Google's $2 billion tax dodge

Google (GOOG) slashed its corporate tax bill by $2 billion in 2011 thanks to some creative and legal accounting, according to Bloomberg News. This should anger taxpayers as Congress debates how to avoid the fiscal cliff.

The search engine giant shifted $9.8 billion in revenue to a Bermuda shell company, almost double the total from three years earlier, the news service says.

This is hardly a shock. Tax authorities in the U.S. and Europe have complained for years about the tricks wealthy individuals and corporations are using to avoid paying their fair share to governments. Officials in Europe and the U.S. are cracking down on practice of companies shifting profits from one country to another, also known as transfer pricing.

According to the Tax Justice Network, $32 trillion in U.S. wealth is parked in offshore accounts. The New York Post recently noted that Apple (AAPL), Microsoft (MSFT) and eBay (EBAY) have tens of billions of dollars squirreled overseas. Google has employed tax avoidance strategies with names that sound like pulp detective novels, such as "Dutch Sandwich" and "Double Irish." They seem to have worked like a charm.

"Last year, Google reported a tax rate of just 3.2% on the profit it said was earned overseas, even as most of its foreign sales were in European countries with corporate income tax rates ranging from 26% to 34%," according to Bloomberg. "Google’s overall effective tax rate dropped to 21% last year from about 28% in 2008. That compares with the average combined U.S. and state statutory rate of about 39%."

One thing that Democrats and Republicans agree upon is that the U.S. tax code is needlessly complicated. It needs to be reformed but Congress needs to tackle the jobless situation first because fixing the tax code is a tall order.

During the presidential campaign, both Barack Obama and Mitt Romney spoke of the need to close tax loopholes. Unfortunately, as the Google case highlights, that's easier said than done. No one has any incentive to address this problem because so much money is at stake.

Jonathan Berr does not own shares of the listed shares. Follow him on Twitter @jdberr.

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