Google dodges billions in tax - by paying itself

Ireland needs all the cash it can get. After the results of a so-called stress-test due at 15:30 GMT today, the country's tax payers will find out how many more billions are needed to bail out the company's beleaguered banks. And yet, thanks to clever accounting by multinational companies like Google, hundreds of millions of Euros continue to escape overseas.

Perhaps the only surprise uncovered by a recent Guardian report on the finances of the search giant's Irish subsidiary was the revelation that Google, actually pays an effective 20 per cent rate on its earnings in Ireland, when the country's corporation tax - one of the lowest in Europe - stands at just 12.5 per cent.

Good news, you'd think. But not when you realise what tiny proportion of its vast profits the company actually pays that tax on. After a mammoth payment of €5.467 billion for "administrative expenses" is deducted, the €5.5 billion gross profit revealed in Google's 2009 accounts shrinks to just €45 million.

What that means for the Irish economy is that instead of many hundreds of millions in tax, the search giant pays just €9.6 million.

Notes to the company's accounts show that Google's "administrative expenses" rose significantly between 2008 and 2009 - by €794 million - partially due to a rise in the number of people employed by its European subsidiary, as well as in sales and marketing costs - but also due to increases in "royalties paid as a result of increases in recorded turnover".

And there's the rub. The lion's share of Google's "administrative expenses" arise from royalty payments - effectively a licence fee - which Google pays to its own headquarters, stationed in the tax haven of Bermuda, for the right to operate.

It's an accounting procedure known as "transfer pricing" - and, due to the complexities of international laws on taxation, it's completely legal. A spokesperson for the company confirmed to Thinq_:

"Google complies fully with all relevant tax legislation in all the countries in which it operates. That means that we contribute to all relevant local and national taxation schemes - as well as providing employment for approaching 2,000 people in Ireland.

"The profits of our Irish entity are consistent with the activities we perform in Ireland. Google's profits in Ireland or any other country are not solely due to the local operations but relate to significant investments in R&D, data centers and other functions and risks performed outside of Ireland."

The Guardian's findings echo research last year by Bloomberg which revealed Google had cut its tax liabilities by a massive $3.1 billion over the previous three years by shifting its income around the globe, resulting in an overall tax rate overseas of just 2.4 per cent.

The reason Google can carry out its colossal tax dodge is the fact that the company's profits rely heavily on intellectual property (IP) - search algorithms, patented software and the like.

Being intangible, that IP can 'reside' just about anywhere Google likes - and it just so happens that the company has chosen to set it down on the sunny island of Bermuda, where it attracts next to no tax. Google's subsidiaries elsewhere in the world pay royalties to use the technology owned by Google's Bermuda operation - rather cutely called Google Ireland Holdings - effectively wiping out their gross profits, and leaving little left on which to pay tax.

According to Peter Vale of tax accountant firm Grant Thornton, which works with many Ireland-based multinationals operating similar tax regimes:

"As long as the intellectual property is in Bermuda, that is where the profits reside. Ireland has no rights to the profit earned by the intellectual property based in another country."

"Accordingly, the key issue is how the IP was migrated to Bermuda in the first place and that is essentially an issue for the Internal Revenue Service in the U.S.. As far as we understand, SEC filings indicate that the transfer pricing arrangements were agreed with the IRS in 2006."