The US Internal Revenue Service (IRS) has negotiated a deal with Google that limits the tax savings the internet search engine giant will make by way of its Irish subsidiaries.
The agreement, reached in December 2006, will slow or halt a decline in Google's global effective tax rate which was saving it tens of millions of euro annually by having greater proportions of its profits go through Dublin.
The deal, which concerns Google's intercompany transfer pricing arrangements, is backdated to 2003.
In financial results released last week, Google said the deal with the IRS would mean its effective tax rate this year will be higher than it would have been otherwise.
The deal, called an Advance Pricing Agreement, is a structure the US tax authorities negotiate with multinationals to cover how they account for inter company pricing.
Because Ireland's corporation tax rate is half that of the United States, US multinationals can reduce what they call their effective tax rate by locating more profits here than in the US.
The US revenue seeks to ensure that the advantages US multinationals gain from subsidiaries in lower tax jurisdictions, do not exceed what is appropriate.
Last week Google announced revenues of $3.21 billion (€2.48 billion) for the quarter ended December 31st, 2006, an increase of 67 per cent on the same period in 2005. Net income was $1 billion.
The company said that depending on the accountancy rules used, its effective tax rate in 2006 was 23 per cent or 26 per cent.
Google's effective tax rate has been falling in recent years as a result of its Dublin operation.
Filings in 2005 in the US indicated that Google had dropped its effective tax rate from 39 per cent to 31 per cent, saving it approximately €100 million that year.
"This is primarily because more of our earnings in 2005 compared to 2004 are expected to be recognised by our Irish subsidiary," the company filing said at the time.
In its quarterly SEC filing in September of last year, Google said: "We currently anticipate that our effective tax rate will be at or below 30 per cent in 2006 compared to 31.6 per cent in 2005, primarily because we expect that our Irish subsidiary will recognise proportionately more of our earnings in 2006 compared to 2005, and such earnings are taxed at a lower statutory tax rate than in the US."
The effective tax rate announced last week for 2006 was significantly below 30 per cent.
The company statement said: "Our effective tax rate will be greater in 2007 under the APA [ Advance Pricing Agreement] than it would have been without it. However, we expect our effective tax rate for 2007 will be at or below 30 per cent."
The deal with the IRS is backdated: "In December 2006, Google entered into an APA with the IRS in connection with certain intercompany transfer pricing arrangements. The APA applies to the taxation years beginning in 2003."
A US tax source said such agreements were used to introduce "greater certainty" for companies and the Inland Revenue Service into the area of pricing within multinational corporations.
Pricing arrangements within multinationals "can distort prices and artificially affect what is reported for accounting and tax purposes," the source said.
Google's operation in Dublin is its largest outside the US. It has an R&D company that receives massive royalty payments from other companies in the group, and a company that services customers from Ireland to the Urals, and Iceland to South Africa. Some 1,300 people are employed.
