ANALYSIS:Loopholes in Ireland and the Netherlands help the internet giant slash its tax bill by €2.2 billion
ITS ANNUAL reports call it the “foreign rate differential”. But Google’s fully legal, fully approved tax tricks also go by the more colourful expressions the “Double Irish” and the “Dutch Sandwich”.
Using these strategies, which involve shuttling profits through its operations in Ireland and the Netherlands to tax havens, Google has cut its overseas tax rate to 2.4 per cent and its company-wide effective tax rate to 22.2 per cent.
These rates are somewhat shy of the US’s corporate tax rate of 35 per cent and the 12.5 per cent Irish rate that many business sector interest groups have declared the Government must retain.
Research by Jesse Drucker, a tax journalist at the financial news wire Bloomberg, pinpoints tax loopholes in Ireland and the Netherlands for helping the company – the third-largest tech company in the US behind Apple and Microsoft – to slash its tax bill by $3.1 billion (€2.2 billion) in the past three years. This hit is primarily, but not exclusively, to the US exchequer, but that doesn’t mean the scale of the sum is irrelevant to Ireland.
Outrage about the extent of tech giants’ tax canniness may boost the political impetus in the US to push through measures designed to curb the shifting of income abroad and clamp down on tax havens. When that happens, Ireland’s desirability as an overseas base may be dented regardless of what the Government does or doesn’t do to our corporate tax regime.
The word “loophole” implies Google’s “Double Irish” scheme is an accidental find, rather than a structure negotiated with tax authorities and established for the pleasure of its shareholders. The company notes its tax practices “are very similar to those at countless other global companies operating across a wide range of industries”. Among companies with valuable intellectual property, Google is not an unusual case, just a big one.
How does the “Double Irish” work? Under a deal approved in 2006 by the US tax authority, Google licenses the rights to its search and advertising technology for the Europe, Middle East and Africa region to Google Ireland Holdings. This has been an unlimited liability company since 2006, meaning under Irish rules it is not required to disclose income statements or balance sheets. It, in turn, owns Google Ireland Limited, the direct employer of almost 2,000 people at Barrow Street in Dublin. The Dublin subsidiary was credited by Google with 88 per cent of its $12.5 billion in non-US sales in 2009 – a figure that substantially dwarfs the €18.3 million that Google paid in taxes in Ireland last year. Allocating the revenue to Ireland helps Google avoid taxes in the US. Allocating the profits of Google Ireland Limited to Google Ireland Holdings then helps it keep its overseas tax bill to an absolute minimum.
Google Ireland reported pretax income of less than 1 per cent of sales in 2008. This was largely because it paid $5.4 billion in royalties to Google Ireland Holdings which, despite its formation in Ireland and Irish-sounding name, has an “effective centre of management” in Bermuda. The royalties take a little detour along the way to the Netherlands and an employee-free company called Google Netherlands Holdings to avoid Irish withholding taxes: this little stopover is what gives rise to the “Dutch Sandwich” nickname. The ultimate parent is Google Inc.
We are used to the idea that US companies might want to set up shop in Ireland to bask in the glow of a 12.5 per cent corporate tax rate. For some companies, however, 12.5 per cent is still too much when there are tax-free destinations such as Bermuda to stash your cash.
While it is sunny Bermuda that is generally dubbed the “tax haven” in this international three-way, from the US perspective, both Ireland and the Netherlands are also worthy of the title. There remains, however, massive political sensitivity about the term “tax haven”, despite the fact that a large part of Ireland’s appeal for companies such as Google is not the headline tax rate, but the ability of companies to exploit legal loopholes such as the “Double Irish”.
We have known about Google’s utilisation of an unlimited company in the structure of its Irish operations pretty much since its inception. It has enabled it to maintain a degree of financial secrecy about its Irish operations that is high but seemingly not uncomfortable for the Government, which has happily resisted implementing the “anti-abuse” mechanisms on the taxation of corporate profits that are present in the tax regimes of most other advanced countries.
In May 2007, the journal Practical US/International Tax Strategiespublished an article co-written by Joseph Darby of international law firm Greenberg Traurig that extolled the virtues of the "Double Irish" for US software companies. It noted how Ireland had "elected to protect its interests in other ways", which generally involve citing how wonderful it is that Google employs people here. The article concluded that Ireland is "a vivid and vibrant example of the fact that, when it comes to taxing business profits, less is often more". It added that "a perceptive observer" of Ireland's "lax" approach might view it as "back door" way of "re-lowering the Irish tax rate".
