IP Tax planning – Google case study

Income shifting commonly begins when companies like Google sell or license the foreign rights to intellectual property developed in a high tax country to a subsidiary in a low-tax country, such as U.S. for this specific case of Google.

That means foreign profits based on the technology get attributed to the offshore unit, not the parent. That licensee in turn owns Google Ireland Limited.

The Dublin subsidiary sells advertising globally and was credited by Google with 88 percent of its $12.5 billion in non-U.S. sales in 2009. Allocating the revenue to Ireland helps Google avoid income taxes in the U.S., where most of its technology was developed. The arrangement also reduces the company’s liabilities in relatively high-tax European countries where many of its customers are located.

The profits don’t stay with the Dublin subsidiary, which reported pre-tax income of less than 1 percent of sales in 2008, according to Irish records. That’s largely because it paid $5.4 billion in royalties to Google Ireland Holdings, which has its “effective centre of management” in Bermuda, according to company filings. This Bermuda-managed entity is owned by a pair of Google subsidiaries that list as their directors, two attorneys and a manager at Conyers Dill & Pearman, a Hamilton, Bermuda law firm.

Tax planners call such an arrangement a Double Irish because it relies on two Irish companies. One pays royalties to use intellectual property, generating expenses that reduce Irish taxable income. The second collects the royalties in a tax haven like Bermuda, avoiding Irish taxes.

To steer clear of an Irish withholding tax, payments from Google’s Dublin unit don’t go however directly to Bermuda. A brief detour to the Netherlands avoids that liability, because Irish tax law exempts certain royalties to companies in other EU-member nations. The fees first go to a Dutch unit, Google Netherlands Holdings B.V., which pays out about 99.8 percent of what it collects to the Bermuda entity, company filings show. The Amsterdam-based subsidiary lists no employees.

The Dutch sandwich

Inserting the Netherlands stopover between two other units gives rise to the “Dutch Sandwich” nickname. Since the 1960s, Ireland has pursued a strategy of offering tax incentives to attract multinationals. A lesser-appreciated aspect of Ireland’s appeal is that it allows companies to shift income out of the country with minimal tax consequences.

Getting profits out

Deferred indefinitely

U.S. policy makers, meanwhile, have taken halting steps to address concerns about transfer pricing. In 2009, the Treasury Department proposed levying taxes on certain payments between U.S. companies’ foreign subsidiaries.

Treasury officials, who estimated the policy change would raise $86.5 billion in new revenue over the next decade, dropped it after Congress and Treasury were lobbied by companies, including manufacturing and media conglomerate General Electric Co., health-product maker Johnson & Johnson and coffee giant Starbucks Corp., according to federal disclosures compiled by the non-profit Centre for Responsive Politics.