The great Google tax dodge

The Power Index

We all love Google, don't we? But on top of the enormous power it has over our daily lives, it now seems to have acquired the power to dodge tax.

Perfectly legally, no doubt.

According to Bloomberg, Google is now being audited or investigated by tax authorities in the USA and France, who want to know whether the company is shifting its profits into tax havens.

Google currently pays a tax rate of only 2.4 per cent on its corporate income outside the USA, according to Bloomberg. When you include its American income, that rate rises to 18.8 per cent, but that is still less than half the statutory rate of 39.2 per cent for combined US federal and state taxes.

The super-hip internet company—which grows rocket and tomatoes at its head office in California—has slashed its tax bill by $3 billion in the last three years, says Bloomberg, by moving profits through Ireland and Netherlands to Bermuda, using techniques known as the 'Double Irish' and the 'Dutch Sandwich'.

It's not alone in this, of course: "Google, Cisco, Facebook, Microsoft and Forest Laboratories, maker of the blockbuster antidepressant Lexapro, have used tax-cutting strategies that move profits into units - often with no employees or offices - in havens such as Bermuda, the Cayman Islands and Switzerland," Bloomberg reports. And plenty of Australian businesses or entrepreneurs, including the Packers, Alan Bond and Rupert Murdoch have done the same.

So how does it work? Well, in Google's case, it goes like this:

Method one

Google bases its European operations in Ireland. European Commission rules allow the group to collect profits there and pay tax at only 12.5 per cent on the money it makes in 27 European countries. Nice work, eh?

Method two

Google extends this technique to Australian operations. Last year Google sold $740 million worth of online advertising in Australia but booked revenues of only $150 million, making a $3 million loss and paying just 1 per cent tax. How did it do that? By billing all the revenue to Google Ireland and getting its costs back in return. Even nicer.

Method three

Google parks its software rights in Bermuda, where no tax is payable, and shifts some of its 'Irish' profits into the tax haven. Google Ireland is apparently run from a law firm in Bermuda. It just gets better.

Method four

Google has sold some US software rights into the Bermudan company and shifted a proportion of its American profits there too. Google did this in 2003, with approval from the Internal Revenue Service, which agreed on the transfer price. But since then, Google has spent around US$5.4 billion buying You Tube, Double Click, and the email security company Postini. It is assumed that profits from these operations are what the IRS may be looking at. In August, Google agreed to pay US$12.5 billion for Motorola, mainly to acquire the mobile manufacturer's patents. It may well want to move these offshore too.

So is this all legal? Absolutely. Is it ethical? That's a matter of opinion.

Is there any chance of the tax authorities getting Google to pay more? Maybe: in 2006, the IRS persuaded GlaxoSmithKline to stump up another $3.4 billion in a similar dispute over patents held offshore. But in 2009 it lost a similar tax case against Veritas. And Google is adamant that it has complied with all its obligations.

This article first appeared on The Power Index on October 19. Republished with permission.