Google is being investigated by the Internal Revenue Service for shifting $1 billion into offshore subsidiaries.
The IRS is reportedly wanting information from Google about its offshore deals after three recent acquisitions, including its $1.65 billion purchase of YouTube, Bloomberg reported.
Google, owner of the world’s most popular search engine, has cut its worldwide tax bill by about $1 billion a year using a pair of strategies called the “Double Irish” and “Dutch Sandwich,” which move profits through units in Ireland, the Netherlands and Bermuda. Google reported an effective tax rate of 18.8 percent in the second quarter, less than half the average combined U.S. and state statutory rate of 39.2 percent.
However, there's nothing illegal in companies using the "Double Irish" and "Dutch Sandwich" techniques, or shifting profits to other countries to avoid paying taxes in the United States. Phamaceutical and tech companies frequently use the techniques because patents and copyrights can easily be sent to tax havens such as Bermuda, the Cayman Islands of Switzerland -- often to company units without employees or offices. Google is also in good company: Cisco Systems, Facebook, Microsoft and Forest Laboratories (maker of popular antidepressant Lexapro) also do the same thing.
"We are considered a large case company, which means we are under a continuous audit by the IRS so of course they would be reviewing our treatment of all acquisitions," a Google spokesperson told the Guardian.
The big story here is that several companies are sitting on $1.375 trillion in their foreign subsidiaries where they pay no federal income taxes. These companies want a tax holiday to bring these profits to the United States, but so far the Obama administration isn't playing that game -- and doesn't seem sympathetic to another corporate tax break.
Google aside, what we find interesting is that Mark Zuckerberg, Facebook's founder and chief executive, said he didn't have a problem paying higher taxes to benefit the country -- so why isn't he the first one stepping up and saying his company will no longer use these tax havens to avoid paying U.S. taxes?