How does Google pay 2.4%?

Back when Commodore was a company I had the opportunity to get a look at its tax structure (I was interviewing for a VP position with the parent company). It was pretty impressive how effectively one could exploit nominal loop-holes in various jurisdiction tax codes to achieve near zero taxation.<p>One of the more dubious strategies was having a company in the Cayman Islands that owned the cars that people drove and paid for the gas and maintenance out of corporate accounts, and paid rent and bought food for folks. So your salary could be 'poverty' level and yet you could have quite a nice lifestyle. The poor company in the Caymans was losing money quite rapidly.<p>As a systems guy I had to be impressed at how they worked that particular system. A CPA friend of mine once quipped that if laziness was the mother of invention, taxation was the father of innovative accounting.

The reality is much more complicated than the article or the blog post makes it out to be. Google's foreign tax rate is 2.4% (quite low), and they shift lots of their earnings offshore where it is not subject to US tax ($17.5B cumulatively, per Note 15 of the 10K).<p>However, it is not the case that Google only pays 2.4% of their US operating profit to the IRS, as a look at Note 15 of their 10K shows. There are lots of reasons that a corporation's effective tax rate will differ from the statutory tax rate of 40% (35% federal + ~5% state). To name a couple of common ones:<p>1. Prior net operating losses (net of valuation allowances)<p>2. Stock option exercises by employees (see 1999-2000 when over 50% of major tech companies' cash flows were from option exercise, and lots of them--entirely legally--paid zero or "negative" tax, or so it appeared; in reality, the taxes were just paid out of a different pocket). There is a bill in Congress to remove this deduction.<p>3. Adjustments for overseas taxes paid<p>4. Use of NOLs, impairment charges, changes in valuation allowances, lots of technical items.<p>Some of the entries in Note 15 of GOOG's latest 10K that lowered its provision for US income taxes (effective rate) in the current period include:<p>- Foreign rate differential (due to tax treaties with foreign countries, income taxed overseas is often not taxed again in the US)<p>- Federal research credit<p>- Tax exempt interest (interest from tax exempt bonds)<p>(Search for "Note 15" here: <a href="http://edgar.sec.gov/Archives/edgar/data/1288776/000119312511032930/d10k.htm" rel="nofollow">http://edgar.sec.gov/Archives/edgar/data/1288776/00011931251...</a>)<p>The rest of Note 15 elaborates on their capital losses from investments, impairments of acquired goodwill, etc. Tax disclosures are some of the most complicated areas of financial statements, and they're very easy to misread. However, they can be very informative, as tax info can provide a window into the difference between accrual-based earnings and cash inflow/outflow.<p>Just for future reference, NOTHING in a financial statement is what it seems until you read the notes, period. That is the first thing they teach you in financial accounting.<p>Think of it as the equivalent of a typical developer's reaction to a blog post claiming "X outperforms Y"--usually, the first comment is "did you take into account setting Z?" The footnotes contain "setting Z."

There's a great slide from my "Taxes for Hax0rs" (SHDH 44) presentation <a href="http://www.transparentaccounting.org" rel="nofollow">http://www.transparentaccounting.org</a> regarding the history of the Federal Income Tax. In a nutshell, the way it was originally written was meant to tax corporate income only and only the most wealthy Americans, not common folk.<p>One needed to make &#62;= $4000/year in deflated 1893 dollars to even be eligible to need to pay any taxes. Not sure, but one computation I came up with (adjusted) puts that around 100K in today's dollars. Imagine making anything up to 100K tax-free.<p>The goal was always to tax corporations more heavily than people.<p>Today even the poorest Americans likely end up short more than 2.4 percent (effective annual rate) in tax payments when their employers "withold" earnings.<p>So when corporations go out of their way and spend a lot of money to accomplish tax avoidance, that seems kinda wrong.

Why hasn't someone created a company that handles this setup for small to midsize companies? Think of it as the Paychex for legal tax evasion. Their clients could all share the same legal addresses in Ireland and the Netherlands. They could keep up with the shifting tax laws and take care of opening all the appropriate banks accounts and filling out the right forms.<p>Of course, the loopholes should be closed, but until they are we could at least keep things fair by making the same techniques available to anyone.

