The revelation comes as Google, which is part of parent company Alphabet Inc., faces outrage in Europe over the small amount of tax it pays in the region. Last month, after Google reached a controversial 130 million pound ($187 million) settlement with the U.K. government over an audit covering 10 years of accounts, critics called the amount “derisory.” The deal spawned parliamentary hearings, a government audit and scrutiny from the European Union. France and Italy are also reportedly in discussions with Google to settle ongoing tax disputes. Outside of Europe, legislators in Australia have in recent weeks questioned whether the company is paying a fair share of tax there.
Google’s Dutch subsidiary is the heart of tax structures known as a “Double Irish” and a “Dutch Sandwich” because it involves moving money from one Google subsidiary in Ireland to a Google subsidiary in the Netherlands before moving it out again to a different Irish subsidiary, physically based in Bermuda, where there is no corporate income tax. This movement of cash enables Google parent Alphabet to keep the effective tax rate on its international income in the single digits.
Google attributes most of the economic value of its products to its research and development operations in the U.S. and, in the case of its overseas sales, to its Bermuda-based subsidiary, which holds the international licenses for Google’s intellectual property. The Irish tax loophole that makes the “Double Irish” possible was closed by the Irish parliament last year. But companies already using the structure can continue to employ it until the end of 2020.
The Double Irish — variations of which are used by Google, Pfizer, Adobe, Johnson & Johnson and Yahoo! — involves, in its generic form, two Irish-registered companies: one collects the proceeds from the mother corporation’s non-U.S. sales, the other holds patents and other intellectual property. The first company pays out most of its revenues to the second one as royalties for the use of intellectual property, leaving little profit to tax. The second company then pays no taxes anywhere, because it is managed from overseas and therefore isn’t considered to be tax resident in Ireland. In 2012, U.S. companies enjoyed an average 2.6 percent effective tax rate in Ireland, thanks to the Double Irish.
The Irish government is proposing to make all Irish-incorporated companies tax resident in the country. That means the Double Irish closes for new entrants on Jan. 1, 2015, and for the rest by 2021, a timetable that gives beneficiaries a six-year window in which to alter their tax strategies. Ireland, meanwhile, will use the time to develop less dodgy arrangements that reduce the amount of tax global companies pay, so they will choose to stay.