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Google's "Double Irish" Costs Billions Here at Home

Written By Brian Hicks

Posted October 21, 2010

shell game

It’s no secret that big multinational corporations no longer have a sense identity with the country where they originated. Get big enough and it’s easy to forget where you came from.

To them it’s about one thing and one thing only: earnings per share. Country, meanwhile, comes in a distant second.

Because of it, armies of accountants and lawyers work late at night figuring out new ways to pay a much smaller tax bite.

So the big boys move earnings around in gigantic shell game that reduces their tax rates to practically nothing using offshore tax havens.

To understand how it all works, there was a great article in Bloomberg this morning that detailed the hoops Google has to jump through to make it all happen. Click the link and read the whole piece.

Unfortunately, there’s one little problem with current arrangement: once the money is moved overseas it rarely comes back home…

From Bloomberg by Jesse Drucker entitled: Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes

“Google Inc. cut its taxes by $3.1 billion in the last 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 A. Sullivan, a tax economist who formerly worked for the U.S. 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 the U.K., 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 Inc. and Microsoft Corp. 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. (See an interactive graphic on Google’s tax strategy here.)

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.

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 U.K.- based Tax Research LLP. Murphy, who has worked on similar transactions, estimates that hundreds of multinationals use some version of the method.

The high corporate tax rate in the U.S. motivates companies to move activities and related income to lower-tax countries, said Irving H. Plotkin, a senior managing director at PricewaterhouseCoopers LLP’s national tax practice in Boston. He delivered a presentation in Washington, D.C. this year titled “Transfer Pricing is Not a Four Letter Word.”

“A company’s obligation to its shareholders is to try to minimize its taxes and all costs, but to do so legally,” Plotkin said in an interview.

Once Google’s non-U.S. profits hit Bermuda, they become difficult to track.

The subsidiary managed there changed its legal form of organization in 2006 to become a so-called unlimited liability company. Under Irish rules, that means it’s not required to disclose such financial information as income statements or balance sheets.


“Sticking an unlimited company in the group structure has become more common in Ireland, largely to prevent disclosure,” Stewart said.

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. (emphasis mine)”


So here’s what I think…..lower the damn tax rate from 35% and the money will never leave in the first place.

The new business investments alone will boost GDP dramatically and put more people to work.

This is not exactly rocket science.

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