Google's recipe for tax-rate cut: Double Irish and a Dutch Sandwich

The offices of Conyers, Dill & Pearman in Hamilton, Bermuda. The law firm aided Google in cutting its taxes by $3.1 billion by funneling foreign profits through Ireland and the Netherlands to Bermuda.
The offices of Conyers, Dill & Pearman in Hamilton, Bermuda. The law firm aided Google in cutting its taxes by $3.1 billion by funneling foreign profits through Ireland and the Netherlands to Bermuda. (Mark Tatem)
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By Jesse Drucker
Sunday, October 31, 2010

NEW YORK - By employing strategies known to lawyers as the "Double Irish" and the "Dutch Sandwich," Google cut its taxes by $3.1 billion in the past three years - moving most of its foreign profit through Ireland and the Netherlands to Bermuda.

Google's income shifting helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries.

"It's remarkable that Google's effective rate is that low," said Martin Sullivan, a tax economist with Tax Analysts. "We know this company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 percent."

The U.S. corporate income-tax rate is 35 percent. In Britain, Google's second-biggest market by revenue, it's 28 percent.

Google, the owner of the world's most popular search engine, uses a strategy that has gained favor among such companies as Facebook and Microsoft. The method takes advantage of Irish tax law to legally shuttle profit into and out of subsidiaries there, largely escaping the country's 12.5 percent income tax.

The earnings wind up in island havens that levy no corporate income taxes at all. Companies that use the Double Irish arrangement avoid taxes at home and abroad as the U.S. government struggles to close a projected $1.4 trillion budget gap and European Union countries face a collective projected deficit of 868 billion euros, or $1.2 trillion.

"Google paid more than $1.5 billion in U.S. income taxes in 2009, and we expect that number to be even higher in 2010," said Tom Hutchinson, director of global tax for Google, based in Mountain View, Calif. "We have an obligation to our shareholders to set up a tax efficient structure, and our present structure is compliant with the tax rules in all the countries where we operate."

Google, the third-largest U.S. technology company by market capitalization, hasn't been accused of breaking tax laws.

Facebook, the world's biggest social network, is preparing a structure similar to Google's that will send earnings from Ireland to the Cayman Islands, according to company filings. A company spokesman declined to comment.

The tactics of Google and Facebook depend on "transfer pricing," paper transactions among corporate subsidiaries that allow for allocating income to tax havens while attributing expenses to higher-tax countries. Such income shifting costs the government as much as $60 billion in annual revenue, according to Kimberly Clausing, an economics professor at Reed College.

Rep. Dave Camp (R-Mich.)the ranking Republican on the House Ways and Means Committee, and other politicians say the 35 percent U.S. statutory rate is too high relative to foreign countries. Income-shifting, which helped cut Google's overall effective tax rate to 22.2 percent last year, shows one way that loopholes undermine that top U.S. rate.

Two thousand U.S. companies paid a median effective cash rate of 28.3 percent in federal, state and foreign income taxes in a 2005 study by academics at the University of Michigan and the University of North Carolina. The combined national-local statutory rate is 34.4 percent in France, 30.2 percent in Germany and 39.5 percent in Japan, according to the Paris-based Organization for Economic Cooperation and Development.


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