Google slips $3.1bn through 'Double Irish' tax loophole

Google has saved $3.1bn in taxes since 2007 by shuttling its foreign profits through Ireland and the Netherlands, then on to a haven in Bermuda, according to the company's regulatory filings.

As reported by Bloomberg Businessweek, Google uses techniques known as "Double Irish" and "Dutch Sandwich" to lower its foreign tax rate to a scant 2.3 per cent. This is the lowest rate among the top five US tech giants, according to the report.

Like many other US outfits, Google uses a known loophole in Irish tax law that lets the company legally avoid local taxes by moving profits between subsidiaries based in the country before routing them to countries such as Bermuda that do not levy corporate taxes. The technique sidesteps taxes not only abroad but in the US as well. In the US, the corporate tax rate is 35 per cent. In the UK, it's 28 per cent.

Microsoft uses a set-up similar to Google's, according to the report, and Facebook is moving in this direction as well. But Google's foreign tax rate is lower than the rates paid by Microsoft, Oracle, Apple, and IBM, which range from 4.5 per cent and 25.8 per cent.

Google's overall tax rate — across the US and abroad — was about 22 per cent in 2009. According to the Bloomberg report, a US economics prof estimates that such techniques cost the American government over $60bn in taxes each year. Companies like Google are licensing their US-developed IP to subsidiaries in low-tax countries, so that foreign profits are attributed to those subsidiaries and not to the US parents.

Basically, Google licenses foreign rights to its intellectual property to an Irish subsidiary known as Google Ireland Holdings, and this outfit owns a separate subsidiary known as Google Ireland Limited. It's Google Ireland Limited — the second subsidiary — that actually sells advertising across the globe. Last year, it accounted for 88 per cent of Google's $12.5 billion in non-U.S. sales.

The second subsidiary pays royalties to the first for use of the Google intellectual property. That's the Double Irish bit. This way, the second subsidiary generates expenses that reduce its taxable income in Ireland. But these royalties don't stay with the first subsidiary. Google Ireland Holdings maintains what's called its "effective centre of management" in Bermuda, so that it can avoid Irish taxes. But before arriving in Bermuda, money is routed through the Netherlands and a third outfit called Google Netherlands Holdings B.V. Irish tax law exempts certain royalties paid to outfits in other EU countries. That's the Dutch Sandwich bit.

The Bloomberg piece is well worth the read, not only for the way it uncovers the ins and outs of this foreign income shifting, but for the rather amusing bit where it implies that Google is failing to pay the US government for a scholarship it gave Sergey Brin. Google has its faults, but making use of a legal tax loophole isn't one of them. ®