Google Inc. cut its taxes by $3.1-billion in the past 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%, 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%."
The U.S. corporate income-tax rate is 35%. In the U.K., Google's second-biggest market by revenue, it's 28%.
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% income tax.
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.
Google, the third-largest U.S. technology company by market capitalization, hasn't been accused of breaking tax laws. "Google's practices are very similar to those at countless other global companies operating across a wide range of industries," said Jane Penner, a spokeswoman for the Mountain View, Calif.-based company. Ms. Penner declined to address the particulars of its tax strategies.
Facebook, the world's biggest social network, is preparing a structure similar to Google's that will send earnings from Ireland to the Cayman Islands, according to the company's filings in Ireland and the Caymans and to a person familiar with its plans. A spokesman for the Palo Alto, Calif.-based company declined to comment.
The tactics of Google and Facebook depend on "transfer pricing," paper transactions among corporate subsidiaries that allow for allocating income to tax havens while attributing expenses to higher-tax countries.
Such income shifting costs the U.S. government as much as $60-billion in annual revenue, says Kimberly Clausing, an economics professor at Reed College in Portland, Ore.
U.S. Representative Dave Camp of Michigan, the ranking Republican on the House ways and means committee, and other politicians say the 35% U.S. statutory rate is too high relative to foreign countries. International income-shifting, which helped cut Google's overall effective tax rate to 22.2% last year, shows one way loopholes undermine that top U.S. rate.
The high corporate tax rate in the United States motivates companies to move activities and related income to lower-tax countries, said Irving 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," Mr. Plotkin said in an interview.
Google's transfer pricing contributed to international tax benefits that boosted its earnings by 26% last year, company filings show. Based on a rough analysis, if the company paid taxes at the 35% rate on all its earnings, its share price might be reduced by about $100, said Clayton Moran, an analyst at Benchmark Co. in Boca Raton, Fla. He recommends buying Google stock, which closed yesterday at $607.98.
The company, which tells employees "don't be evil" in its code of conduct, has cut its effective tax rate abroad more than its peers in the technology sector: Apple Inc., the maker of the iPhone; Microsoft, the largest software company; International Business Machines Corp., the biggest computer-services provider; and Oracle Corp., the second-biggest software company. Those companies reported rates that ranged between 4.5% and 25.8% for 2007 through 2009.
Google is "flying a banner of doing no evil, and then they're perpetrating evil under our noses," said Abraham Briloff, a professor emeritus of accounting at Baruch College in New York who has examined Google's tax disclosures.
"Who is it that paid for the underlying concept on which they built these billions of dollars of revenues?" Mr. Briloff asked. "It was paid for by the United States citizenry."
The U.S. National Science Foundation funded the mid-1990s research at Stanford University that helped lead to Google's creation. Taxpayers also paid for a scholarship for the company's co-founder, Sergey Brin, while he worked on that research. Google now has a stock market value of $194.2-billion.
Google's annual reports from 2007 to 2009 ascribe a cumulative $3.1-billion tax savings to the "foreign rate differential."Jesse Drucker, Bloomberg News