Inside Google

Remember the “Double Irish” and the “Dutch Sandwich?” Those are the nicknames for the schemes that Google uses to dodge about $1 billion a year in U.S. taxes by running profits through offshore subsidiaries and stashing the cash in tax havens like Bermuda.

Bloomberg Reporter Jesse Drucker originally revealed a year ago how the dubious techniques helped the Internet giant reduce its overseas tax rate to 2.4 percent.

Thursday Drucker brought the welcomed news that the Internal Revenue Service is auditing how Google avoided U.S. taxes. Google reported an effective tax rate of 18.8 per cent in the second quarter, less than half the average U.S. and state statuary rate of 39.2 percent, Drucker reported.

What Google does is transfer some of its technology and intellectual property to overseas subsidiaries in very low tax countries and attribute earnings to those units. The “Double Irish” and “Dutch Sandwich” moved the profits through Ireland and the Netherlands to Bermuda.

So long as the money is kept offshore, no U.S. taxes are due. When the money comes into the United States, it’s taxed at the usual corporate rate. Google isn’t the only company to do this. As Drucker reports:

“U.S. companies are sitting on at least $1.375 trillion in earnings in their foreign subsidiaries on which they have paid no federal income taxes, according to a May report by JPMorgan Chase & Co. Companies including Google, Cisco Systems Inc., Pfizer Inc., Apple Inc.

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and Microsoft Corp. are lobbying Congress for a tax holiday on bringing home those profits, which would otherwise be subject to U.S. income tax at the 35 percent corporate rate with a credit for foreign taxes already paid.”

They’re claiming a tax holiday would help create jobs and stimulate the economy. We’ve been down this road before. There was a tax holiday in 2005, but most of the repatriated cash went to pay dividends and buy back shares economic research shows.

Google spokesman Jim Prosser called the IRS action a “routine inquiry.”

What’s at stake for Google? Drucker explains it like this:

“While Google’s potential liability isn’t clear, similar deals between companies and offshore arms are often the subject of disputes over hundreds of millions of dollars in taxes, said Daniel Frisch, an economist at Horst Frisch Inc. which advises businesses on transfer pricing — the allocation of income between units in different countries. In 2006, the IRS settled a case with drugmaker GlaxoSmithKline Plc for $3.4 billion.”

Google deserves close scrutiny from the IRS over whether its tax avoidance schemes are legal. I’d say they certainly don’t pass the “Don’t Be Evil” test — but when did that ever really matter to Google? And the Administration needs to stand firm against calls for another tax holiday that serves no real public interest.