How Google's Refusal To Pay US Taxes Means US Taxpayers Fund Its Innovation, Resulting In A Benefit Of $100/Share

Tyler Durden's picture

We first discussed the topic of cash repatriation (or lack thereof) about a month ago. Since then, more and more seem to be waking up that of the over $1 trillion in cash on the corporate "balance sheet" not only is most of it unusable domestically (without being taxed at the marginal tax rate upon repatriation), but that companies are effectively boosting earnings by not paying taxes (money which should be going to the US coffers to pay for the same corporate friendly policies enacted by the government, that is currently being funded almost exclusively by individual taxpayers, and the Fed of course). And massively so. An expose in Bloomberg details how courtesy of various, perfectly legal, tax avoidance schemes, Google's effective tax rate is 2.4%, which has resulted in $60 billion in less taxes paid to the US, and which has boosted the company's stock price by a whopping $100/share!

Per Jesse Drucker:

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.”

How does Google go about legally sheltering essentially all of its net income from the IRS?

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.”

And with the hypocricy of such ethical stalwarths as Warren Buffett now having been exposed for all to see, it is only time that the company's which "does no evil" is exposed for its own "do as I say, not as I do" practices:

Google’s transfer pricing contributed to international tax benefits that boosted its earnings by 26 percent last year, company filings show. Based on a rough analysis, if the company paid taxes at the 35 percent 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, Florida. 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 percent and 25.8 percent for 2007 through 2009.

Google is “flying a banner of doing no evil, and then they’re perpetrating evil under our noses,” said Abraham J. 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?” Briloff said. “It was paid for by the United States citizenry.”

Of course, when US citizens, especially those who have never been in Congress, decide to pursue various tax shelter loophole, the result usually ends up being jail.

And here is where the tax repatriation issue comes in:

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.

Which explains why as we noted a few days ago, the vast corporate lobby is already begging for a huge tax amnesty so it can repatriate its massive cash hoard from abroad on promises it will be used for what it should have been used in the first place. Surely, we can believe these honest tax evaders... But at least we can finally put the topic of the "vast cash on the sidelines" lie to rest. 

Mure more here.

And here is a interactive graphic representation of Google's tax evasion (after the jump):

 

 

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Problem Is's picture

Half the Fortune 500 DO NOT PAY US Income Taxes
Nothing to see or collect here... Argue about personal tax rates some more and move along...

Brought to you buy the best government oligarchy and corporate money can buy...

i-dog's picture

Thanks for exposing this, TD. This is how they can invest so much in offshore manufacturing and service centres ... with a tax break from the foreign governments for generating employment, to add cream on the offshore cake!

PS. I'm opposed to all taxes ... and pay none myself. Taxation is theft!

But if anyone wants manufacturing and technical services jobs back onshore, then they should either drop corporate taxes to less than those of a typical tax haven -- or get so-called American companies benefitting from government contracts, subsidies and protection to pay the same rate as any onshore small business. Of course, that would require some serious trimming of the size of government. :)

Problem Is's picture

i-dog: "PS. I'm opposed to all taxes ... and pay none myself. Taxation is theft!"

So you want no roads, no airports, no cops, no firemen, no courts, no hospitals, no regulation, no nothing?

Or you want these things via a free lunch?

Private Sector Cannot Provide the Above Structure
Somebody has to pay for the basic framework of a society. No taxes, no nothing is a nihilist society...

The private sector can not provide these things... no laws, no courts means no markets. They can't function. 

Xedus129's picture

Import/Export Tariffs.. maybe a national and/or local sales tax.  But first you have to cut down the empire to size.

Problem Is's picture

"a national and/or local sales tax."

A tax is a tax. i-dog said no tax.

Import/Export Tariffs may qualify as not a tax. Thoughts?

Cut the empire down to size: ALWAYS...
The oligarchy uses their bought and bribed political class to misuse the tax system as well as suck corporate welfare out of the system...

Ripped Chunk's picture

Where do you live? I want to move there. I promise to act like I don't know you.

koaj's picture

i live on a private road built by the builder of my development; the private airlines can maintain airports; fireman can be volunteer and work on donations or be a 'for fee' service; people can arm themselves and protect their own person and property; most hospitals were originally set up by churches or private donations and grants (not government)

my garbage service is private. the street cleaners and plowers are private

why do i need to pay government half of what i earn only for them to take 30% off the top and return 70% of my investment to me in the form of services they say i "need"

bullshit and lies!

society is not roads and not unionized government thug RICO cops and firefighters and street pavers

Problem Is's picture

Jamie Dimon will set your tolls since he has the wealth and power to do so...

