Google LLC and Facebook, Inc. plan to start locally booking advertising revenue from Japanese operations that was previously posted in other countries with lower corporate tax rates, sources close to the matter said Monday.
The move is apparently in response to global pressure over the tax-saving measures of IT giants, with Google posting its Japanese operations’ revenue in Singapore and Facebook transferring income to Ireland.
Amazon.com, Inc. has already stopped booking revenue from its Japanese businesses in the United States and begun declaring income locally, other sources said recently.
Corporate finance experts have said the amount of taxes paid by Google and Facebook in Japan has been too small given the size of their operations in the country.
The two IT giants, which account for over half of the global digital advertising market, are believed to command a similar share of the internet advertising market in Japan, estimated at ¥1.45 trillion ($13 billion), according to an industry group of internet business firms in Japan.
Google has booked advertising revenue derived from businesses in Japan as that earned through contracts made by its Singapore unit. Since April this year, a Japanese unit of Google has been directly making business contracts with Japanese clients, the sources said.
The shift in Google’s practice also coincides with its plan to build a data center in Chiba Prefecture. Having permanent facilities is a key factor in Japanese authorities’ taxation policy for foreign companies.
The Japan unit of Facebook, meanwhile, currently books its advertising revenue from Japanese clients at a unit in Ireland. Its Tokyo-based unit is expected to start declaring locally generated income from next year, the sources said.
According to a source close to the National Tax Agency, Facebook units located abroad have covered the expenses of Japanese operations.
The effective corporate tax rates in Ireland and Singapore are 12.5 percent and 17 percent, respectively, compared to around 30 percent in Japan.
Google’s Japanese unit, operating as a limited liability company, does not disclose its earnings data. The Japanese unit of Facebook logged a net profit of just ¥200 million for the business year through December 2018, according to its earnings report.
The European Union has been stepping up pressure on digital giants such as Google and Facebook to book sales in countries where they are generated.
In Japan, IT giants including Apple Inc. have come under government scrutiny for allegedly abusing their dominant positions to take advantage of smaller companies that do business on their platforms.
The government is set to propose a bill next year aimed at securing transparency in contracts with such digital giants.