I refer to my "Google's SOS to the SEC: The modern corporation and private property in the Third Millennium" (Jan. 29-Feb. 11, 2007, page 6). Google's recent filing of its annual report Form 10-K for 2006 permits me to update the chart that accompanied that article and was captioned, "Searching for tax savings: An overview of Google's tax accounting labyrinth for its stock compensation programs," so as to reflect the data for the entire year 2006, as well as for the fourth quarter. (The updated chart appears on page 8.)
Especially noteworthy is the negative income tax liability toted up by me for the final 2006 quarter in the amount of $99 million.
This is, to begin with, a consequence of the "usual suspect," the tax benefit from stock options in the amount of $253 million. But then the management's discussion and analysis in the 10-K informed us that the quarter, which coincidentally included Christmas, was especially felicitous for Google, thus: "Our provision for income taxes decreased to $154 million, or an effective tax rate of 13 percent, in the three months ended Dec. 31, 2006, from $306.2 million, or an effective tax rate of 29.5 percent, in the three months ended Sept. 30, 2006. This decrease was primarily attributable to the effects of an advanced pricing agreement we entered into with the Internal Revenue Service in December 2006 in connection with certain inter-company transfer pricing arrangements beginning in 2003."
"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. Also, during the three months ended Dec. 31, 2006, the 2006 Research and Development Tax Credit was signed into federal law, which resulted in a $77.9 million benefit to our provision for income taxes."
The annual filing with the Securities and Exchange Commission also permits me to provide the details for the line item in the updated "foreign rate differential" chart for the years 2005 and 2006 (see table, this page).
Intriguing is the fact that for the year 2006, the so-called foreign rate differential amounted to $506 million. The Income Tax Footnote 13 notes that the foreign source income before income taxes for the year amounted to $1,318.4 million. If the income provision tax rate on that foreign income had been at the presumed 35 percent rate, the tax on that income would have been $461.4 million - so that the indicated foreign rate differential would induce a negative contribution to the 2006 provision for income taxes.
If we were now to give effect to the $90 million credit resulting from the December advanced pricing agreement, we would come up with a positive tax of $45 million on that foreign source income - a mere pittance when related to the $1.3 billion dollars of such income. Clearly, further explanation is called for from management to explain the apparent arithmetic incongruities.
Those fourth-quarter happenings raise some further queries, to wit: Does the APA provide for an allocation or apportionment of the tax benefits from the stock compensation plans between the United States and foreign jurisdictions? Do these very special entitlements become "slam dunk" subtractions from the U.S. tax in their entirety? If so, should they be so? Correspondingly, does that agreement provide for an apportionment or allocation of the R&D credit re-enacted by the Congress last December?
The foregoing makes all the more essential the recommendation in my article, to wit: 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 reporting period. Clearly, communities cannot pay their bills with accruals (or "contingency responses") on the books of their corporate constituents. I 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.
Abraham J. Briloff
Emanuel Saxe Distinguished
Professor Emeritus, Baruch College, The City University of New York
New York City
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