Tax? Search me…

Very interesting article on how Google's effective tax rate is around 2% (and on how Ireland bankrupted itself):

 Google’s office in Ireland is the center of the company’s international operations.  In 2009 it “was credited with 88 percent of the search juggernaut’s $12.5 billion in sales outside the U.S.”  But Google doesn’t pay taxes on that amount, because most of the profits went to Bermuda, where there is no corporate income tax.

So, how did Google get its profits to Bermuda?  Businessweek explains:

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.)

This set-up (as Businessweek describes it) also helps Google lower its tax bill in the U.S.  Google Ireland licenses its search and advertizing technology from Google’s headquarters in Mountain View, California.  Obviously this technology is worth a lot—but Google headquarters keeps the licensing fee to Google Ireland low.  Doing so means that Google headquarters can minimize its U.S. earnings and thus its tax obligations to the U.S. government.  And of course, Google Ireland knows how to move its profits around to minimize its tax liabilities.

 “Facebook is preparing a structure similar to Google’s that will send earnings from Ireland to the Cayman Islands, according to company filings and a person familiar with the arrangement.”  Microsoft already has one in place.