Google Questioned by SEC Over Earnings in Low-Tax Countries

According to Bloomberg.com, Google has been questioned by the U.S. Securities and Exchange Commission in regards to their overseas tax strategy that saved the company a reported $3.1 billion. The “Double Irish” and the “Dutch Sandwich” strategies were both used by the internet giant.

From Bloomberg.com:

SEC officials asked Google for “disclosures to explain in greater detail the impact on your effective income tax rates and obligations of having proportionally higher earnings in countries where you have lower statutory tax rates,” according to a Dec. 2 letter.

The company responded to the requests for information, the filings show. The SEC said in a Feb. 3 letter that it had completed its review of Google’s filings, and has “no further comments at this time on the specific issues raised.”

Google, owner of the world’s most-popular search engine, has used a strategy that has gained favor among some U.S. companies to reduce taxes. Google cut its income taxes by $3.1 billion over three years by shifting the bulk of foreign profits to Ireland, then the Netherlands and eventually to no-tax Bermuda, according to regulatory filings in the U.S. and abroad.

The tax-cutting strategy, involving a pair of techniques known as the “Double Irish” and the “Dutch Sandwich,” helped cut the company’s income-tax rate to 2.4 percent on the profits it attributed to its foreign subsidiaries during the three-year period, filings show. The statutory corporate income tax rate in the U.S. is 35 percent.

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The Tax Haven That's Saving Google Billions

New reports have emerged regarding the complicated international business structure to keep its corporate tax rate at a super low 2.4%. The search giant takes advantage of generous laws in countries including Ireland, the Netherlands, and Bermuda to save on their tax bill.

Business Week.com reports:

The heart of Google's (GOOG) international operations is a silvery glass office building in central Dublin, a block from the city's Grand Canal. In 2009 the office, which houses roughly 2,000 Google employees, was credited with 88 percent of the search juggernaut's $12.5 billion in sales outside the U.S. Most of the profits, however, went to the tax haven of Bermuda.

To reduce its overseas tax bill, Google uses a complicated legal structure that has saved it $3.1 billion since 2007 and boosted last year's overall earnings by 26 percent. While many multinationals use similar structures, Google has managed to lower its overseas tax rate more than its peers in the technology sector. Its rate since 2007 has been 2.4 percent. According to company disclosures, Apple (AAPL), Oracle (ORCL), Microsoft (MSFT), and IBM (IBM)—which together with Google make up the top five technology companies by market capitalization—reported tax rates between 4.5 percent and 25.8 percent on their overseas earnings from 2007 to 2009. "It's remarkable that Google's effective rate is that low," says Martin A. Sullivan, a tax economist who formerly worked for the U.S. Treasury Dept. "This company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 percent." The corporate tax rate in the U.K., Google's second-largest market after the U.S., is 28 percent.

In Bermuda there's no corporate income tax at all. Google's profits travel to the island's white sands via a convoluted route known to tax lawyers as the "Double Irish" and the "Dutch Sandwich." In Google's case, it generally works like this: When a company in Europe, the Middle East, or Africa purchases a search ad through Google, it sends the money to Google Ireland. The Irish government taxes corporate profits at 12.5 percent, but Google mostly escapes that tax because its earnings don't stay in the Dublin office, which reported a pretax profit of less than 1 percent of revenues in 2008.

Irish law makes it difficult for Google to send the money directly to Bermuda without incurring a large tax hit, so the payment makes a brief detour through the Netherlands, since Ireland doesn't tax certain payments to companies in other European Union states. Once the money is in the Netherlands, Google can take advantage of generous Dutch tax laws. Its subsidiary there, Google Netherlands Holdings, is just a shell (it has no employees) and passes on about 99.8 percent of what it collects to Bermuda. (The subsidiary managed in Bermuda is technically an Irish company, hence the "Double Irish" nickname.)

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Google or China—Who Has More to Lose?

On Monday, Google closed its Internet search service in China and redirected users to its uncensored search engine in Hong Kong.

In an article I adapted from the New York Times today, “Behind the Free-Market Veneer (Google or China—Who Has More to Lose?)” it asks the questions, “Should Google take a harder stance and withdraw from China completely? Should multinationals like Google play a greater role in challenging China’s policies?” The article reads, "Google’s showdown with China is over censorship and now leaves the company with few choices". But did we really think it would be any different?

Ai Weiwei is an artist and political activist based in Beijing feels Google has set a different example. It has shown that it values decency and integrity, even when that means standing up to the Chinese government. The Chinese government has always been arrogant in dealing with protests of any kind when it comes to censorship or judicial reform. Google’s departure now teaches millions of people how much is at stake. What the Chinese government doing is suicidal.

Oded Shenkar is the Ford Motor Company Chair in Global Business Management and professor of management and human resources at the Fisher College of Business at Ohio State University. He is the author of “The Chinese Century.” Whether Google should take a harder stance is not really up to Google anymore. The company might have thought it could continue to have a presence in the search business in China from Hong Kong and elsewhere and keep other businesses like online ads sales and operating system/smartphone programs, but China does not work like that.

To an extent, this is a government-to-government dispute, since the U.S. is holding the flag of Internet freedom and has a stake in ensuring that American firms, particularly those in a field where the U.S. has a competitive advantage, are allowed to compete in a major foreign market.

See the full article here.

Sarkozy Proposes Ad Tax on Google

Although not related to American tax changes, I was surprised when I ran across this article on FT.com about the French government’s proposal to levy a tax on the advertising revenues of Google and other Internet portals. According to FT.com, this is the latest sign of a European backlash against the U.S. owner search giant.

President Nicolas Sarkozy instructed his finance ministry to examine the merits of a tax in response to complaints from the French media that Google and other sites are generating advertising income using their news and other content. He also called for an inquiry by French competition authorities into a possible “abuse of dominant position” in the advertising business of big internet sites.

Mr. Sarkozy commented after the publication of an independent report for the French culture ministry that proposed a tax on Google, Yahoo, Facebook and other sites, to help fund initiatives for writers, musicians and publishers to make money from the web.

The report recommended issuing music cards to young people with €25 ($36) in credit provided by the government as a way of encouraging legal downloading of cultural works.

Google said that it opposed any such tax. “We don’t think introducing an additional tax on internet advertising is the right way forward as it could slow down innovation,” said Olivier Esper, senior policy manager of Google France.

Amid growing global scrutiny, the French government, in particular, has gone after Google on a number of fronts.

Continued at FT.com…