Google's Complex Tax Scheme Saves It Billions

A report in Business Week shows us one way that Google keeps its bottom line up. Using a complicated structure, the company sends most of its overseas profits overseas to known tax havens. With that, Google's corporate overseas tax rate is a low, low 2.4 percent.

For a company with the unofficial motto of "Don't be evil," this seems, well, evil. Or at least it seems unethical. However, as a corporation, trying to maximize process for its shareholders is not evil or unethical. That said, the rest of the taxpayers in the U.S. don't have to like it, but honestly, Google isn't the only corporation to take such measures.

What's amazing is the incredibly low tax rate Google has, because it's much lower than other corporations. Google, Apple, Oracle, Microsoft, and IBM make up the top five technology companies by market capitalization. The other four have reported tax rates between 4.5 percent and 25.8 percent on their overseas earnings from 2007 to 2009.

Google and others depend on what's called “transfer pricing,” which involves shifting income to tax havens while shifting expenses to higher-tax countries. Thus, while it seems like we are talking about overseas taxes, it's the U.S. and other high-tax countries that take the hit. According to Kimberly A. Clausing, an economics professor at Reed College in Portland, OR, such income shifting costs the U.S. government as much as $60 billion in annual revenue.

The practice is called "Double Irish" or the "Dutch Sandwich." BW describes it as follows:

When a company in Europe, the Middle East, or Africa purchases a search ad through Google, it sends the money to Google Ireland. The Irish government taxes corporate profits at 12.5 percent, but Google mostly escapes that tax because its earnings don't stay in the Dublin office, which reported a pretax profit of less than 1 percent of revenues in 2008.

Irish law makes it difficult for Google to send the money directly to Bermuda without incurring a large tax hit, so the payment makes a brief detour through the Netherlands, since Ireland doesn't tax certain payments to companies in other European Union states. Once the money is in the Netherlands, Google can take advantage of generous Dutch tax laws. Its subsidiary there, Google Netherlands Holdings, is just a shell (it has no employees) and passes on about 99.8 percent of what it collects to Bermuda. (The subsidiary managed in Bermuda is technically an Irish company, hence the "Double Irish" nickname.)

Although other companies used "Double Irish," Google's success at it amazes even Martin A. Sullivan, a tax economist who formerly worked for the U.S. Treasury Department. He said,

"It's remarkable that Google's effective rate is that low. This company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 percent."

In fact, the corporate tax rate in the U.S. is 35 percent, while in the U.K., Google's second-largest market after the U.S., it is 28 percent.

You can see an interactive diagram of how the "Double Irish" scheme works, here.