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Google’s Tax Dodging Ways Explained

by | 14th, October 2011

A REPORT out of the US about an investigation into Google’s tax dodging ways.

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

Something’s going on, obviously. What is actually going on is technically complex but can be, at the risk of losing a bit of detail, explained simply enough. There’s essentially two rules you need to understand.

1) An American company only pays the corporate income tax (what we call corporation tax) on profits it takes back into America. If an American company makes profits in, say, Ghana, the profits stay in Ghana or move anywhere in hte world other than the US, then the US doesn’t tax those profits.

2) Within the European Union we’ve got “freedom of establishment”. That means you can set up your company anywhere in the EU and then do business anywhere in the EU. Yes, it’s a little bit more complicated but not all that much.

So, what you could do, if you were a purely online firm, no need  for girt big factories or anything, is the follwoing. So, you’re a US company but you want to sell stuff to Europeans. OK, so, let’s have a company in the EU to sell things to Europeans (say, adverts on search engines, just as an example). We’ll stick that company in Ireland because Ireland has a nice lovely low corporation tax rate of 12.5%.

We can now sell all over the EU: sure, we’ll need a few salesmen in the UK for example, but they can be in a different company: the revenues from what they sell go to our Irish company.

Excellent, all our European sales now get taxed in Ireland (and again, yes, it’s more complex than this but this is a good enough level of detail) at that lovely low rate. And instead of sending those profits back to the US, we’ll send them, after Ireland has taxed them, to a company in, say, Bermuda, where there is no corporation tax. True, this means we can’t take them back into the US without paying more tax (we’d have to pay the 39.2% minus the 12.5% we’ve already paid) but we’ve got plenty of uses for the money outside the US. We can use it to invest in India, or Colombia or wherever.

And that, pretty much, is it. You might think it’s all just great, you might think it’s an abomination, but that is pretty much what Google and many other US companies are doing.



Posted: 14th, October 2011 | In: Money Comment | Follow the Comments on our RSS feed: RSS 2.0 | TrackBack | Permalink