Google France could be ordered to pay $1.3 billion to France’s equivalent of the IRS (Direction générale des finances) due to tax noncompliance in 2011. The agency has been investigating Google’s revenue in France for months. With only 138 million euros of revenue in France in 2011, the company has used tax-optimization strategies, but has always stated that they comply with the law. It denies the accusation.

The French weekly Le Canard enchaîné (which has an excellent track record for investigations) first obtained a letter that the Direction générale des finances sent to Google France asking it to pay $1.3 billion (€1 billion) in tax penalties. Most of Google France’s revenue could go directly to Google’s European headquarters in Ireland where the corporate tax is only 12.5 percent. French news website Owni obtained Google Ireland’s 125-page financial statements for 2011, certified by Ernst & Young, in order to corroborate Le Canard enchaîné’s investigation.

Here are the important numbers:

Revenue in France in 2011: €138 million

Revenue in Ireland in 2011: €12.4 billion

Profit in Ireland in 2011: €9 billion

Tax in France in 2011: €5.5 million

Estimated tax in France for 2011 according to the DGF: €150 million

Right now, Google France has a few hundred employees. According to Google, they only handle support and don’t sign contracts. Yet, salespeople are based in France. The company doesn’t report that activity, which is why the DGF is asking for the gigantic fine.

According to a document from the investigation obtained by BFM TV, Google has posted job openings for salespeople in France. According to the document: “Google France doesn’t seem to only provide support, but seems to handle all the sales and client relationships of Google Ireland, including the closing of advertising contracts, and without declaring that revenue in France.”*

Later in the document, they say that “the receipts and contracts of Google Ireland are written in French, and have a clause conferring jurisdiction to the French courts.”* It is therefore considered a French contract by French laws.

French authorities asked advertisers about those contracts. They found out that “advertising contracts with French advertisers are written by Google Ireland, but handled by employees of Google France.”*

Google Ireland Limited didn’t follow France’s taxation rules. After that accusation, a Google France spokesperson told the French news agency AFP the following statement:

Google didn’t receive a notification of tax adjustment from the French taxation agency. We will continue to cooperate with French authorities, as we’ve done until now. Google complies with all the laws of the country in which the company operates, and with the European legislation.*

On October 29, Google Executive Chairman and former CEO Eric Schmidt met French President François Hollande to talk about the disagreement with French news websites on Google News. According to Le Canard enchaîné, Hollande mentioned the tax issue, as well.

Once again, the problem isn’t that most of the revenue is going to Ireland. It is that French contracts are recorded and taxed by Irish authorities.

Google’s European Tax Scheme

But France isn’t the only European country in which Google only reports a fraction of their revenue. Supposedly, Google operates in many European countries and proceeds exactly the same way. It’s the only way to justify the incredible revenue in Ireland.

And Google isn’t the only company. Apple, Amazon, Facebook and others have all been accused of tax noncompliance in France.

As Google is the current target of French authorities, it offers a glimpse into the tax scheme those companies have to follow in order to lower their tax rates.

Google’s European HQ is called Google Ireland Holdings. It is the owner of Google Ireland Limited. Google Ireland Limited receives the revenue from European subsidaries. But, in order to lower the tax rate, Google Ireland Limited pays billions of royalties to Google Ireland Holdings. In 2011, it was $4.6 billion. It drastically lowers the profit of Google Ireland Limited.

Despite the name, Google Ireland Holdings’ cost center is in Bermuda and is called Google Bermuda Unlimited. In Bermuda, corporate tax doesn’t even exist. But there is a tax if you want to transfer big sums from Ireland to Bermuda. That’s where the Netherlands are needed.

If you transfer money from Ireland to the Netherlands, then to Bermuda, there is no tax. Google Netherlands Holdings BV, you guessed it, is a subsidiary that has the sole function of transferring money from Ireland to Bermuda.

There is another tax to transfer to the U.S. Currently, Google and other big Internet companies keep the money in Bermuda. $1,400 billion are stuck there according to the Win America Campaign, a lobbying action to remove the tax between Bermuda and the U.S.

Google France is just an example to illustrate a greater issue involving other countries with a high corporate tax and other companies. Learning about their sophisticated tax noncompliance plans is always mind-boggling.

* Translated from French.

(Image credit: Flickr/Images_of_Money)