The rest of your logic is who has the biggest gun and most ammo...

Ever hear of a social contract? Laws and courts?

Your false dichotomy is a fallacy of argument...

Anarchy <period>.

i-dog's picture

I don't expect any free lunch ... and I didn't contract for the income tax or the profits tax either -- whereby I could have negotiated the terms and the consideration -- so there is no legal basis for anyone claiming payment from me. And that is quite separate from the argument that both the income tax and the profits tax are unconstitutional!

Though I refuse to pay any income or profits taxes, I have no choice at all in having to pay sales taxes, value added taxes, property taxes, fuel taxes, alcohol taxes, import tariffs, customs duties, application fees, licence fees, registration fees, filing fees, parking fees, water charges, road tolls ... and a hundred other ways the state fleeces us every day.

Most roads that I travel on were paid for from the capital of the original developer and are [poorly] maintained by local authorities out of property taxes, tolls, traffic fines and parking fines. Airports are [or can be] built by private developers and supported by fees levied on both the airlines and the passengers. If I need private security for some reason, I'll pay for it separately, rather than relying on the state tax collectors and enforcers (cops). I pay for all medical care in cash (for myself and my dependants) and hold no state health card. My children were educated in private schools (and I'm encouraging them to consider home schooling my grandchildren). I don't wish to encourage foreign wars of imperial possession by paying for an offensive military team ... and if the state tax collection system didn't exist for takeover then we wouldn't need a defensive military team to defend it either!

You obviously don't [want to] understand how a peaceful and free society works, so I won't go into a detailed rebuttal of your childish objections. Suffice to say, there are examples in history and close approximations today in many extremely-pleasant-to-live-in tax havens.

sagelike's picture

"I'm opposed to all taxes ... and pay none myself"

So in other words, you're a thief too. Takes one to spot one I guess. You get free roads, cops, firefighters, teachers, health benefits, army to protect you, etc, etc, etc for nothing.

Talk about calling the kettle black!

 

ILikeBoats's picture

Actually whenever you buy gas (or use a service that does, such as a bus) you are paying the road taxes on using the road. 

I assume you are talking about income taxes that you are not paying, not sales, excise, fuel, etc. taxes which are levied on consumption rather than income.

Bearster's picture

Whether or not you think this is outrageous, one thing is for sure:

paying less in taxes (than a theoretical rate) is *NOT* the same thing as getting a subsidy!

Everyone repeat after me: keeping a little more of your own money is not taking from taxpayers!

whatsinaname's picture

But TARP yields better than Treasury bonds !! (Headline on yahoo finance). Why do we need corporate tax repats ?

Djirk's picture

Who are some of the two biggest and fastest growing companies? GOOG and AAPL. Why is that? They invest in innovation.

Both are growing and adding high paying jobs in the US. Which in turn generate income taxes, property taxes and consumption taxes. Not to mention keep the US competitive in the global economy.

US should get it's act together and create tax benefits for innovation, then the cash would not be moved offshore.

This is entirely different than Bush style tax cuts for all corporations.

Ripped Chunk's picture

So? It's OK if they don't pay corporate taxes?  Just wanted to make sure I am getting your post as you intended.

Djirk's picture

Nope, just thinks the US needs to give better tax breaks for innovation. This creates more consumption and tax reciepts via creating jobs for highly skilled labor.

 

 

NumberNone's picture

Google's Motto is 'Don't Be Evil'...clearly they are making a statement about taxes by not paying them. 

PhotonJohn's picture

They are called the Credit for increasing research activities (IRC 41) and the Domestic Production Deducation (IRC 199). IRC 41 has been around since the early 80s and the IRC 199 is a replacement from something the WTO declared unfair trade practice.

Turd Ferguson's picture

What???

The quasi-socialist Google guys want everyone to pay taxes but themselves?

No!!!! I'm stunned!!!

Socialist hypocrites??? Really???

 

Problem Is's picture

Turd F. please...
Why should an NSA front company pay taxes to spy on you?

Turd Ferguson's picture

Good point. Just another money-laundering scheme, I suppose.

 

Problem Is's picture

My Favorite Movie Quote:

Sam Spade to Joel Cairo: "When you're slapped, you'll take it and like it."

