IRS Probes Google’s Bermuda Tax Avoidance

October 13, 2011

Google-logo_2The US Internal Revenue Service is auditing how Google Inc. avoided American federal income taxes by shifting profits to subsidiaries in Bermuda and other off-shore jurisdictions, Bloomberg is reporting today [Oct. 13].

The agency is bringing “more than typical scrutiny to how the company valued software rights and other intellectual property it licensed abroad”, a source who requested anonymity because the audit isn’t public told the business and financial news service.

The IRS has requested information from Google about its offshore deals after three acquisitions, including its $1.65 billion purchase of YouTube, the source said.

The transfer overseas of these kinds of rights rights has enabled Google to attribute earnings to foreign units that pay lower taxes, Bloomberg News reported a year ago.

Bloomberg’s revelation that Google had funneled its profits to Bermuda to avoid American taxes caused a firestorm of controversy both in the United States and Europe, with politicians, political commentators and businessmen charging that the Internet giant was engaging in “morally reprehensible” behaviour.

“It [Google] exploits tax havens such as Bermuda to legally avoid taxation,” said one leading British media industry figure at the time, describing the US multinational’s actions as “profoundly unethical”. ”

While Google’s potential liability isn’t clear, similar deals between companies and offshore arms are often the subject of disputes over hundreds of millions of dollars in taxes, said Daniel Frisch, an economist at Horst Frisch Inc. which advises businesses on transfer pricing — the allocation of income between units in different countries. In 2006, the IRS settled a case with drugmaker GlaxoSmithKline Plc for $3.4 billion.

“The very biggest transfer-pricing tax disputes are over transfers of intangibles to offshore subsidiaries,” said Frisch, whose firm is based in Washington.

Google, owner of the world’s most popular search engine, has cut its worldwide tax bill by about $1 billion a year using a pair of strategies called the “Double Irish” and “Dutch Sandwich,” which move profits through units in Ireland, the Netherlands and Bermuda.

Google reported an effective tax rate of 18.8 percent in the second quarter, less than half the average combined US and state statutory rate of 39.2 percent.

US companies are sitting on at least $1.375 trillion in earnings in their foreign subsidiaries on which they have paid no federal income taxes, according to a May report by JPMorgan Chase & Co. Companies including Google, Cisco Systems Inc., Pfizer Inc., Apple Inc. and Microsoft Corp. are lobbying both the White House and Congress for a tax holiday on bringing home those profits, which would otherwise be subject to US income tax at the 35 percent corporate rate with a credit for foreign taxes already paid.

The Obama administration is opposed to that tax break and has been stepping up criticism of tax preferences for various industries and millionaires.

Last week, Senate Democrats proposed a new surtax on people earning at least $1 million a year, a move that would generate an estimated $453 billion over the coming decade.

And a report issued this week by a US Senate committee was highly critical of renewed efforts by US firms requesting tax breaks to move profits back on-shore from off-shore domiciles including Bermuda.

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  1. Googlybda says:

    Wake Up Bermuda!