Simple. They pay accountants a substantial portion of the taxes not paid.<p>The actual amount any country can tax it citizens and corporations is a complex relationship between its own tax laws, every other country in the world's tax laws, and the cost of the tax lawyers that figure out how to shuffle funds around to minimize their tax liability.<p>When politicians say "we will close this loophole and collect $xxx MM more in taxes" my BS meter pegs. There is <i>not</i> going to be a 1:1 relationship between a loophole's current deduction and collected taxes if that loophole is closed. There will be some increase in collected taxes (presumably), but people will minimize their taxes using different "loopholes" so the "recovered taxes" will never be as much as the politicians sell it as.

Fixing this sort of loophole should be far higher on Congress's list of priorities than it is now. There is no reason why a massively profitable corporation like Google should pay so little in taxes when poor Americans are nickel-and-dimed with sales, payroll and income taxes.

If your not attached to the USA you can just move you and your business to a territorial based corporate income tax country (singapore, etc). Income not repatriated into the country and not generated from the country is tax free. If your an american citizen you'll still have to pay personal federal income tax to the USA, even if you don't live in the USA, and to your country of residence but you can work with that much better with the ~$100k not living in the USA tax deduction that the US gives you.

Here's another idea: drop the corporate tax rate to 0% and raise income, high-end property (let's say houses that cost 2x the median in a particular area), and high-end consumption taxes (a "yacht tax".)<p>Another handy related idea would be to have a maximum income multiplier. Something like "the highest paid employee cannot make more than 20x the lowest paid in total compensation", so if you want to make one million a year, the lowest paid employee must be making 50k.

Anyone interested in this will also be interested in learning about IKEA: <a href="http://www.economist.com/PrinterFriendly.cfm?story_id=6919139" rel="nofollow">http://www.economist.com/PrinterFriendly.cfm?story_id=691913...</a><p>And, more recently, some details about how they do it: <a href="http://www.ft.com/intl/cms/s/0/2437643c-2985-11e0-bb9b-00144feab49a.html#axzz1SbQvblTs" rel="nofollow">http://www.ft.com/intl/cms/s/0/2437643c-2985-11e0-bb9b-00144...</a>

Google has an effective tax rate of 2.4%? They are being robbed as GE not only pays no taxes but also gets a refund.<p>Personally, I am tired of millionaires (or well of people like John) complaining about taxes.

"Generally, Google and companies of similar size are audited every year. Thus, the IRS actually has a permanent office within the Googleplex compound because they audit them year-round" I think this statement is incorrect. The auditors hired (PwC, Deloitte, E&#38;Y, whoever) are at the Googleplex all year round, but not the IRS

Why on Earth do we bother with a corporate income tax at all? Just get rid of it and bump up capital gains to compensate.

With Double Irish slices of bread and Dutch cheese in the middle, the Dutch Sandwich "leaves no tax behind to taste".

Our congressional representatives are corrupt, doling out tax breaks to wealthy corporations, while ordinary people are left to pay high tax rates on ordinary income. I think Google should be ashamed to be part of this corrupt system.<p>It's BS to say that they owe it to their shareholders to try to defraud the federal government of as much tax revenue as possible. They should instead be fighting for corporate tax reform and closing loopholes to make a level playing field and not rewarding "scumbag" corporations.

One of the big problems with our overcomplicated tax system is that it creates these sorts of moral ambiguities. Is person X or corporation Y paying their fair share of taxes? Only the accountants and (maybe) the IRS have any idea. So people with a negative view of business can get all riled up and angry, and people with a positive view of business can get all riled up and angry.<p>The presence of ambiguities in the system breeds mistrust among the citizenry. This cannot be healthy for society.

Don't many companies pay nothing? IE if my company earns $100k and I pay out $100k in salaries and overhead, there is nothing left to tax as all my expenses were deductible?<p>Google may pay 2.4% but presumably the money is getting taxed at a higher rate when it gets to individuals.

Isn't that a tax rate of 2.4% on foreign income? Or does "effective tax rate" mean taxes across all income? If they've only saved "$3.1 billion since 2007" (to October 2010), it seems like they haven't saved that much (er, relatively...).

Actually, no company _really_ pays taxes. Taxes are another cost of doing business which is passed on to the consumer

and we were laughing at the mobster furious as his 4% percent in "The Firm"! Ultimately, he happens to be right as paying 4% instead of 2.4% seems to be a pretty valid reason to be furious...

Just searching "Double Irish" should explain it well enough.<p><a href="http://www.google.com/search?q=double+irish" rel="nofollow">http://www.google.com/search?q=double+irish</a>