Google is known for innovation in technology — but taxes?
It turns out the Silicon Valley giant also excels at exploiting tax loopholes. By employing tactics such as the “Double Irish” and the “Dutch Sandwich,” Google has saved $1 billion in annual taxes and reduced its effective tax rate on foreign profits to just 2.4 percent.
The complex strategy that sends overseas income on a circuitous journey from the rainy shores of Ireland to the sunny island of Bermuda has cut Google’s tax bill by $3.1 billion over the last three years, according to an analysis by Bloomberg News.
Although legal, Google’s tax-saving strategy is raising eyebrows at a time when both the US government and many European nations are fighting furiously to close record deficits.
Such strategies — also employed at Microsoft, IBM and soon Facebook — reduce the amount companies pay to overseas countries and allow firms to lower their US tax rates by shifting expenses to countries with higher tax rates, experts said. Those expenses are used to cut their tax rates here.
But the process has been condoned by the Internal Revenue Service, which granted Google the right to license its offshore search engine and other intellectual property rights to an offshore subsidiary in 2006, according to Bloomberg.
The subsidiary, Google Ireland Holdings, employs about 2,000 people in Dublin and gets credit for almost 90 percent of Google’s overseas sales. It then offsets that income with billions in royalty payments to an Irish entity, whose management is based in Bermuda.
Tax planners call this tactic the “Double Irish” because it relies on two Irish companies — one that pays the royalties, and one that collects the royalties in a tax-haven like Bermuda.
The term “Dutch Sandwich” comes from the fact that the fees shuttled between the two Irish companies first head to a unit in the Netherlands, Google Netherlands Holdings, to avoid the Irish withholding tax of 12.5 percent. Irish law allows tax-free royalty payments to companies in other European Union countries.
Critics of Google’s tax strategy argue that the company created its intellectual property within the US — even using some federal funding — and therefore should ensure the US gets a bigger piece of the taxes generated from those profits.
But some tax-policy experts contend that the real problem lies in the US corporate tax rate of 35 percent, which remains among the highest corporate tax rates in the world.
Also, unlike most other countries, the US taxes overseas income, even if taxed by foreign countries, once it’s brought back to the US.
“Some people’s reaction is, this is outrageous and it should be illegal,” said Bill Ahern, director of communications at the Tax Foundation. “They will say, Google is a California company and there should be no Irish company and all the revenue should go through the headquarters in California.
“But that would be a multibillion mistake from a corporate-tax perspective.” kwhitehouse@nypost.com