
They protest—“People have a deep distrust of machines. Haven’t you seen Terminator? People want to deal with people!”—but Goodman snarls back: “People hate people!”
Of course, the two stars eventually adapt themselves to the world of Google, while teaching their team of introverted computer savants the importance of focusing on humans, not computer algorithms. Ultimately, they all win permanent jobs at Google by using technical wizardry and old-fashioned handshake skills to sell the company’s services to a local pizza parlor. (According to the L.A. Times , Google cooperated with the filmmakers, allowing them to film on their campus cost-free and giving input on how their products were portrayed.)
So where does international taxation come in?
The movie’s central question—do companies need salespeople anymore?—is at the heart of political controversies over tax avoidance around the world, but especially in Europe. And the issue often comes down to what John Goodman said—these days, computers can do a lot of the stuff that people used to do. And that is confounding traditional ideas about where money is generated, and where it should be taxed.
The employment of salespeople—or, more precisely, agents with the legal authority to bind the principal to a contract—is often a key factor in determining whether a company has a permanent establishment, or a taxable presence, in a country other than the one in which it is incorporated.
To use one recent, high-profile example, Google has been sharply criticized by some British members of Parliament for, they claim, manipulating the PE rules to avoid paying taxes in England despite employing more than 1,300 people there, according to a report from Parliament’s Public Accounts Committee ). Those workers are employed by Google UK Ltd, a Google subsidiary. But when British companies purchase services from Google, they do it through the company’s European headquarters, located in Ireland.
Google claims that the U.K. employees are only promoting or marketing the service—they aren’t closing deals or negotiating terms. Thus, the money flows from the United Kingdom to Ireland, where it is taxed at a much lower rate.
The parliamentary report claims that from 2006 to 2011, this arrangement allowed Google to shift $18 billion in U.K. revenue out of the reach of Britain’s tax collectors.
Critics are also very skeptical of Google’s claims that its 1,300 employees aren’t salespeople. A Reuters investigation noted that Google itself often referred to many of the employees in the United Kingdom as its sales unit, and some of the employees described themselves as salespeople on their resumes and LinkedIn profiles. They also worked on commission and had sales targets—things often associated with selling.
The report called Google’s claims “deeply unconvincing,” and alleged that the only reason for Google’s corporate structure is to avoid paying taxes in the United Kingdom.
Google executives, as you might expect, strongly disagree. During a May 16 hearing, Matt Brittin, Google’s vice president for sales and operations in northern and central Europe, noted that the vast majority of buyers in the United Kingdom—99 percent—never have any contact with a Google employee. Complex computer algorithms, developed by engineers in the United States, determine where a purchased ad will be seen and how much it will cost. That’s where the real economic activity is happening, Google claims—not in a sales office but in a tech lab thousands of miles away. Things that used to be determined during a half-hour martini lunch can now be worked out in a few milliseconds of computing.
True, a slim percentage of deals with larger clients do need some extra human attention, Brittin conceded. But in those cases, the U.K. employees just grease the rails for the ultimate decision-makers in Ireland.
“Clients may well feel that they are selling: we hire people with sales skills and they are encouraging people to spend money and showing them the business case, but what is very clear is that no money changes hands—and there are very good reasons for this,” Brittin said.
In short, Google is claiming that their salespeople aren’t binding Google to a deal, because those deals are available to anyone willing to click onto their website and agree to its terms. That on-the-ground employees are there to help you along to their website is only an auxiliary function, the company contends.
Of course, the relationship between Google’s U.K. employees and its Irish headquarters is very complex. As one member of Parliament noted, U.K. employees are involved in researching and setting the search terms that ultimately set rates for the U.K. customers. Doesn’t that make them part of the negotiating team?
Tax experts note that, traditionally, information gathering is seen as being separate from deal making.
“There's no question that if you've got an employee in another jurisdiction, and all they're doing is sending that information home, even on potential clients--that's not going to create a permanent establishment,” said David Cameron, a professor of law at Northwestern University. “Given the flexibility that telecommunications and the Internet provide, the former conditions under which these rules makes sense don't really exist any longer.”
The Organization for Economic Cooperation and Development, which sets international transfer pricing standards, is expected to examine these issues, both in a working group on permanent establishments and in its project on base erosion and profit shifting.
None of this would matter for Vaughn and Wilson, since they’re working in the United States, where Google is incorporated. But if they’re transferred to London, they’d be a perfect example of these confusing definitions. The message of the movie seems to be that old-fashioned people skills are just as important in the digital economy as computer programming—but that would seem to belie the company’s claims that the majority of its sales are generated not by the people, but by the algorithms.
Alex Parker, Staff Writer, Transfer Pricing Report
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