Google's international tax shenanigans

The company shifts money around the world to get the lowest tax rates possible. It's legal, but is it right?

By Kim Peterson Oct 21, 2010 1:24PM
Making tax shelters © Ingram Publishing / SuperStock Google (GOOG) loves to talk about the ways it makes money, but it stays mostly silent on one of its most profitable units: its tax lawyers.

Those lawyers have made Google and its shareholders oodles of money by devising ways to funnel profits out of high-tax countries and into island tax havens like Bermuda.

It's all perfectly legal -- though it does make some people skeptical of Google's "Don't be evil" mantra. And as a result, Google has cut taxes by $3.1 billion in three years and lowered its overseas tax rate to a jaw-dropping 2.4%, Bloomberg reports.

The numbers should make a shareholder proud. The U.S. tax rate for corporations is 35%. If Google actually paid that rate on all its earnings, its share price might be $100 lower, one analyst told Bloomberg.

"It's remarkable that Google's effective rate is that low," one tax economist told Bloomberg. "We know this company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20%."

Google's tax strategy helped it boost earnings by 26% last year through international tax benefits, Bloomberg reported. While other tech companies use similar strategies, Google is more aggressive and has been able to pay lower international taxes than Apple(AAPL), IBM (IBM) and Microsoft (MSFT). (Microsoft owns and publishes MSN Money.)

So how does Google do it? By creating a subsidiary in a low-tax country and selling that unit the foreign rights to Google technology developed in the U.S. As a result, all foreign profits from that technology go to the low-taxed subsidiary.

Google decided to create a subsidiary in Ireland, Bloomberg reported. Google Ireland Holdings now has the foreign rights for Google's search and advertising for Europe, the Middle East and Africa.

As a result, the Ireland office took credit for 88% of Google's international sales last year.

Why Ireland? Because in its desperation to attract big names, Ireland loosened rules to let companies move profits out of the country with little tax penalty. And the penalty gets even smaller if Google moves the money to the Netherlands.

So the payments go from Ireland to the Netherlands to Bermuda, Bloomberg reports. That's what the lawyers like to call a "Dutch sandwich." Yum. Post continues after video:
This is not illegal. But is it ethical? As the U.S. struggles to pull out of a recession, is it fair for Google to island-hop its way out of paying more taxes? Google's overall effective tax rate was 22.2% last year.

One economics professor told Bloomberg that corporate profit shifting costs the U.S. government up to $60 billion a year in lost taxes.

Bloomberg found two opposing viewpoints. One manager at PricewaterhouseCoopers says Google is obligated to shareholders to minimize taxes, which it is doing.

But a college accounting professor who reviewed Google's tax disclosures said the company is "perpetrating evil under our noses."

"Who is it that paid for the underlying concept on which they built these billions of dollars of revenues?" the professor said. "It was paid for by the United States citizenry."


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85Comments
Oct 21, 2010 2:17PM
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If the government and IRS would pull their collective heads from dark smelly places and give AMERICAN companies incentives, wait, lets not use the word incentive.  How about restructure the tax laws where corporations wouldn't look to other countries to do business because our overspendy government is greedy and we have such a high tax rate.  How many more jobs would be created if our tax laws helped our own country instead of creating jobs and revenues for other countries.  Less cooperate tax would amount to more American jobs which help stimulate our own economy, working people paying income tax, having a job to buy American made products and services.  Do it on volume, not by enacting such a huge tax rate.  Do you think McDonalds got to be a multi-billion dollar company by selling great tasting burgers...NO, they did it on volume.
Oct 21, 2010 5:08PM
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“Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” 

-Judge Learned Hand

Oct 21, 2010 4:41PM
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It's legal, but is it right?

 

Hell yes; look what the government does.

 

 

Oct 21, 2010 5:30PM
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I say good for Google! The taxes in this country are way too high for businesses.
Oct 21, 2010 6:06PM
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People should not be outraged by this.  Google has no obligation to pay more in taxes than they are legally required.  There is a huge difference between tax avoidance and tax evasion.  Only you taxpayers who wrote checks for more than you owed last April 15th have any right to preach.  I'm all for paying the correct amount of taxes, but expanding the economy requires dollars too, but not in the form of higher taxes! 

