Update: A report on Yahoo! Finance claims that Google paid just 2.6 percent tax on its $6b of overseas profits in 2012.

Google, one of a number of companies to come under fire for alleged tax-avoidance practices, says that it welcomes debate on how international tax treaties can be reformed so that multinational companies pay the right amount of tax in each of the countries in which they operate.

In a comment piece on the Observer UK newspaper website, Google Chairman Eric Schmidt says he understands the controversy.

At a time when families are having to tighten their belts and funding for vital public services is under pressure, corporate taxation is rightly a hot topic. And as a company that has always aspired to do the right thing, we understand why Google is at the centre of that debate. In the interests of moving the argument forward – away from accusation and toward action – here are three principles we hope most people can agree upon …

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First, he says, tax should be based on where profits are generated, not where revenues are accrued. In other words, if a product is invented in the USA by US engineers, the profits should be taxed there even if the bulk of the sales are made overseas.

Second, that companies should merely follow the rules set out by legislation – and that politicians should set the right rules in the first place.

Third, that any reform needs to be international in nature, with all OECD countries agreeing a revised set of tax treaties.

The third point is indisputable: it’s pretty much impossible for any one country to effectively impose unilateral rules on companies based outside those countries. His first two contentions, however, bear closer scrutiny.

If you sell a million units of a product in a country – let’s say, a phone or perhaps some electronic glasswear – is it really reasonable to argue that you should pay no taxes in that country just because the technology was invented elsewhere? Should Google ads sold in the UK to UK companies and appearing on UK websites to generate sales from UK consumers really not be liable to UK taxation because the concept of sponsored search results was devised in the USA?

And while the principle that politicians should make the laws and companies merely abide by them sounds reasonable, it is hardly the case that multinational companies cheerfully and innocently simply pay what the law says they owe. The reality is that companies hire lots of clever lawyers and accountants whose sole job is to figure out legal ways of getting around the rules in order to minimise tax bills.

It is no accident that Google bases its UK sales teams over the sea in Ireland, where corporation tax is 12.5%, rather than in the UK where the rate is 24% – not, it might be suggested, the obvious actions of a company ‘aspiring to do the right thing’ …

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