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Google searches for lowest tax rate — and uses it

NEW YORK — Google cut its taxes by $3.1 billion in the past three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda.

Google's income shifting — involving strategies known to lawyers as the "Double Irish" and the "Dutch Sandwich" — 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 who formerly worked for the Treasury Department. "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 profits 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 massive collective projected deficit.

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, said Kimberly Clausing, an economics professor at Reed College in Portland, Ore.

International income shifting, which helped cut Google's overall effective tax rate to 22.2 percent last year, shows one way that loopholes undermine the top U.S. rate of 35 percent.

As a strategy for limiting taxes, the Double Irish method is "very common at the moment, particularly with companies with intellectual property," said Richard Murphy, director of Britain-based Tax Research. Murphy, who has worked on similar transactions, estimates that hundreds of multinationals use some version of the method.

Google's transfer pricing contributed to international tax benefits that boosted its earnings by 26 percent last year, company filings show. Based on a rough analysis, if the company paid taxes at the 35 percent rate on all its earnings, its share price might be reduced by about $100, said Clayton Moran, an analyst at Benchmark Co. in Boca Raton.

Google is "flying a banner of doing no evil, and then they're perpetrating evil under our noses," said Abraham Briloff, a professor emeritus of accounting at Baruch College in New York who has examined Google's tax disclosures.

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

Technically, multinationals that shift profits overseas are deferring U.S. income taxes, not avoiding them permanently. The deferral lasts until companies decide to bring the earnings back to the U.S. In practice, they rarely repatriate significant portions, thus avoiding the taxes indefinitely, said Michelle Hanlon, an accounting professor at the Massachusetts Institute of Technology.

Google searches for lowest tax rate — and uses it 10/22/10 [Last modified: Friday, October 22, 2010 9:43pm]
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