U.K. Lawmakers Slam Google Over ‘Contrived’ Tax Strategy

U.K. lawmakers attacked Google Inc. for defending a “highly contrived” strategy of booking advertising sales through Ireland to reduce its tax liability in Britain.

Parliament’s Public Accounts Committee said in a report published in London today that “public confidence” in the company “will only be restored when it establishes a corporate structure that ensures Google pays tax where it generates profit.”

The cross-party panel attacked British tax officials for not challenging Google, which it said paid $16 million in U.K. corporation tax between 2006 and 2011 on $18 billion of revenue. It urged leading accounting firms to “provide responsible advice” instead of focusing on “artificial structures which serve only to avoid tax.” U.K. Prime Minister David Cameron is pushing for a global agreement to overhaul company taxes at next week’s Group of Eight summit in Northern Ireland.

“Google brazenly argued before this committee that its tax arrangements in the U.K. are defensible and lawful,” the panel’s chairwoman, Margaret Hodge from the opposition Labour Party, said in an e-mailed statement. “It claimed that its advertising sales take place in Ireland, not in the U.K. The company’s highly contrived tax arrangement has no purpose other than to enable the company to avoid U.K. corporation tax.”

Even so, Hodge said she didn’t wish to “single out” Google, Amazon.com Inc. or Starbucks Corp. for criticism over their arrangement to minimize tax, as these are “illustrative of a much wider problem.”

‘Double Irish’

Mountain View, California-based Google, the owner of the world’s most popular search engine, has avoided billions of dollars of income taxes around the world using a pair of shelter strategies known to lawyers as the “Double Irish” and “Dutch Sandwich,” as first reported by Bloomberg in October of 2010.

Google’s overall effective tax rate dropped to 19.4 percent last year. That compares with the average combined U.S. and state statutory rate of about 39 percent.

Though the company sells advertising throughout Europe, it attributes nearly all of the revenue to an Irish subsidiary, called Google Ireland Ltd. In 2011, for example, that Dublin-based entity reported more than $16 billion in sales.

The strategy has helped the company pare its income taxes in its major European markets.

The committee called Google’s argument that its sales to U.K. clients take place in Ireland “deeply unconvincing,” saying most of the sales revenue is generated by staff in Britain.

Politicians’ Rules

“Google complies with all the tax rules in the U.K., and it is the politicians who make those rules,” the company said in an e-mailed statement. “It’s clear from this report that the Public Accounts Committee wants to see international companies paying more tax where their customers are located, but that’s not how the rules operate today. We welcome the call to make the current system simpler and more transparent.”

Google’s strategy does not just move income out of the countries where its customers are located and into Dublin. The company then moves nearly all of that profit into a second subsidiary in Bermuda, which has no corporate income tax.

The rights to Google’s patents for use outside of the U.S. belong to that second unit, which claims Bermuda as its residence for tax purposes, company filings show. That entity is technically an Irish company.

In 2011, Google paid nearly $10 billion in royalties to that Bermuda subsidiary, helping to cut its overall reported tax expense by about $2 billion, according to company filings in the U.S. and the Netherlands.

The “Double Irish” nickname stems from the use of these two Irish units. To avoid an Irish withholding tax, the company used to route those payments through a subsidiary with no employees in the Netherlands -- hence, the “Dutch Sandwich.”

During a committee hearing last month, Hodge told Google’s vice president for sales and operations in northern and central Europe, Matt Brittin, that “your company says you don’t do evil; you do do evil, you use smoke and mirrors.”

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