French court throws out Google's $1.3 billion tax bill

Alphabet Inc.’s Google won a reprieve from one of its biggest legal battles in Europe on Wednesday, when a Paris court threw out a €1.11 billion ($1.27 billion) bill that France’s tax authority has sought from the search giant for five years of back taxes.

In a decision issued Wednesday afternoon, Paris’s administrative tribunal ruled that Google’s lucrative advertising-sales business had no taxable presence in France—absolving it of income or sales taxes on advertising income from French clients.

The decision, covering the years 2005 to 2010, backs Google’s position in a dispute that has dragged on for more than six years, and could have implications for other tax battles in Europe and elsewhere.

A Google spokesman said that the court “has confirmed Google abides by French tax law and international standards,” adding: “We remain committed to France and the growth of its digital economy.”

French Budget Minister Gérald Darmanin said that the tax authority is analyzing the decision with a view to appealing it, noting “the significant role of French employees in Google’s commercial activity in France.”

Though the decision concerns only France, and is subject to appeal, it is a victory for Google and other Silicon Valley firms when they are facing multiple regulatory battles on topics including taxes, competition and privacy.

The European Union two weeks ago fined Google €2.4 billion ($2.7 billion) for abusing the dominance of its search engine to promote one of its own businesses, one of three antitrust cases in which the EU has filed formal charges.

Multiple European regulators are also investigating Facebook Inc. over its use of personal data, and tech companies are also clashing with authorities over how to best remove hate speech and terrorist propaganda from their platforms. Last month, Germany passed a new law threatening fines of up to $57 million for companies that don’t comply quickly enough.

Taxes have been a particular pressure point. Politicians in countries such as France and the U.K. have said tech giants declare too little profit in their countries and then manage to reduce whatever profit they do declare elsewhere in Europe by paying huge untaxed royalty fees that often end up in tax havens.

Several European countries, other than France, have pursued Google for back taxes. Spain raided Google offices in Madrid last year, and the company earlier this year to pay Italian tax authorities €306 million ($349 million).

The EU last year demanded that Ireland recoup as much as €13 billion ($14.8 billion) in back taxes from Apple Inc. stemming from profits the EU said Apple should have declared as taxable in Ireland, and it is investigating whether Amazon.com Inc. should owe back taxes to Luxembourg. Apple is appealing, and Amazon has said it pays all the tax it owes.

The threat of legal action—coupled with new tax rules proposed by the Organization for Economic Cooperation and Development, and a new “diverted profits tax” in the U. K.—has led companies to make structural changes. Last year, Facebook began directing U.K. clients to start paying an affiliate in the country rather than funneling that money through Ireland and then on to the Cayman Islands, boosting its tax payments in the U.K.

Google also made a controversial tax deal with the U.K. that involves attributing more income to that country, therefore paying more taxes there.

The French case indicates, however, that there may be limits to tax authorities’ efforts to make significant clawbacks of taxes under existing laws.

Similar to how Google operates in other large EU countries, its French unit doesn’t sell ads to French customers, but rather offers only logistical and marketing support to the Google unit in Ireland that closes the advertising deals. Google Ireland pays the French unit for that support service, leaving a smaller profit in France than if the sales were booked in the country.

The French tax authority argued that the structure is fictitious and that it believed French employees were actually selling ads in France. The authority said that meant the Google’s Irish unit should have paid income and sales taxes as if it had a “permanent establishment” in France.

But in its decision, the court backed Google’s argument that its French employees were doing nothing more than preparatory work allowed under the Franco-Irish tax treaty.

France’s tax authority has separately complained to France’s tax prosecutor, which said last year that it has been investigating the company since 2015 for aggravated tax evasion. Wednesday’s court decision that Google doesn’t owe any additional taxes could complicate that criminal case.