Google avoids paying $2bn in taxes

Google has avoided about $2bn (€1.55bn) in worldwide income taxes in 2011 by shifting $9.8bn (€7.6bn) in revenues into a Bermuda shell company — almost double the total from three years before — filings show.

By legally funnelling profits from overseas subsidiaries into Bermuda, which does not have a corporate income tax, Google cut its overall tax rate almost in half.

The amount moved to Bermuda is equivalent to about 80% of Google’s total pretax profit in 2011.

The increase in Google’s revenues routed to Bermuda, disclosed in a Nov 21 filing by a subsidiary in the Netherlands, could fuel the outrage spreading across Europe and in the US over corporate tax dodging.

Governments in France, the UK, Italy, and Australia are probing Google’s tax avoidance as they seek to boost revenue during economic doldrums.

Last week, the European Commission advised member states to create blacklists of tax havens and adopt anti-abuse rules.

Tax evasion and avoidance, which cost €1 trillion a year, are “scandalous” and “an attack on the fundamental principle of fairness,” Algirdas Semeta, the commissioner for taxation, said at a press conference in Brussels.

Last year, Google reported a tax rate of just 3.2% on the profit it said was earned overseas, even as most of its foreign sales were in European countries with corporate income tax rates ranging from 26% to 34%.

At a hearing last month in the UK, MPs pressed executives from Google, Seattle-based Amazon.com, and Starbucks to explain why they don’t pay more taxes there.

The UK, Google’s second-biggest market, was responsible for about 11% of its sales, or almost €3.1bn last year, according to company filings.

Google paid €7.4m in UK income taxes.

Similar challenges have been made to Google by authorities in France and Italy, who are trying to prevent multinational companies from using “transfer pricing,” paper transactions among corporate subsidiaries that allow for allocating income to tax havens and expenses to higher-tax countries.

In Google’s case, an Irish subsidiary collects revenues from ads sold in countries like the UK and France.

That Irish unit in turn pays royalties to another Irish subsidiary, whose legal residence for tax purposes is in Bermuda.

The pair of Irish units gives rise to the nickname “Double Irish”.

To avoid an Irish withholding tax, Google channelled the payments to Bermuda through a subsidiary in the Netherlands — thus the “Dutch Sandwich” label.

The Netherlands subsidiary has no employees.

The Dutch unit’s payments to the Bermuda entity last year were up 81% to $9.8bn (€7.6bn) from $5.4bn (€4.2bn) in 2008.

Google’s overseas sales have increased at about the same rate.

Google’s overall effective tax rate dropped to 21% last year from about 28% in 2008.

That compares with the average combined US and state statutory rate of about 39%.