Delfi journalists in Lithuania, Latvia and Estonia, Ugnė Karaliūnaitė, Guna Gleizde and Erik Rand, set out to learn how much of the billions earned by Google and Facebook were paid as taxes in the region.
Advertising specialists have noticed that Lithuanian companies are spending more and more of their advertising budgets on international giants like Google and Facebook. The companies, which have registered themselves in Ireland, have been criticised by revenue authorities and financial regulators in a number of countries for the level of taxes they pay in the EU.
At the end of January, Italian legal officials in charge of financial security suspected that, between 2009 and 2013, Google may have avoided paying €227 million to the Italian government. At around the same time, Great Britain's tax experts also offered their insights into Google’s practices by claiming that, over the last decade, Google had only paid tax of 2.77% on its profits in the country, as opposed to the standard corporation tax rate of 20%.
The company was forced to pay an additional £200 million to the country for the past decade of operating there but tax experts said found this sum was laughable sum given that the company’s profits in Great Britain alone had reached £7.2 billion.
Google and Facebook provide their services in Lithuania through companies registered in Ireland - “Google Ireland Limited” and “Facebook Ireland Limited”. These are the companies that receive payments for advertising purchases made in Lithuania.
It is unclear how much income those companies have generated in Lithuania. Vasaris Oržekauskas, the CEO of an advertising planning and purchase company called Inspired UM, explained why:
“First, you should note that official information on this is not collected. Practically, we can say that, for example, dating apps and websites, credit companies, insurance companies, airline ticket retailers, home supply stores and online shops rely heavy on these forms of advertisements,” he said.
According to him, the amount of money being spent on advertising with these online giants is growing: “I'd say the tendency to invest in social networks and search engines has been around for about eight years.”
Though he couldn't say how much money is spent on these international websites by Lithuanian companies, he did say that these sites formed about 60% of online advertising expenditures in Great Britain.
“We could estimate, then, that the foreign providers could make about €15 million in income per year in Lithuania,” Oržekauskas said, convinced that this sum would continue growing in the future.
How much tax was actually paid in Lithuania?
Since last year, the European Union's new MOSS system has changed reporting rules so that companies that provide electronic services have to pay value-added taxes (VAT) in the countries where they provide their services. Since then, Lithuania has begun receiving tax on sales from companies like Google and Facebook.
Of course, the taxes are received from the end purchaser much like the VAT. When companies buy advertisements from Google or Facebook, the invoices issued by the internet giants' companies registered in Ireland show VAT values of 0.
According to the State Tax Inspectorate (VMI), Google Voice Inc. paid €1,000 in VAT to Lithuania over the first nine months of last year, Google Technology Inc. paid €99,100, and Facebook Payments International Limited paid €98,000. The VMI did not have any data about Youtube, but this company is owned by Google. Linkedin Ireland paid €12,300 in tax to Lithuania over the first nine months of last year.
Neither Google nor Facebook pay corporate taxes in Lithuania because they do not have any registered offices in Lithuania and therefore are not required to do so.
When asked about whether it was believed these internet giants might be hiding taxes from the Lithuanian government, a representative said: “Google has registered the UAB Google Lithuania company whose only shareholder is Google International LLC. Facebook and LinkedIn have not registered any companies, subsidiaries or offices in Lithuania, so these international companies are subject to those countries where their legal entities are registered.”
“Should the need arise, however, the Lithuanian tax administrator can initiate or participate in a multi-party or one-time audits if they have information about potential taxes unpaid to the state or potential tax evasion schemes. The VMI also pays special attention to companies that buy advertising services from international entities that have not been registered in Lithuania (for example, Facebook and Google).”
A tax expert at the consultancy Fidexperta, Rūta Bilkštytė, said that internet giants would be subject to corporate tax in Lithuania, only if they met the necessary conditions for permanent establishment: had a place of business, conducted commercial activities through that place and conducted business regularly here.
"In that case, they would have to pay VAT from revenue they make in Lithuania to the Lithuanian government, even without a registered entity in Lithuania. Neither Facebook nor Google conducts regular business in Lithuania nor employ people here, all services are provided directly from Ireland, so there is no obligation to register a permanent establishment and pay corporate tax from revenue made in Lithuania,” she said.
Tech giants’ profits continue to grow
In 2015, TNS, the market research company carried out a survey asking market participants in Lithuania how the internet advertising market's would develop in Lithuania.
The survey's participants indicated that, last year, visual advertisements on Youtube would have grown by 19%, Facebook ads should have grown by 10%, and Google ads by 14%.
