In the Jan. 29-Feb. 11, 2007, issue of Accounting Today, there appeared an article by Abraham J. Briloff titled "Google's SOS to the SEC." That article discussed Google's July 2006 appeal to rescue it from a tsunami that was flooding its banks with billions of billions of dollars. The ill wind inducing this dilemma for Google was the Securities and Exchange Commission rule that requires a registrant with investments (excluding U.S. Treasuries) that exceed 40 percent of its total assets to follow the much-stricter rules applicable to mutual funds - a fate that Google wanted to avoid.The contingency that then confronted Google appears to have passed. In any event, we have not heard any further alarms. That article also considered in some detail Google's very special tax minimization circumstances; those circumstances still prevail and instigate this article.


In 1932, Professors Adolf A. Berle and Gardiner C. Means published The Modern Corporation and Private Property. In that seminal work, the professors described the alienation of power over property by executives and corporate management from the putative owners of that property (i.e., the shareholders).

Back then, property was presumed to be essentially brick and mortar or other tangibles. There were some intangibles, generally involving copyrights, patents or other identifiable contractual rights (for example, leaseholds). But that notion of property has been transmuted in this Third Millennium, an era that we have dubbed that of the "Four I's" - the Internet, intangibles, intellectual property, and information.

In this era, we see the power/property dichotomy accelerating at an exponential pace, with increasing institutionalization through mutual funds, 401(k)s, and the securitization of bundles of assets that are embedded in the bellies of corporations and stepped down into new entities with their layers of participation (that is, tranches).

The power/property/Four I's trichotomy is pointed up especially dramatically by the configuration developed from Google's March 31, 2008, balance sheet (see "The Trichotomy," below).

We are led, then, to the subject indicated by the subtitle of this writing. For this objective, from Google's annual Securities and Exchange Commision Form 10-K filing for the years 2007 and 2006, we have developed tables reflecting data regarding the categorization of tax accounting for the years 2007 and 2006 (see "The Labyrinth," page 20).

Turning to 2007 and focusing on the total column, herewith is presented a guide through the tax accounting labyrinth for that year:

We begin with two numbers from its income statement - that is, its income before income taxes amounting to $5.7 billion, with a hefty income tax provision of $1.47 billion.

Now, let us pause here to focus on that $1.47 billion provision for income taxes for 2007. According to the income tax footnote in Google's annual report, we are informed that the company's taxes for the year are equal to the 35 percent standard corporate tax rate. But if this were the case, the tax expense would have been an even-heftier $2 billion. However, there were various adjustments to that standard tax, thus a subtraction of $705 million, which represents a "foreign rate differential." This notation identifies a critical fork in the trail. An addition of $173 million representing state taxes net of the related federal benefit, a subtraction of $81 million representing the federal research credit and other net adjustments, an addition of $97 million - all serve to reduce the standard tax of roughly $2 billion down to the aforementioned tax provision of $1.47 billion (a net reduction of $516 million). However, that "provision" is not the amount of income taxes that Google anted up during 2007.

Thus, again, turning to the table, we see that Google was able to subtract from its income tax liability $379 million for "excess tax benefit from stock-based compensation," to which we digress for a moment.

A significant portion of Google's executive compensation expense is paid by way of stock options, only a portion of which is reflected in its income statement. When the executives exercise their stock options, the gains these executives realize are taxed as compensation income; concurrently, Google becomes entitled to a deduction for income tax purposes.

According to Google's cash-flow statement for 2007, the excess tax benefit, amounting to $379 million over and above what may have been embedded in the income statement itself, is treated as a contribution to Google's shareholders' equity. There were then various balance sheet adjustments leading to the amount squirreled down at the bottom of Google's cash-flow statement as "cash paid for taxes."

Excepting for the $90 million "advanced pricing agreement adjustment," the table for 2006 tracks that for 2007; that item was explained in Google's 2006 Form 10-K as follows: "As a result of the APA, we reduced certain of our income tax contingency reserves and recognized an income tax benefit of $90.3 million in the fourth quarter."

Now let us go back to the 2007 trail and pick up the fork where we noted a foreign tax differential leading to a reduction in Google's tax by $705 million.

According to Google's income tax footnote, its foreign income was roughly $2.5 billion. Had the tax on that been at the presumed 35 percent standard rate, it would have been $863 million. However, as noted, the foreign income tax rates were below the U.S. rates, allowing the $863 million to be reduced to $158 million. Thus, the effective tax rate was only 6.4 percent.

For an especially titillating view, we suggest you observe the corresponding data configuration for 2006.

Thus, at the 35 percent rate, the tax on foreign income for the year would have been $461 million. However, the rate reduction brought that tab down by $506 million, which means that in 2006 Google would have been subjected to a negative income tax. Google might well have been crowned the foreign corporate welfare queen of the year.

