Google Slapped with $5 Billion Fine?

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Life is good for Google (NASDAQ: GOOG).  Google’s stock soared in 2013, up 22% from the first of the year. But all this success has attracted the attention of both competitors and the tax man. With a $5 billion fine threatened in an antitrust acquisition and the European Union calling for millions in tax hikes, let’s see if Google’s days of glory are numbered. 

Antitrust lawsuit

Google’s strength has once again brought brewing storms to the company’s doorstep. First, competitors Microsoft and Nokia are more than willing to bring accusations against Google. This isn’t the first time these companies have chased the competition. Microsoft sued Barnes & Noble in 2011 and Motorola in 2012 over patent issues, while Nokia brought lawsuits against mobile phone seller HTC in 2013. These attempts to maintain market share have united the two in a fight against Google. Complaining about the unfair ranking of search results, the Microsoft group that filed the complaints stated

Google should implement the same ranking policy to all websites. This should include their own vertical services, which currently have their ranking unfairly manipulated to appear at or near the top of search results.

These complaints brought about the creation of a focus group to lead the probe into Google’s business practices. Google responded by providing proposed tweaks to how its search results are displayed. The situation will be reviewed by the antitrust committee.  But here is the important part: the proposed fine is 10% of Google’s annual revenue, which would amount to $5 billion.

The tax man wants his share

A group of the European Union is also investigating the loopholes and tax shelters that Google has employed in recent years to pay significantly lower taxes. As Google noted in its quarterly earnings report, its company-wide effective tax rate is right around 8%, a staggeringly low number for such a large business. Google, however, is not alone in the European Union’s investigation.

The EU is targeting both Amazon (NASDAQ: AMZN) and Starbucks (NASDAQ: SBUX) as well. All three have large international bases and are taking a beating in the news. Amazon is being investigated for shielding its tax payments through intricate inter-company payments, while Starbucks has attempted to capitalize on every tax break possible. Take a quick look at the effective tax rates for these five companies. Microsoft and Nokia have good reason to be envious of the tax rate that Google and Amazon enjoy.

<table> <thead> <tr><th> <p><strong>Company-wide effective tax rates</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p>Amazon</p> </td> <td> <p>6%</p> </td> </tr> <tr> <td> <p>Google</p> </td> <td> <p>8%</p> </td> </tr> <tr> <td> <p>Starbucks</p> </td> <td> <p>28%</p> </td> </tr> <tr> <td> <p>Nokia</p> </td> <td> <p>25%</p> </td> </tr> <tr> <td> <p>Microsoft</p> </td> <td> <p>22%</p> </td> </tr> </tbody> </table>

Enough to push the stock south?

Will this hullabaloo have enough of an effect to push Google’s stock south? I don’t believe so. Even amidst this turmoil, Google continues to build its business. Google invested $291 million into acquisitions in 2013, posted staggering first quarter earnings, and is even looking to develop wireless networks in several emerging markets. How is that for strength?

For years Google, like Amazon and Starbucks, conducted operations in Europe and has therefore contributed a meaningful portion to Europe’s tax base (in total dollars, not in percentage terms). Last year alone, Google paid nearly $15 million in European taxes, a small percentage on the supposed $4 billion in sales, but still a significant amount. While the European Union would love to line its pockets with more tax dollars, it won’t be able to push hard enough for fear of losing significant revenue.

Finally, Google is not new to antitrust movements. The last thing both Google and the European Union want is Google to scale back its European operations. Just as Google emerged from its other antitrust trials, it will do so from this attack. And not only emerge, it will continue to dominate. Who knows, maybe another 31% increase of year-to-year revenue is on tap for the second quarter of 2013?

Either way, take a glance at this very simple chart below. Google wins. It really is that simple. Over the life of Google, through antitrust trials, failed products, and continual tax arguments, Google still managed to do one thing well: make money for investors.

<img alt="" src="http://g.fool.com/editorial/images/50044/finney-2_large.PNG" />

Source: Y Charts

What to do?

Google’s future is still bright. It doesn’t matter that every time you turn on BBC, you find yourself watching Europe’s attempt to reel in more tax dollars, or competitors’ attempts to break up Google’s market. Life is still good at Google. And if you’re a shareholder, life is good for you, too.

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This article was written by Ian Finney and edited by Chris Marasco. Chris Marasco is Head Editor of ADifferentAngle. Neither has a position in any stocks mentioned. The Motley Fool recommends Amazon.com, Google, and Starbucks. The Motley Fool owns shares of Amazon.com, Google, Microsoft, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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