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).

  • DC

    “Ireland is a small open economy. So open”…its brains have fallen out?

  • joeCanuck

    Do no harm.

    And avoid doing good while you’re at it.

  • 21stcentury fenian

    1% of 12.5bn is still 125m pa to the exchequer. And that’s not counting all the indirect and employer / employee related taxes they bring in. I’d say Google are very welcome in Ireland.

  • pippakin

    I’d say it is about time the ‘international community’ grabbed these multi nationals by the short ones and squeezed until the likes of Google learn the lesson.

  • joeCanuck

    Squeeze hard enough and they may become google eyed.
    But you can’t blame people for exploiting loopholes in tax codes. Just need to keep closing the loopholes.

  • Rory Carr

    Unionist readers will no doubt be happy to learn that when it comes to playing footsie with big tax-avoiding companies the U.K. government can more than hold its own with the tax-dodger lovers of the RoI.

    Despite HMRC, emboldened by a ruling that its robust anti-avoidance policies did not clash with European legislation, ardently pursuing Vodaphone through the courts with a more than hopeful chance of recovering £6billion in unpaid taxes which the Tory-supporting group had squirrelled away via artful avoidance schemes the whole recovery campaign ground to a shuddering halt.

    HMRC inspectors of integrity were angered by the intervention of HM Revenue & Customs’ (HMRC) “permanent secretary for tax”, Dave Hartnett. According to Private Eye, ‘Despite HMRC’s victories, Hartnett moved the case from his specialists and lawyers – dismissed in recent comments to the FT as “very intelligent people” suffering from “a black and white view of the law” – to a dimmer but more amenable group to negotiate with Vodafone’s head of tax, John Connors, who until 2007 was a senior official at HMRC working closely with Hartnett on handling big business.” ‘

    In recent days LibDem Deputy P.M., Nick Clegg confirmed that Vodaphone was no longer to be pursued for the outstanding billions as HMRC recovery resources were needed to be applied more efficiently – to harass all those lesser individuals who will suffer as a result of HMRC’s previous coding cock-ups no doubt.

  • pippakin

    joe

    Looking at the way things are and bearing in mind our fairly recent past, I don’t blame Google at all. At least they are not Irish and can hardly be blamed for taking advantage of a situation our politicians not only created but were proud of achieving.

    The Irish government made it easy for the like of Google and now it will take more than the Irish government to change the system but it must be changed.

    The government is going to cut healthcare, welfare, state pensions and the public sector. All this while with a straight face they tell us we are all in this together.

  • Alan Maskey

    It is for reasons like this that the EU is trying to harmonise tax laws and close loop holes and quasi criminal joints like the Isle of Man, Channel Islands (Anglo Norman law ffs) and Monaco.

    A more extreme example than Google is Newscorp which has a raft of British companies to help it pay zilch tax in Britain by exporting its profits to the Caymans.

  • Drumlins Rock

    where do get one of these sandwiches?

    good on google.

  • Seems to me that someone should be leaning on the Dutch to consider taxing patent income transfers more stringently, not just berating Ireland as the bad boy who lets the Yanks pay no taxes.

  • Alan Maskey

    Maybe the EU fatcats should actually do their job and accelerate the harmonisation of tax systems to stop this “arbitrage”. This would not help Ireland but hey, them’s the rules.

  • Mack

    Probably worth spelling this out a little. If the Dublin office had €12.5 billion in sales, that’s not really the same thing as the Dublin office generating the €6bn in profits that get booked in Ireland.

    Google Ireland didn’t develop the bulk of the technology (certainly not the most valuable parts), nor did it build the infrastructure or grow the brand. It’s perfectly reasonable that the bulk of those profits get repatriated elsewhere. To the Googleplex in Mountain View perhaps, just probably not Bermuda..

  • David Blake

    This makes it sound as if the actual tax RATE is not that important. Even if corporation tax were increased to, say, 20%, Google would have a great deal and could presumably make it better by paying 99.5% of revenue to Google Ireland Holdings.
    What matters is that tax authorities are willing to allow transparent avoidance schemes like this.

  • Rory Carr

    “….tax authorities,” are indeed,“willing to allow transparent avoidance schemes like this,” David and not alone in the Republic of Ireland. I have already made reference to the £6billion in corporation tax artfully avoided by Vodaphone thanks to the willing complicity of HMRC boss, Dave Hartnett, a startling piece of generosity justified by Deputy PM, Nick Clegg.

    But Vodaphone are not alone in their ability to avoid paying astronomical sums in corporation tax on UK earnings while remaining on the very best of terms with members of HM Government as a recent op-ed piece in the Daily Telegraph co-written by Google boss, Eric Schmidt and Chancellor, George Osborne entitled “Innovation is the secret of economic success” illustrates. For so cosy is this easy-going relationship that it is not in the least affected by Google’s innovative tax-avoidance schemes which annually channels hundreds of millions of corporation tax on UK earnings beyond the clutches of the Chancellor.

    p.s. I see that unemployed former Home Secretary, the expenses fiddler with the porno-peeping hubbie, Jacqui Smith no longer has to fear reduced circumstances after being chucked out by her constituents. While Business Secretary in 2008, Smith negotiated a sweet deal with tax-avoidance supremo KPMG ‘s chairman, Mike Rake on behalf of the Big Four accountancy firms in the wake of the scandals around auditing standards and practice at Enron, Equitable Life and others, whereby they were able to limit their liability when caught with their trousers down when dodgy audits were revealed following the exposure of unsustainable bank balance sheets. Sustaining the old saw that it is wise to be kind to others when one is up as you are likely to meet them on the way down, we now learn that a grateful KPMG have appointed Smith as a consultant, no doubt impressed by their experience of her tough negotiating skills.

    p.p.s. The decision by HMRC to let Vodaphone off the hook for these billions was later spun jointly by Vodaphone and HMRC as “an urban myth” in friendly newspapers of the type that are not at all averse to tax avoidance (by the mega-rich). Indeed so successful was this “spin” (or “lie” as it’s known in the trade) that one commenter on Slugger has already repeated it in challenging my earlier postings on Vodaphone’s trickiness and HMRC’s complicity. I did offer him the opportunity to refute my remarks but he has so far declined.