The endeavor to shift tax attribution to "cheap tax states" away from the "harder" venues is as old as the Internal Revenue Code. Nonetheless, the ability to shift the tax on manufactured products or even partly processed or finished products is infinitely more daunting than it might appear to be with respect to the intangible, intellectual information kind with which Google, for example, is involved.

According to Google's 10-K for 2007, 43.5 percent, or $2.5 billion, of its pre-tax income was attributed to foreign sources. Further, according to that document, "Although we file U.S. federal, U.S. state and foreign tax returns, our two major tax jurisdictions are the U.S. and Ireland."

We find the reference to Ireland rather intriguing.

To our knowledge, Ireland was not and is not the homeland of Google's founding fathers - nor of its venture capitalists. Nor, to the best of our knowledge, is Ireland the nation that housed the educational facilities where the founding fathers developed their epiphany. Nor again is Ireland the nation that devoted enormous resources to the protection of the intellectual properties of Google and others, protections that assure that Google, et al., are capable of exploiting the proliferation of the "Four I's" on a global scale. Again, to the best of our knowledge, the "Four I's" did not spring forth from the emerald grasses of Ireland. Why does Google want to attribute so much to Ireland, to signal it as a jurisdiction (or tax home) on a par with the United States? How is it that Google is capable of attributing so much of its revenues and income to Ireland?

Speaking metaphorically, Ireland has law offices with file cabinets lined with "honey," a 12.5 percent tax blended with opportunistic interpretations of the tax treaty and statutes, file cabinets capable of accommodating licensing agreements. Those licensing agreements, in turn, attract the royalties derived from Google's foreign exploitations.

We recognize that Google is not alone in availing itself of those facilities; it has been reported that both Microsoft and Yahoo have been correspondingly involved.

Should Ireland or other sovereign states be permitted to engage in such procedures through the manipulation of the rules of taxation to attract enterprises or individuals intent on utilizing their tax rules for tax avoidance? Are such activities essentially different from subsidies provided for agricultural or manufactured products to obtain a competitive advantage?

In short, the findings that have surfaced in the relatively simple Google calculus are far from simple. They are, in our view, of a transcendent nature.

But then why focus on Google?

To quote a great financial tycoon of the 1960s: because it is "so big and beautiful." Besides, it's the enterprise we previously wrote about and are now in the process of updating.

And then, too, we question Google for flaunting its "Do No Evil!" proclamation when its lawyers and accountants have programmed Goggle's tax payment proclivities to produce the consequences noted by the accompanying charts.

As we contemplate Google's tax calculus, we cannot avoid feeling a sense of irony or cynicism at Google's proud proclamation. Somehow we find ourselves analogizing it to the situation where an exceptionally successful captain of a hedge fund is pacing the deck of his yacht with his flag unfurled proudly proclaiming the caption "Do No Evil" when the ship is sailing guided by astute lawyers and accountants toward the safest and most accommodating tax haven - all this while the captain's indigent grandfather is in a nursing home on the tab of the public's purse, to which the captain contributes only most reluctantly and parsimoniously.

We ask ourselves, is he really, actually, doing no evil?


We propose, first, and least daunting, that Google, et al., be required to set forth in significant detail and specificity the taxing jurisdictions and kinds of taxes actually paid in cash during each period. Clearly, communities cannot pay their bills with accruals on the books of their corporate constituents. We expect that this very transparency might serve to moderate some of the aggressiveness on the part of management to divert income to low-tax havens.

For expeditious implementation, we propose that the tax data provided by the SEC annual 10-K filing be also included in the quarterly 10-Q reports. This will permit the development of analyses like those in our tables on a quarterly basis.

Moving now more aggressively on our part, we suggest that consideration be given to the imposition of what might be deemed to be a "severance tax" based on the utilization of the Internet and other intangibles and information properties that have been created over past generations and paid for from the public purse, either directly or by taxation.

Granted, this will call for creative and cosmic thinking, but it is just that kind of thinking that makes it possible for us to engage in trading carbon-emission credits. It may be that such a "severance tax" (however measured) might have to be imposed and apportioned globally, but then we ask, why not in our global economy and environment?

We have, in various circumstances, found ways to measure air and other environmental rights relating to physical properties. Accordingly, we are confident that, when pressed, standards would evolve to measure the intellectual, informational and other intangible elements entering into Google's stream.

The ultimate response we are reaching for may be far, far above our grasp, even for the near future; nonetheless, as the poet reminds us, "What's a heaven for?" So we must reach out to the nations of the globe to put an end to the structuring by statute or administrative largesse of tax havens that attract enterprises and individuals intent on evading taxes fairly and justly required by their home jurisdictions. And then we call on the professions, especially law and accountancy in this context, to identify those of their members who are not fulfilling their covenants with society's presumed standards for their professions and to ostracize these members as charlatans. All this is to fulfill an objective of not only not doing harm, but to enforce the ultimate good contemplated in our reach, however far beyond our grasp.

All this to be done in order to deserve posterity's proper regard.

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