Google Questioned by SEC Over Earnings in Low-Tax Countries

Google Inc. (GOOG) received questions from the U.S. Securities and Exchange Commission in December about earnings in other countries that may have reduced the company’s tax bill, according to regulatory filings released today.

SEC officials asked Google for “disclosures to explain in greater detail the impact on your effective income tax rates and obligations of having proportionally higher earnings in countries where you have lower statutory tax rates,” according to a Dec. 2 letter.

The company responded to the requests for information, the filings show. The SEC said in a Feb. 3 letter that it had completed its review of Google’s filings, and has “no further comments at this time on the specific issues raised.”

Google, owner of the world’s most-popular search engine, has used a strategy that has gained favor among some U.S. companies to reduce taxes. Google cut its income taxes by $3.1 billion over three years by shifting the bulk of foreign profits to Ireland, then the Netherlands and eventually to no-tax Bermuda, according to regulatory filings in the U.S. and abroad.

The tax-cutting strategy, involving a pair of techniques known as the “Double Irish” and the “Dutch Sandwich,” helped cut the company’s income-tax rate to 2.4 percent on the profits it attributed to its foreign subsidiaries during the three-year period, filings show. The statutory corporate income tax rate in the U.S. is 35 percent.

Google rose $15.44 to $576.50 at 4 p.m. New York time on the Nasdaq Stock Market. The shares have declined 2.9 percent this year.

Overseas Profits

U.S. multinational corporations had more than $1 trillion in profits stashed in overseas subsidiaries on which they had paid no U.S. income tax as of the end of 2009, according to data compiled by Bloomberg.

John Nester, a spokesman with the SEC, said the agency has no further comment on the exchange with Google. The company, based in Mountain View, California, declined to comment on the correspondence beyond the filings.

The SEC was seeking information on aspects of Google’s taxes stemming from its international operations, including more detail on how lower taxes overseas affect the company’s effective tax rate. It also asked for terms of an agreement with the Internal Revenue Service dictating how much Google charges a foreign unit for licensing. Companies with valuable intellectual property, like Google, are able to move rights to that property into low-tax jurisdictions overseas, cutting their tax bills. The lower taxes on earnings they classify as foreign can result in a significant boost to earnings.

Determining Tax Rates

In the Dec. 2 letter from the SEC’s Division of Corporation Finance, the agency asked Google to better explain the relationship between foreign and domestic tax rates, and asked how the company determines the impact from its foreign operations on its overall effective tax rate. Google, in a return letter, disclosed the calculation it uses to determine the impact on its tax rate from lower-taxed foreign earnings.

The SEC asked Google to make public a copy of its 2006 accord with the IRS signing off on a 2003 licensing agreement between Google and its Irish subsidiary, Google Ireland Holdings. That arrangement, known as an “advance pricing agreement” or APA, dictated how much the Irish unit would pay the U.S. parent for the rights to Google’s intangible property in Europe, Middle East and Africa.

Pricing Agreement

Transactions like the one covered by the APA -- called a “buy in” -- mean foreign profits based on intangible property developed in the U.S. get attributed to an offshore subsidiary based in a low-tax jurisdiction instead of to the parent company. Payments made under such deals help generate taxable income for the U.S. parent corporation, giving companies an incentive to set the price as low as possible.

In a hearing last July before the House Ways and Means Committee, former U.S. Treasury Department economist Martin A. Sullivan called on the committee to reopen an older congressional investigation into the APA program.

In a Dec. 13 response to the SEC from Mark Fuchs, Google’s vice president for finance and chief accountant, the company requested “confidential treatment” for the letter and terms of the agreement, which would exempt it from requests to the SEC under the Freedom of Information Act.

In a Dec. 29 response, the SEC wrote it was reviewing Google’s assertion that the APA shouldn’t be public.

Domestic Profit

Google did agree to more explicitly break out its pretax income from domestic operations. The company also said it would add language that “substantially all of the income from foreign operations was earned by an Irish subsidiary.”

In November, Wayne Carnall, the chief accountant of the SEC’s Corporation Finance Division, said the agency was examining tax disclosures made by public companies, particularly the portions that divide up foreign and domestic earnings and tax obligations, according to trade publication Tax Notes.

In a response to a question about its overseas earnings, Google said it couldn’t estimate the potential tax bill from repatriating earnings to the U.S., and said it has no plans to repatriate those earnings.

To contact the reporters on this story: Brian Womack in San Francisco at Bwomack1@bloomberg.net; Jesse Drucker in New York at jdrucker4@bloomberg.net.

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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