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Google's tax practices come under fire in Europe

Google's (GOOG) efforts to minimize its taxes are under fire in Europe, where some officials are accusing the Internet giant of not paying its fair share.

At issue is a 130 million pound ($186 million) deal Google struck with the U.K. government to resolve a decade-long tax dispute. According to the Tax Justice Network, an advocacy group, Google will pay a corporate tax rate of about 3 percent, well under the standard U.K. levy of between 20 percent and 30 percent that applied during that time period.

"It is impossible to say for certain how the company managed to achieve such a substantial discount on the standard rate of tax, as the details of the deal remain confidential," the Tax Justice Network said in a Jan. 28 letter to the European Commission's Secretary General.

The Scottish Nationalist Party has asked the European Union to investigate the deal, which has also been criticized by the opposition Labor Party. Officials from the EU were quoted as saying in press reports that no decision had been made on whether an investigation was warranted. A spokesman for Google, now part of the Alphabet conglomerate, told the Financial Times that it complies with tax laws.

A Google representative didn't respond to requests for comment.

U.S. companies doing business in Europe should be concerned about an EU tax crackdown, according to Ryan Dudley, the partner in charge of the international tax practice at Friedman LLP.

"Clearly, the European Union has determined that a lot of the profits that U.S. companies are moving into more favorable European taxing locations should have been taxed in higher taxing locations," he said. "It is a message that will go down well among local voters."

The Google controversy comes a day after the 31 members of the Organisation of Economic Cooperation and Development signed an agreement to make it more difficult for companies to avoid paying taxes on profits they earn in particular country. Similar concerns have been raised in the U.S. over so-called inversion deals, where companies merge with partners in lower-tax countries in order to lessen their payments to Uncle Sam.

Google, the dominant player in search, is uniquely situated to minimize its tax burden.

"They have a type of income that is very mobile," said Bob Goulder, an analyst with Tax Analysts, adding that Google can easily characterize its profits as returns from intellectual property. "General Motors would do it if they could, but it's hard to categorize the income from selling cars as intellectual property."

Through a process called "cost-sharing," the intellectual property is first moved to a low-tax jurisdiction such as Ireland, which has a rate of 12.5 percent, compared with the 35 percent statutory rate in the U.S. The funds are then sent to a tax haven such as the Cayman Islands or the Bahamas that has no corporate tax.

Google's tax strategy, which has drawn criticism under fire in France and Italy, isn't unique to the tech sector, with the pharmaceutical industry employing similar tactics, Goulder said.

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