By Numerian posted by Michael Collins

Google, which encourages employees to “Do No Evil”, managed this past quarter to reduce its international tax rate to 2.4% of net income, despite earning most of its revenue in countries like the US, the UK, Germany, and Japan that have corporate tax rates of at least 25%. In comparison, the average recent effective US tax rate for 2,000 companies was 28.3%.

In a report published today in Bloomberg, Google was described as using tax techniques known as the “Double Irish” and the “Dutch Sandwich” to avoid paying taxes in the countries in which it earns most of its revenue. Google uses a Dublin subsidiary and declares that 88% of its overseas sales are generated by this office which employs 2,000 people. Ireland maintains a very low tax rate to encourage foreign investment, but it then adds an important benefit: it allows companies to shift revenues to low-tax countries using transfer pricing. Google shifts its Ireland revenues to The Netherlands (Irish law requires using an EU country for the first leg of this shift). The revenue is then transferred to Bermuda, which has a minimal tax rate. In the meantime, Google uses transfer pricing to shift its expenses to high-tax countries in order to declare tax write-offs.

Google is estimated to have cut its taxes in the past three years by $3.1 billion. Studies done on this tax evasion technique, which is not illegal, estimate it costs the US Treasury $60 billion a year in lost tax revenue. Google’s stock closed yesterday at $608/share, and according to some analysts the tax scheme contributes at least $100/share to this price.

Microsoft uses a similar tax technique, and Facebook has announced it is setting up an Irish subsidiary for this purpose. Google owes its existence to support from the US Government. The research used to power Google’s search engine was developed and funded by a grant from the National Science Foundation. Sergei Brin, co-founder of Google, was provided a tax-payer funded scholarship while working on this research.

The taxes are not eliminated under this scheme; they are deferred. If a corporation repatriates its overseas earnings back to the US, the earnings are taxed at the US rate. However, corporations never do this. Microsoft, for example, recently went to the US bond market to borrow money for cash purposes, rather than repatriate its substantial cash pool sitting overseas.

See this article in Bloomberg by reporter Jesse Drucker

First published in The Agonist