The United States Internal Revenue Service (IRS) has opened an investigation into Google's practice of saving about $1 billion a year in federal income tax by funneling profits from its US and European business units into countries with lower tax rates, Bloomberg is reporting.
The techniques Google used, referred to as the "Double Irish" and the "Dutch Sandwich," involved moving profts through Ireland, the Netherlands and Bermuda in order to get the most favorable tax rates possible. In fact, in the second quarter of 2011, Google paid an effective tax rate of 18.8 percent, about half of the average combined US and state statutory rate of 39.2 percent.
A large part of the issue, according to Bloomberg's unnamed source, is Google's valuation of software and intellectual property that was licensed abroad. In other words, Google may be attributing acquisitions (like the $1.65 billion YouTube purchase) to its foreign subsidiaries and paying less in taxes for having done so. It's estimated that Google may have saved $3.1 billion over three years by following this method.
We're short on official details: the IRS hasn't made the audit official and doesn't comment on individual taxpayers regardless, and the French tax authorities have launched their own investigation but are following that same rule of silence.
The Guardian, which has put together its own timeline of Google's international money trail, got the following statement from a company spokesperson:
"We have an obligation to our shareholders to set up a tax-efficient structure, and our present structure is compliant with the tax rules in all the countries where we operate. We make a very substantial contribution to local and national taxation and provide employment for over a thousand people in the UK. We also generate significant revenues for other companies, and last year gave more than $6bn to our AdSense publisher partners, including newspapers and broadcasters across the world."
Or in simpler terms, Google is saying that you can argue all you want about the ethics of this kind of tax strategy, what it's doing is perfectly legal and ultimately beneficial. And if the brass at the IRS doesn't like it, it's up to them to prove Google wrong. But what's one more legal battlefront to Google?