US probing Google's method of shifting profits here to avoid tax
GOOGLE'S method of routing billions of euro in profits through Ireland for tax purposes is to be investigated by US authorities in a probe that could have far-reaching implications for the search giant.
The Inland Revenue Service (IRS) is investigating Google's use of the 'Double Irish' tax scheme, as well as the use of a Netherlands-based scheme known as the 'Dutch Sandwich'.
Under the tax scheme, Google licensed its intellectual property, such as its search function and advertising methods, to a subsidiary called Google Ireland Holdings (GIH).
This company, while domiciled in Ireland, reports that its management is centred in the tax-haven Bermuda, therefore exempting it from paying tax here.
In turn, Google Ireland Ltd, which is the de facto Irish business, paid an estimated €7bn to GIH last year in royalties for the use of its intellectual property. Because these "administrative expenses" count as an expense against Google Ireland Ltd, the company is not required to pay any corporation tax on it.
The vast majority of that €7bn is paid to GIH via a Google holding company in Holland, which prevents triggering a withholding tax in Ireland. The routing through Holland is known as the 'Dutch Sandwich'.
As well as avoiding a huge tax bill here, the scheme also greatly reduces the amount of tax Google has to pay to the US revenue service, where the corporation tax rate is 35pc.
While the scheme was approved by US authorities when it was set up in 2003, the IRS only signed off on it being used for intellectual property that Google held at that time.
The new investigation is believed to be focused on whether or not Google has licensed intellectual property gained through acquisitions it has made since that time.
The tech giant has made numerous deals since then, including paying $1.65bn (€1.19bn) for video-sharing site YouTube in 2006.
A Google spokesman described the probe as a "routine inquiry".
The firm's tax structure is estimated to have reduced its tax bill by some $1bn a year.
Last week, Google's Irish operation revealed a pre-tax profit of €18.5m in 2010 on revenue of more than €10bn -- a ratio of less than 1pc. Globally, Google's profit-to-revenue ratio was 29pc.
Google's taxes have also drawn government scrutiny from the US Securities and Exchange Commission (SEC). Last December, the SEC asked the company for "greater detail" about the profit it said it had earned in countries with lower tax rates and the impact on its effective tax rate.
The SEC said in a February letter that it had completed its review of Google's filings. It is unclear what action, if any, the agency took. Google was up 1.13pc in New York.