When asked how much of their internet advertisement budgets would be spent on various advertisers, companies said they'd spend about 6.6% of their budgets on Youtube (as opposed to 8.2% on Lithuanian video websites), 9.8% on Facebook, and 15.8% on Google.
According to the market research company's estimates, the total spend on internet advertisements in Lithuania could be in or around €28 million a year.
Preliminary data indicates that the advertising market in Lithuania should have grown by 4%, with the largest growth, at 12%, seen in online advertising.
Latvia and Estonia
Google Voice Inc, Google Technology Inc, Linkedin Ireland and Facebook Payments paid a total of €179,800 to the Latvian state over the first three quarters of 2014, according to the Latvian State Revenue Service.
These companies registered as tax payers in Latvia at the end of 2014. It is estimated that, in 2014, Latvia's advertisement market was worth €75.6 million, €11.6 million of which was spent on internet advertisements.
Under the previously mentioned new MOSS rules (where the VAT on electronic services is paid in the country where the services are provided), Latvian tax authorities collected a total of €2.2 million in VAT.
Arnis Ozols, spokesman for Latvia-based online advertising agency Httpool, said that global giants (social networks, search engines) were direct competitors to local market players, like the popular Latvian social network draugiem.lv.
Ozols believes that actual revenues of online giants in Latvia could be bigger than previously thought: "I feel that the money Google and Facebook make in the internal [domestic] market could be as big as the entire online advertising budget of Latvia, about €11 million."
He notes that, for instance, Latvian users can see Latvian ads not just on Latvian sites, but on international ones as well.
In Estonia, the tax authorities cannot provide specific numbers about specific companies, but TNS Emor, a market analysis company in Estonia, claims that one fifth of the country's internet advertisement budget was spent on the internet giants.
"Most of the tax comes from large international corporations. Under Estonian law, we cannot disclose the details of specific companies,” said Rainer Laurits, the Estonian tax and customs service.
"We cannot disclose whether we probe or have probed particular companies. In general, we collect information from different sources and, after analyzing it, we decide whether to open an investigation into particular companies or not. Last year, we checked several companies using the MOSS system. Granted, we did not find any evidence of possible tax evasion risks that would be of interest to us," Laurits said.
In 2013, Google and Facebook received €1.48 million from Estonia's largest advertising agencies, and this sum grew to €3.32 million in 2014 (€2.56 million to Google and €0.76 million to Facebook).
The online advertising revenues of Estonian companies are estimated to have grown 11.8% in 2014, while those of foreign-registered companies more than doubled, by 225%.
TNS Emor said that these figures were not entirely accurate, since they are based solely on data supplied by media agencies, while companies often buy advertising directly from Facebook and Google, not through agencies.
Meelis Jarvela, CEO of the media agency Inspired Universal McCann, estimates that the sum leaving Estonia and going to the online giants could be double the figure given by TNS Emor.
"Generally speaking, Google and Facebook get on average 25-50% of a company's total online advertising budget," he said.
The European Commission is watching
In January of this year, the European Commission decided that 35 international companies would have to pay about $684 million USD more in taxes after finding that certain tax incentives offered by Belgium were illegal.
The companies were not named, but the European Commission did say that such incentives hurt competitiveness and disadvantage smaller companies that cannot compete with giant international corporations.
The decision was part of a bigger investigation into suspected tax evasion by the likes of Apple in Ireland and Amazon in Luxembourg.
Following this in late January, momentum built behind a widely discussed so-called Google tax: the European Commission has proposed legislative changes to curb tax evasion and aggressive tax planning. The issue has been pushed in particular by British politicians.
One of the proposals concerns an administrative cooperation directive, obliging EU countries to share data on global corporations. There are also plans to continue working on another initiative, forcing companies to disclose information on paid taxes publicly.
The Google tax scandal in Britain erupted after it emerged that the company made GBP £6 billion in profits in the country, all the while the UK's tax administrator refused to acknowledge that Google had a permanent presence there and the company itself insisted it was providing all services from Dublin.
It then agreed a tax settlement of £130 million with the UK revenue authorities for the period from 2005 which also attracted widespread public and political opprobrium as its revenues in the country ran well into billions of pounds in most of those years.
The tax arrangements of global internet giants has become an international issue for countries where they generate large revenues and yet pay little in tax. It is clear that it is an issue that will not go away.
Google and Facebook did not respond to DELFI's enquiries about taxes paid in the Baltic States.
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