Well next to Marla's: "My God. I haven't been fucked like that since grade school."

Both are appropriate... no?

Oh regional Indian's picture

Ahhhhh.. calling it like it is. The 3 letter agencies are ALL over the silicon valley. WHere do people believe these ridiculous vulture funds get their funds from?

Not true for this sub-set, but most people have no clue that the Grabbermint would never allow such a huge information gathering source to be independent. Rather, nothing can get this big without some Givermint..errr...support, shall we say.

ORI

http://aadivaahan.wordpress.com

 

Cognitive Dissonance's picture

The 3 letter agencies are ALL over the silicon valley.

ORI

You are immediately branded a "conspiracy theorists" and must wear a scarlet "C" on your forehead whenever you are in public. And you must now willingly consent to daily body cavity searches as well as mind probes in order to assure the minders that you are harmless to society and to them.

How dare you suggest that we live in anything other than a free and open society. Off with your head.

</sarcasm off>

Oh regional Indian's picture

Hah! I vill vear zat badge vid honor!

ORI

barkingbill's picture

since when is the CIA socialist turd?

Bananamerican's picture

since they started receiving taxdollars...

Still, i hear they'd LOVE to go private....Blackwater's cleaning their CLOCKS

Godot's picture

Isn't Google among the largest contributors to Obama?

Just askin.

snowball777's picture

Dude, where have you been? We've been waiting!

Ripped Chunk's picture

Whoever junked you is an AFT

Oh regional Indian's picture

Ahahahahhhaaaa..... Awesome!

Whoever junked must be the dumbest dork on this site.

:-) Perfect!

PS: Sold your gold yet everyone? This is a good window to convert a greater portion to Silver at the very least. Please understand, in this particular time gold is THEIR silver bullet!!!

 

ORI

http://aadivaahan.wordpress.com

snowball777's picture

Eric Schmidt: putting the crony, in crony capitalism.

He looks a little effeminate for an Il Duce impersonation.

Azannoth's picture

That would explain the massive direct investment in Ireland, because they honestly have nothing else to offer, all the skilled tech workers are immigrants anyway

Ripped Chunk's picture

And the remainder are similar to (and they hate this) their brethren in the UK.

TheGreatPonzi's picture

If you have an online business, not paying taxes at all is possible and legal.

I just find funny that Google has funded the electoral campaign of O'Bamao, and then refuses to pay taxes.

snowball777's picture

Not that Pugs aren't just as ethically bankrupt when it comes to placing truck-sized loopholes in the tax code, but how do you think Google is able to do so legally?

Enjoy your audits.

Ripped Chunk's picture

Please share the details oh great one. If you live in the US, income FROM ALL SOURCES must be reported.

So (for example) if you run all your personal expenses through a credit card drawn on an offshore bank that you pay off with offshore based deposits, you have taxable US income. And that is just the beginning depending on the legal formation of your business. Let me know.

Common_Cents22's picture

Please post more information and sources on this.  Thanks!

 

I'll start an online biz and employ people too if I get to reduce my taxes down to 2.4%!!

Ripped Chunk's picture

Anything is possible until you are the target of an audit or "review"

Dismal Scientist's picture

This topic will not go away. Renegotiation of international tax treaties will be a theme for the next few years, IMHO. Once again, tax lawyer looks like a job that will never go out of style...

williambanzai7's picture

My god, I can't believe that guy Briloff is still alive. He wrote great book called More Debits Than Credits.

Cognitive Dissonance's picture

WB7

You keep up your non stop political art and we'll all soon be wondering how you remain alive. I'm sure those whom you eviscerate have reached down to cradle their balls after viewing your latest genius. Here's hoping they do no more than hold their wounded pride. :>)

Problem Is's picture

If WillB7 keeps up the political art...

  1. He'll be on the NO FLY list...
  2. NSA will take down his website...
  3. Homeland Insecurity will issue                       <DOMESTIC TERROR ALERT>
  4. Government contractor Xe will rendition him...

And will never hear from or see the art of WillB7 again...

<tear>

williambanzai7's picture

Does this mean Neidermeyer hates me?

williambanzai7's picture

I was wondering why no post form CD. You're lying low ;-)  Incoming!

citationneeded's picture

I saw him speak once. He's blind, old, frail, and mad as hell.

williambanzai7's picture

He is legally blind, that is the funny part.