Governments Wake Up to Idea That Google Is a Tax Cheat
Foreign governments are starting to wake up to the notion that Google (GOOG) is a tax cheat and may owe them billions in unpaid taxes. In New Zealand, Google recently paid a tax bill of just NZ$230,000 even though it sells more than NZ$150 million of ads annually. In 2009, Google paid less tax in New Zealand than the average teacher -- just NZ$7,226. In the U.K., Google is believed to stiff the government of £100 million a year.
The search giant, which makes almost all its revenue via advertising, achieves tax savings through an accounting maneuver called "transfer pricing," which allows it to book revenues in low-tax jurisdictions such as Ireland even though they may have been earned elsewhere. Ad agency holding company WPP (WPPGY) did something similar when it moved its "official" HQ to Dublin (even though the company is plainly based in London). The maneuver may be technically legal, but it runs afoul of the general principle of taxation law in most Western countries, which is that companies may not indulge in accounting maneuvers for the sole purpose of avoiding tax.
Google is believed to have saved $3.1 billion in the last three years through tax maneuvers such as the "Double Irish" and the "Dutch Sandwich," in which the company pretends it has a massive business in those tiny European countries simply because corporate tax is lower there. In the U.S., Google's biggest market, the corporate tax rate is officially 35 percent. In the U.K., Google's second-biggest market, it's 28 percent.
You can see the effect of the maneuvering on Google's income statements. In Q1 2011 and the full year of 2010, Google expensed just 8 percent of its revenues on taxes. Average working Americans pay about 30 percent of their gross income in taxes to the federal and state governments.
Even though the U.S. government is struggling to balance the budget and narrow the deficit, Google has proposed that it pay even less tax. It is part of a coalition of companies that want a one-time tax holiday that would allow them to repatriate $1 trillion in revenues currently stashed in foreign countries for tax purposes. They argue that the money would fuel new investment -- and therefore new jobs and taxes -- in the U.S. A study of the 2004 tax holiday, however, found that up to 92 percent of repatriated money ended up being returned to shareholders.
You can insert your own "don't be evil" joke here.
- WPP Shows U.K. Government Who's Boss on Corporate Tax
- Protesters Aim to Shame Apple over Tax Holiday Support