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Google's Off-Shore Tax Dodge

Introduction

Evidently, Goggle's slogan "do no evil" does not apply to its U.S. tax obligations. By using a complicated offshore tax strategy, Google lowered its overseas tax rate to just 2.4%, making it the leading tax dodger among the largest technology companies.

Over three years, Google avoided approximately $3.1 billion in U.S. taxes, according to a recent article in Bloomberg.

Google is not alone: Microsoft, Facebook and a host of other multinational corporations engage in similar schemes.

The Ploy

Here's a simplified version of how multi-nationals avoid U.S. taxes on their overseas profits:

1. A multi-national forms a subsidiary in Ireland where its tax rate is just 12.5%.

2. Then virtually all the Irish income is eventually shifted to another subsidiary located in a tax haven, such as the Cayman Islands or Bermuda, which imposes no taxes on company profits.

3. The tax-haven subsidiary charges the Irish subsidiary "royalties", causing a transfer of profits from the Irish subsidiary (thus escaping the 12.5% Irish tax) to the tax haven subsidiary. Once the profits hit the tax haven subsidiary, they become impossible to track because of a lack of disclosure requirements.

The Result

Multi-nationals are taxed under U.S. law when and if profits are repatriated, which may never occur. These companies, with billions stashed off shore, are constantly lobbying for a special tax rate (usually 5%) as an incentive to repatriate their profits.

Consequently, they avoid U.S. taxes when they earn profits, accumulate untaxed billions overseas for years, and then demand a preferential tax rate to repatriate their off-shore earnings.

IRS's Blessing

IRS and Google entered into a special arrangement, called an advanced pricing agreement, that fixed the value of Google's search and advertising intellectual property for foreign transfer purposes, thereby blessing Google's use of this tax dodge. Google is taxable in the U.S. on this amount.

Of course, Google wanted the value as low as possible and, presumably, hired an army of financial advisors to make its case. Because the agreement is secret, the fairness of the deal cannot be scrutinized.

Conclusion:

Google's off-shore tax dodge demonstrates how the international tax system allows multi-national corporations to effectively circumvent tax obligations to the U.S. government and throughout the world.

Although the Obama administration tried to address the problem, according to the Center for Responsive Politics, heavy lobbying pressure from General Electric, Johnson & Johnson and Starbucks caused Treasury to drop the proposal.