- Google parent saved $2.4 billion with its 'Dutch sandwich'
- Foreign profits eventually end up in a Bermuda mailbox
Google saved $2.4 billion in worldwide taxes in 2014 by shifting 10.7 billion euros ($12 billion) in international revenues to a Bermuda shell company, regulatory filings show.
The amount the the Web-search provider moved through its Dutch subsidiary, Google Netherlands Holdings BV, and then on to Bermuda represents the bulk of its profits overseas. The amount transferred to Bermuda was 16 percent greater than the prior year, according to documents the subsidiary filed with the Dutch Chamber of Commerce on Feb. 4 and made available this week. The filing was first reported by the Dutch magazine Quote.
The revelation comes as Google, which is part of parent company Alphabet Inc., faces outrage in Europe over the small amount of tax it pays in the region. Last month, after Google reached a controversial 130 million pound ($187 million) settlement with the U.K. government over an audit covering 10 years of accounts, critics called the amount "derisory." The deal spawned parliamentary hearings, a government audit and scrutiny from the European Union. France and Italy are also reportedly in discussions with Google to settle ongoing tax disputes. Outside of Europe, legislators in Australia have in recent weeks questioned whether the company is paying a fair share of tax there.
"Google complies with the tax laws in every country where we operate," the company said in an e-mailed statement.
Google’s Dutch subsidiary is the heart of tax structures known as a "Double Irish" and a "Dutch Sandwich" because it involves moving money from one Google subsidiary in Ireland to a Google subsidiary in the Netherlands before moving it out again to a different Irish subsidiary, physically based in Bermuda, where there is no corporate income tax.
This movement of cash enables Google parent Alphabet to keep the effective tax rate on its international income in the single digits. For 2015, Alphabet reported its average tax rate outside the U.S. was just 6.3 percent, according to a calculation using the income from foreign operations and the foreign income tax reported in its U.S. Securities and Exchange Commission filings. Figures for 2015 revenue moved through Google’s Dutch subsidiary aren’t available.
The company says this calculation does not reflect the methods actually used to determine its international taxes in any jurisdiction. Those methods involve transfer pricing, where payments between various international subsidiaries are used to attribute profit to the geographies where economic value is deemed to have been created. The amount of these payments are based on estimates of what similar transactions with an unrelated company would cost. Google attributes most of the economic value of its products to its research and development operations in the U.S. and, in the case of its overseas sales, to its Bermuda-based subsidiary, which holds the international licenses for Google’s intellectual property.
The Irish tax loophole that makes the "Double Irish" possible was closed by the Irish parliament last year. But companies already using the structure can continue to employ it until the end of 2020.
Last week, Tom Hutchinson, Google’s vice president for finance, defended the company’s tax arrangements before a U.K. parliamentary committee. Noting that its average global tax rate for the past five years was 19 percent, Hutchinson said Google paid "a fair amount" of tax worldwide.
He also said that the complex structure through which Google moves most of its international profits through its Dutch subsidiary and then on to Bermuda, "made sense" given that the U.S. government taxes companies on their foreign income if they bring it back into the U.S. This gives multinationals an incentive to keep those profits overseas and in locations with little or no corporate tax.
At the end of 2015, Alphabet’s foreign subsidiaries were holding $43 billion in cash untaxed by the U.S., according to the company’s SEC filings.