Oct 21, 2010 5:30PM
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It's amazing.  The college professor says Google was built by "US Citizenry."  That is absolutely foolish.  It was built by the creators, employees, and stockholders.  Google owes nothing to a bunch of bureaucrats in Washington D.C. 
Oct 21, 2010 6:26PM
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The way I see it is that Google earned that money and therefore has every right to it, if it can legally keep the government from asserting tax then more power to them. I wish I had a team of tax lawyers to do the same thing for me. What do we get for our tax? A huge and inefficient government bureaucracy. I recognize that taxes are a necessary evil but we should do everything in our power to minimize said evil. I'm tired or supporting bloated government spending projects that reward the lazy with the money that others have worked hard to earn. 
Oct 21, 2010 6:42PM
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Progressive liberal Google doesn't like to pay more taxes! I'm not surprised as all progressives/liberals want the earnings of others confiscated for the "greater good" but don't want to put their own into the pot.

Replace our confusing Tax Code, which is really just a tool to punish political enemies as well as reward political friends (not to mention it encourages class warfare), with a simple Flat Tax of 20% across the board. No more tons of paperwork, no more IRS, and no more attempts at behavior modification by the govt using "Tax Incentives".  Then everyone will have some "skin in the game".

I'll bet everyone then will be more interested in govt spending less!

Oct 21, 2010 6:44PM
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ME9999 so true, people who are okay with companies being unethical should never complain about the deficit.

 

 

Oct 21, 2010 6:11PM
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So why is this newsworthy?  Google is a business and everyday the activities of the corporation are centered on profits or losses.  The tax code is so complicated and convoluted and obviously there are loopholes which clever firms hire savy people to capitalize on.  If we viewed business transactions as morally "right" then how could anyone profit and increase market share?  Sure a business needs to profit but cutting costs and reducing tax liabilities is legitimate and necessary.  Rather than question the morality of the actions, the tax code needs to be revised and ways found to keep the money and jobs here.  
Oct 21, 2010 6:09PM
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Good for Google! Government just wastes money anyway.
Oct 21, 2010 6:01PM
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Lets see. The U.S. rate is 35% and their actual tax rate is 2.4%. Yep, that is right. The U.S. govt would probably waste 32.6% of that anyway.

Great job Google. I am all for turning off the Washington money pipeline any way we can.
Oct 21, 2010 6:24PM
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For those of you who posted here or read this and think Goole paid US taxes of 2.4%, read the article, they paid forgein taxes at a 2.4% rate, later in the article their total tax rate was over 22%. They paid a heck of a lot of tax in the US to raise that rate from 2.4% to 22.2%.
Oct 21, 2010 5:34PM
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What Google is doing is called "transfer pricing", it is perfectly legal under US law and international OECD guidelines.  ALL Global-1000 & S&P 500 companies engage in this practice.  I know because I worked as a transfer pricing expert around the world.  The end result is a stronger stock which ultimately benefits the stock holder and the market were the stock is sold.  Moreover, if any single individual had a LEGAL opportunity and means to lower their personal tax burden, wouldn't they do it?  Google is obliged to do so to maximize their stockholders equity value.  nuf said. 
Oct 21, 2010 5:22PM
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We as Americans have the burden to follow the law.  And if by any reason that we can find away to save taxes it is our right.  The tax laws are so complex and

so large I think no know really if they are breaker the law.  The IRS don't know if it is legal or not.  They can't find 3 billion they lost.  Good for Google!!!

Oct 21, 2010 5:47PM
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Google is doing nothing wrong.  They are simply doing what our tax code and government allow them to do.  If you want to find fault look no further than incompetent legislative members and our federal reserve.  In one day at the Plaza Hotel in NYC 1985 (1985 Plaza Accord) our central bankers did more damage to these united states than have all tax haven exploiting corporations put together.   Our government needs to get spending under control first and foremost.
Oct 21, 2010 6:51PM
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I didn't see anywhere in the article how much estimated tax revenue has been generated directly and indirectly by people using google products for personal and business uses.
Oct 21, 2010 5:55PM
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To the idiots "hating" on Google....

Do you work to pay your bills or do you work to pay your neighbors bills???

Well neither does Google, morons!!!

 

They are in business and work to make money for themselves and their shareholders.  Not to take care of a bunch of welfare suckoffs!

 

There should not even be an income tax!  Way to go Woodrow Wilson (the worst president in US history) Taxing prosperity is what "F'd" up our country in the first place.  Then ruining our money by riding us of the gold system.

 

The income tax was ruled unconstitutional in the late 1800's so Wilson rammed it through by ammending the constitution.  What a jackass!

Oct 21, 2010 6:48PM
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Gee...which is more ethical.  Keeping the money you earned, or extorting money from people by the government?  All taxes are immoral and everyone should do what they can to minimize their tax bill because the government has no incentive to lower taxes by efficiently running or eliminating programs.  If there costs run over estimates, they just solve their deficit by taking more money from the people.  Revolution is brewing!
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