A couple of colorful tax strategy monikers have emerged to describe the elaborate steps that Google and other companies employ to shift their U.S. tax burden overseas.
The Mountain View, Calif., search giant makes use of entities in Ireland and the Netherlands to shift its income around the world, much like the way Internet traffic can now be moved easily to servers across the globe to make it move faster. Such transfer pricing methods have become increasingly routine as companies seek to avoid U.S. corporate income tax rates that can be as high as 35 percent, but are oftentimes effectively much lower in practice. Google avoided $3.1 billion in U.S. taxes as a result of its income-shifting tax strategies in the past three years, lowering its effective tax rate to 2.4 percent.
The so-called Double Irish strategy used by Google involves licensing the foreign rights to its intellectual property to the low-tax country of Ireland, according to an illuminating investigation by Jesse Drucker of Bloomberg.com. Google Irish Holdings has the rights to Googles search and advertising technology in Europe, the Middle East and Africa. The double part comes in because Google actually has a second Irish company called Google Ireland Limited, which is managed in Bermuda by a law firm there to avoid paying much in Irish taxes either. In between Ireland and Bermuda is another entity in the Netherlands. Hence the Dutch Sandwich.
Google received the IRSs blessing on the arrangement in 2006 after three years of negotiation and a secret advanced pricing agreement, according to Bloomberg. The search king isnt the only company using the Double Irish strategy. Microsoft has also employed it, as well as drug maker Forest Laboratories. Facebook is reportedly setting up such a tax structure as well. Expect to see the social networking giant making some new friend requests in Ireland and the Cayman Islands.