Over the years, there have been a dribble of stories about how Google tries to avoid paying taxes on foreign profits. In 2007, Google was investigated for tax evasion in China. In 2009, the Sunday Times reported on Google's attempt to avoid paying taxes in the United Kingdom -- with estimates that it dodges hundreds of millions of dollars in taxes each year. Last year, also, Google was hit with a huge $47 million fine by the Turkish government for tax evasion.
Now comes a devastating expose by Jesse Drucker of Bloomberg about how Google is avoiding paying both U.S. and foreign taxes through the use of complex loopholes. The strategy, known as "income shifting," moves Google's profits through Ireland and the Netherlands to Bermuda. The article reports that these strategies have helped Google "reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries." That's a suspiciously low rate, to put it mildly, since Google is operating in nations where the average corporate tax rate is 20 percent.
A Google spokeswoman said that "Google's practices are very similar to those at countless other global companies operating across a wide range of industries." But as Drucker points out, many other U.S. companies actually pay a much higher rate of taxes on their foreign profits. (On the other hand, Google is right to some degree: A January 2009 GAO report found that of the 100 largest U.S. corporations, 83 have subsidiaries in tax havens.)
There is nothing illegal about all this. Google's income shifting is tax avoidance, not tax evasion. But it is hugely disappointing news and suggests a serious level of hypocrisy in Google's high command. Google's leaders are ostensibly committed to the proposition that higher taxes are needed to pay for crucial national investments. CEO Eric Schmidt campaigned for Barack Obama, who pledged to raise taxes on the wealthy, and both he and cofounder Larry Page contributed generously to Obama's inaugural committee. And as Drucker points out, Google and its founders have benefitted from government spending: "The U.S. National Science Foundation funded the mid-1990s research at Stanford University that helped lead to Google's creation. Taxpayers also paid for a scholarship for the company's cofounder, Sergey Brin, while he worked on that research."
Drucker might have also mentioned the federal government's role in helping to create the Internet in the first place. Or all the other kinds of government spending that turned Silicon Valley into a scientific powerhouse starting in the 1960s.
Revelations about Google's foreign tax avoidance underscore the need for the Obama Administration to more aggressively push its crackdown on U.S. corporations engaged in offshore shell games. The Administration announced this effort amid much fanfare in May 2009, saying that closing tax loopholes on foreign profits could return $190 billion to the U.S. Treasury over the next decade. But that proposal disappeared into Congress and not much came of it. Now is a good time to push on this front again, with a rising clamor for ways to reduce the deficit. As Chuck Collins has noted, there are plenty of small businesses that should back the tax haven crackdown, since they are either not sophisticated or unethical enough to engage in income shifting and, in effect, end up picking up a larger share of the nation's corporate tax bill than they should.
The Google story also points to the need for much better global cooperation to shut down tax havens. Here, too, big plans have been announced -- including by the OECD. But nothing much ever seems to happen. American political will and muscle could help move the ball forward.