Google continues to expand its use of legal-but-questionable tax shenanigans as a way to minimize its overseas tax burden.
According to Irish media reports Friday, in 2013 Google Ireland Limited paid an effective tax rate of just 0.16 percent on €17 billion ($22.8 billion) revenue, which came to a mere €27.7 million ($37.2 million). Google paid €11.7 billion in “administrative expenses,” which The Irish Times reports “largely refers to royalties paid to other Google entities, some of which are ultimately controlled from tax havens such as Bermuda.”
David Wilson, a London-based Google spokesman, confirmed the Irish figures to Ars.
Google and many other tech firms have recently come under increased scrutiny for using a quirky Irish tax law arrangement that allows organizations to incorporate in Ireland but legally route money through other jurisdictions, such as the Netherlands. It's all done in the name of drastically reducing tax burdens. The general term is called “transfer pricing,” although specific tactics involve colorful names like the “Double Irish” and the “Dutch Sandwich.”
“Technically legal”
On Thursday, President Barack Obama decried a related practice, known as tax inversion, in an interview on CNBC.
"This is basically taking advantage of tax provisions that are technically legal—but I think most people would say if you're doing business here, if you're basically still an American company, but you're simply changing your mailing address in order to avoid paying taxes, then you're really not doing right by the country and by the American people," he said.
"Keep in mind that what we're trying to do is to say that if you simply acquire a small company in Ireland or some other country, to take advantage of the low tax rate, you start saying, 'We're now magically an Irish company' despite the fact that you may only have a hundred employees there," the president continued. "And you've got 10,000 employees in the United States. You're just gaming the system. You are an American company. You continue to benefit in all kinds of ways from being an American company."
Google declared $60 billion worth of revenue in the United States in 2013. Google’s effective tax rate in the United States has fallen dramatically from 21 percent to 15.7 percent in recent years as the company has broadened its use of overseas tax benefits.
As Google stated in its 2013 annual report, “Our provision for income taxes and our effective tax rate decreased from 2012 to 2013, primarily as a result of proportionately more earnings realized in countries that have lower statutory tax rates as well as the federal research and development credit related to the American Taxpayer Relief Act of 2012.”
Obama conceded that this tactic was legal, but it might not be a practice that Google should follow.
"People are paid to maximize profits," he said. "But people are also paid to be good corporate citizens. They're also paid to make sure that they're thinking about [that] in addition to shareholder value. How do you grow a company over the long term? And this kind of strategy, I think, undermines people's confidence in how companies are thinking about their responsibilities to the country as a whole."
Last year, the Organisation for Economic Co-operation and Development (OECD)—a group of the world’s top economies—decided that it was time to crack down on international tax shenanigans through meaningful reform.
“I think the way Google and such companies use the Irish tax system to reduce their global tax bill to negligible levels is unfair, particularly on more domestically centred firms,” Sheila Killian, a finance lecturer at the University of Limerick, told Ars. “It's important to stress that this has nothing to do with Ireland's low corporate tax rate—this is about firms channeling billions through the country and out the other side. Very little benefit to Ireland, very little connection to real economic activity.”
Bermuda triangle of taxation
Bloomberg first described the process of the Double Irish in 2010. As we've reported, here’s how the Double Irish works: a company sells or licenses its foreign rights to intellectual property developed in the United States to a subsidiary in a country with lower tax rates. The result? Foreign profits that come from that tech—like the rights to Google’s search and advertising technology, effectively the keys to the kingdom—are now attributed to that offshore subsidiary rather than the American headquarters. The subsidiaries have to pay “arm’s length” prices for those rights, just like an outside company would.
Bloomberg concluded, “Because the payments contribute to taxable income, the parent company has an incentive to set them as low as possible. Cutting the foreign subsidiary’s expenses effectively shifts profits overseas.”
So who does Google license its tech to? A fun little company called Google Ireland Holdings, headquartered in Bermuda. Bermuda, of course, has zero corporate income tax. So as a Bermuda company, Google Ireland Holdings pays none.
Google Ireland Holdings, in turn, owns Google Ireland Limited. This holding company based in Bermuda is owned by yet another Bermuda-based subsidiary, Google Bermuda Unlimited. It is managed by Conyers, Dill, and Pearman, a law firm specializing in such offshore transactions. That “unlimited” corporation means that the company is not required to disclose income statements, balance sheets, and other financial information.
But getting money tax-free from Ireland to Bermuda requires a stopover in the Netherlands (the "Dutch Sandwich" part) at Google Netherlands Holdings B.V. This entity, according to Bloomberg, “pays out about 99.8 percent of what it collects to the Bermuda entity, company filings show. The Amsterdam-based subsidiary lists no employees.”