How Google manages a Irish corporate tax rate of 2.5%

Ireland is a small open economy. So open it seems that even with a low corporate tax rate big bucks outfits like Google can slice a full ten percent off that 12.5% corporate tax rate by simply porting the money to an employeeless ‘office’ in the Netherlands and thence to Bermuda. Bloomberg has an amazing about of detail:

The Dublin subsidiary sells advertising globally and was credited by Google with 88 percent of its $12.5 billion in non-U.S. sales in 2009.

Allocating the revenue to Ireland helps Google avoid income taxes in the U.S., where most of its technology was developed. The arrangement also reduces the company’s liabilities in relatively high-tax European countries where many of its customers are located.

The profits don’t stay with the Dublin subsidiary, which reported pretax income of less than 1 percent of sales in 2008, according to Irish records. That’s largely because it paid $5.4 billion in royalties to Google Ireland Holdings, which has its “effective centre of management” in Bermuda, according to company filings.

Here’s the hard core mechanics:

Tax planners call such an arrangement a Double Irish because it relies on two Irish companies. One pays royalties to use intellectual property, generating expenses that reduce Irish taxable income. The second collects the royalties in a tax haven like Bermuda, avoiding Irish taxes.

To steer clear of an Irish withholding tax, payments from Google’s Dublin unit don’t go directly to Bermuda. A brief detour to the Netherlands avoids that liability, because Irish tax law exempts certain royalties to companies in other EU- member nations. The fees first go to a Dutch unit, Google Netherlands Holdings B.V., which pays out about 99.8 percent of what it collects to the Bermuda entity, company filings show. The Amsterdam-based subsidiary lists no employees.

Inserting the Netherlands stopover between two other units gives rise to the “Dutch Sandwich” nickname. “The sandwich leaves no tax behind to taste,” said Murphy of Tax Research LLP.

That loophole is a powerful reason why the polyglot sales executives are positioned strategically down by the Grand Canal Dock in Dublin. Whilst it may be an embarrassing revelation for Google, it is doubly so for the government given (according to the front page of the FT this morning) the bond rate on Irish debt is now an eye watering 8.64% (and the tax ballast has proven itself to light to keep this open sided vessel afloat).