Google Revenues Sheltered in No-Tax Bermuda Soar to $10 Billion

Google Inc. avoided about $2 billion in worldwide income taxes in 2011 by shifting $9.8 billion in revenues into a Bermuda shell company, almost double the total from three years before, filings show.

By legally funneling profits from overseas subsidiaries into Bermuda, which doesn’t have a corporate income tax, Google cut its overall tax rate almost in half. The amount moved to Bermuda is equivalent to about 80 percent of Google’s total pretax profit in 2011.

The increase in Google’s revenues routed to Bermuda, disclosed in a Nov. 21 filing by a subsidiary in the Netherlands, could fuel the outrage spreading across Europe and in the U.S. over corporate tax dodging. Governments in France, the U.K.,Italy and Australia are probing Google’s tax avoidance as they seek to boost revenue during economic doldrums.

Last week, the European Union’s executive body, the European Commission, advised member states to create blacklists of tax havens and adopt anti-abuse rules. Tax evasion and avoidance, which cost the EU 1 trillion euros ($1.3 trillion) a year, are “scandalous” and “an attack on the fundamental principle of fairness,” Algirdas Semeta, the EC’s commissioner for taxation, said at a press conference in Brussels.

‘Deep Embarrassment’

“The tax strategy of Google and other multinationals is a deep embarrassment to governments around Europe,” said Richard Murphy, an accountant and director of Tax Research LLP in Norfolk, England. “The political awareness now being created in the U.K., and to a lesser degree elsewhere in Europe, is: It’s us or them. People understand that if Google doesn’t pay, somebody else has to pay or services get cut.”

Google said it complies with all tax rules, and its investment in various European countries helps their economies. In the U.K., “we also employ over 2,000 people, help hundreds of thousands of businesses to grow online, and invest millions supporting new tech businesses in East London,” the Mountain View, California-based company said in a statement.

The Internet search giant has avoided billions of dollars in income taxes around the world using a pair of tax shelter strategies known as the Double Irish and Dutch Sandwich, Bloomberg News reported in 2010. The tactics, permitted under tax law in the U.S. and elsewhere, move royalty payments from subsidiaries in Ireland and the Netherlands to a Bermuda unit headquartered in a local law firm.

Last year, Google reported a tax rate of just 3.2 percent on the profit it said was earned overseas, even as most of its foreign sales were in European countries with corporate income tax rates ranging from 26 percent to 34 percent.

Foreign Taxes

At a hearing last month in the U.K., members of Parliament pressed executives from Google, Seattle-based Amazon.com Inc. and Starbucks Corp. to explain why they don’t pay more taxes there.

The U.K., Google’s second-biggest market, was responsible for about 11 percent of its sales, or almost $4.1 billion last year, according to company filings. Google paid 6 million pounds ($9.6 million) in U.K. income taxes.

Matt Brittin, Google’s vice president for Northern and Central Europe, testified that the company pays taxes where it creates “economic value,” primarily the U.S.

Still, Google attributes some profit based on technology created in the U.S. to offshore subsidiaries, lowering its U.S. taxes, according to company filings and people familiar with its tax planning. Google paid $1.5 billion in income taxes worldwide in 2011.

Transfer Pricing

Multinational companies cut their tax bills using “transfer pricing,” paper transactions among corporate subsidiaries that allow for allocating income to tax havens and expenses to higher-tax countries.

In Google’s case, an Irish subsidiary collects revenues from ads sold in countries like the U.K. and France. That Irish unit in turn pays royalties to another Irish subsidiary, whose legal residence for tax purposes is in Bermuda.

The pair of Irish units gives rise to the nickname “Double Irish.” To avoid an Irish withholding tax, Google channeled the payments to Bermuda through a subsidiary in the Netherlands — thus the “Dutch Sandwich” label. The Netherlands subsidiary has no employees.

The Dutch unit’s payments to the Bermuda entity last year were up 81 percent to $9.8 billion from $5.4 billion in 2008. Google’s overseas sales have increased at about the same rate.

Google’s overall effective tax rate dropped to 21 percent last year from about 28 percent in 2008. That compares with the average combined U.S. and state statutory rate of about 39 percent.

Via: Bloomberg