If you run a company in many parts of the world, one of your biggest concerns is not where you’re going to find customers or how you’re going to close sales. It’s how you’re going to grow your business given the tax burdens you face.
That’s because, in many parts of the world, including in some of the most important consumer and business markets, corporate tax rates are pretty darn high.
But making lots and lots of money and dealing with taxes isn’t such a big deal for some of the world’s largest corporations. They have the resources to minimize the taxes they pay through complex corporate structures and accounting trickery.
One company that is guilty of using techniques that many would call ‘shady‘ at best is Google. An article in Bloomberg BusinessWeek yesterday details how the search giant uses a variety of techniques to keep its overall corporate tax rate at a “super-low” 2.4%. That, of course, is substantially lower than the tax rates in the major countries where Google derives much of its revenue.
BusinessWeek’s Jesse Drucker explains:
When a company in Europe, the Middle East, or Africa purchases a search ad through Google, it sends the money to Google Ireland. The Irish government taxes corporate profits at 12.5 percent, but Google mostly escapes that tax because its earnings don’t stay in the Dublin office, which reported a pretax profit of less than 1 percent of revenues in 2008.
Irish law makes it difficult for Google to send the money directly to Bermuda without incurring a large tax hit, so the payment makes a brief detour through the Netherlands, since Ireland doesn’t tax certain payments to companies in other European Union states. Once the money is in the Netherlands, Google can take advantage of generous Dutch tax laws. Its subsidiary there, Google Netherlands Holdings, is just a shell (it has no employees) and passes on about 99.8 percent of what it collects to Bermuda.
According to some observers, this strategy violates Google’s ‘do no evil‘ mantra. One accounting professor, Abraham J. Briloff, told BusinessWeek that Google is “flying a banner of doing no evil, and then they’re perpetrating evil under our noses.“
Evil? Hardly. Google’s tax strategy is, first and foremost, entirely
legal. Of course, what’s legal might not be ethical. But is Google’s tax
strategy unethical? No.
In Briloff’s view, Google’s evil seems to stems from the fact that Google originated at Stanford
University out of research funded by the National Science Foundation. But Briloff’s notion that the United States citizenry “paid for” Google is disingenuous:
- Despite its tax strategy, Google has paid billions of dollars in corporate taxes around the world.
- Google’s backers and early employees have paid significant tax on their windfalls.
- Many Google investors of all shapes and sizes have paid capital gains tax on their Google investment profits.
- Google searches and ads facilitate countless commercial transactions which invariably create tax revenue on multiple levels.
- At the end of 2009, Google had just under 20,000 employees worldwide — employees who pay various taxes (income, sales, etc.).
- The stock Stanford received in Google was worth hundreds of millions of dollars in 2005.
The reality is that Google has grown the pie. A company that didn’t exist fifteen years ago in an industry that barely existed fifteen years ago has created immense wealth and thousands of jobs, and has directly and indirectly contributed billions of dollars to government coffers. Which begs the question: how much more should Google pay in tax? 25%? 50%? 100%?
That’s obviously a tough question for the critics to answer, because there isn’t a good answer. When you have governments with trillions of dollars of debt, you will never find enough money.
But there are easy answers to the important questions. Is Google’s money better spent on product development and innovation? Or is it better spent financing debt-riddled and broken governments? Is Google’s money better spent on hiring new employees who will help the company thrive? Or is it better spent on taxes that will, in part, help pay the salaries of bureaucrats? Is Google’s money better spent subsidizing valuable services the company offers — in many cases at no cost — to individuals and businesses around the world? Or is it better spent subsidizing services governments provide?
The unfortunate thing about Google’s tax situation is not that Google is engaging in such a convoluted tax strategy, but rather that to run a competitive company that can invest heavily in innovation, it practically has to. If there’s an evil here, it’s that smaller companies can’t expand, innovate and create wealth in the same fashion. And that hurts all of us.