Bloomberg has an eye-opening report Thursday about an elaborate tax haven saving Google $3.1 billion. The company uses subsidiaries in Ireland, the Netherlands and Bermuda and, as a result, benefits from a stunningly low overseas tax rate of 2.4 percent. Considering the U.S. has a $1.4 trillion budget shortfall, havens like these threaten to tarnish Google's "responsible corporate citizen" image.

  • Here's How the Loophole Works, explains Jesse Drucker at Bloomberg:

In Bermuda there's no corporate income tax at all. Google's profits travel to the island's white sands via a convoluted route known to tax lawyers as the "Double Irish" and the "Dutch Sandwich." In Google's case, it generally works like this: When a company in Europe, the Middle East, or Africa purchases a search ad through Google, it sends the money to Google Ireland. The Irish government taxes corporate profits at 12.5 percent, but Google mostly escapes that tax because its earnings don't stay in the Dublin office, which reported a pretax profit of less than 1 percent of revenues in 2008.

Irish law makes it difficult for Google to send the money directly to Bermuda without incurring a large tax hit, so the payment makes a brief detour through the Netherlands, since Ireland doesn't tax certain payments to companies in other European Union states. Once the money is in the Netherlands, Google can take advantage of generous Dutch tax laws. Its subsidiary there, Google Netherlands Holdings, is just a shell (it has no employees) and passes on about 99.8 percent of what it collects to Bermuda. (The subsidiary managed in Bermuda is technically an Irish company, hence the "Double Irish" nickname.)

Google owes its existence to support from the US Government. The research used to power Google's search engine was developed and funded by a grant from the National Science Foundation. Sergei Brin, co-founder of Google, was provided a tax-payer funded scholarship while working on this research.

The taxes are not eliminated under this scheme; they are deferred. If a corporation repatriates its overseas earnings back to the US, the earnings are taxed at the US rate. However, corporations never do this. Microsoft, for example, recently went to the US bond market to borrow money for cash purposes, rather than repatriate its substantial cash pool sitting overseas.

Google isn't alone in the practice, said the report. Other technology companies such as Facebook and Microsoft also take advantage of Irish tax laws which allow corporations "to legally shuttle profits into and out of subsidiaries there, largely escaping the country's 12.5 percent income tax," Bloomberg reported.
  • This Is a Political Issue, writes liberal blogger Pat Garofalo at Think Progress:

The U.S. corporate tax rate is 35 percent. But Google not only avoided U.S. taxes with its scheme, it also dodged taxes in the United Kingdom (where the statutory corporate tax rate is 20 percent). Facebook is reportedly cooking up a similar tax plan right now. ...

Since the Obama administration came into office, it has been trying, along with some congressional Democrats, to close some of the more egregious tax loopholes that allow corporations to sling profits all over the world and never pay taxes on them. But they have been stymied at every turn by Republicans, working with the Chamber of Commerce and other Big Business groups, who are content with allowing corporations to do all they can to get around paying the tax rate on the books.

  • There's Another Point to Be Made, writes conservative blogger Stephen Green at Pajamas Media:
Higher tax rates do no necessarily generate higher tax revenue. Again and again we fail to remember this simple fact.

How much does Google pay fancy accountants and lawyers to avoid paying confiscatory US and British taxes? How much of Google's savings gets eaten up in currency transactions and fluctuations? There's another -- bigger -- story in those questions, but chances are it won't get reported.

Make the tax code simple. Make the tax rate low. Increase revenue.