Google avoided paying $2bn in worldwide income tax last year

Google's 'Don't be evil motto' has been shaken again this week as it emerged some $9.8bn in 2011 revenues were hidden away in a Bermuda shell company in order to avoid paying tax.

by Rebecca Burn-Callander
Last Updated: 09 Oct 2013

It's not just ships and airplanes getting lost in the Bermuda triangle. Taxes are disappearing too. Search giant Google has been secretly siphoning off huge chunks of its pre-tax profit and hiding them in Bermuda, where no corporation tax rate applies.

To be clear, the process of funnelling profits from overseas subsidiaries into tax havens is legal, so Google has broken no laws. But it is frowned upon in the extreme when you are making billions from the countries in which you operate and giving nothing back to government for the privilege. 

Google has been using this practice with increasing gusto in recent years, doubling the number of funds that it is squirrelling away to reach abround 80% of its total pretax profit in 2011. To put this into perspective, Google overall tax bill was halved as a result.

All eyes are now on these tax loopholes as governments in the UK, France, Italy and Australia scramble to put an end to corporate tax dodging. Tax evasion and avoidance cost Europe dear; we lose out on an estimated €1tn a year. Money which could easily reverse the effects of the downturn across the UK and eurozone if recouped. Just last week, the European Commission told member states to create blacklists of tax havens and adopt anti-abuse rules.

Google is desperately trying to distance itself from the scandal, saying that it complies with all tax rules, and that its investment in various European countries helps their economies. It is true that in the UK alone, the search giant has created 2,000 jobs and has contributed significantly to the technology ecosystem - not to mention the fact that its products help hundreds of thousands of businesses to start, run and grow. But does that mean government should let Google off the hook?

The short answer is no. The UK is Google’s second-biggest market, responsible for about 11% of its sales - $4.1bn last year, according to company filings. Yet Google paid just £6m in income taxes. At a House of Commons hearing last week, it was revealed that Google (plus the usual suspects: Starbucks, Amazon etc) were using a pair of strategies bearing jolly names that belie their serious financial purpose: the 'Double Irish' and 'Dutch Sandwich' , which move royalty payments from subsidiaries in Ireland and the Netherlands to a Bermuda unit headquartered in a local law firm, saving squillions.

Last year, Google reported a tax rate of just 3.2% on the profit it allegedly earned overseas, even as most of its foreign sales were in European countries with corporate income tax rates ranging from 26% to 34%.

So what next? In his Autumn Statement, chancellor George Osborne promised to crack down on tax evasion and avoidance, announcing a multi-million pound investment into the HMRC's investigations unit. Will we see rabid Dobermann Pinschers, their nostrils stinging with green tax form ink, yanking on their chains to find these missing taxes? Or does the promise lack the teeth to make any kind of impact on these billion-dollar behemoths?

Starbucks has already made a small concession to the public pressure and is coughing up an extra £20m over two years. Amazon is still in the midst of the consumer backlash with thousands of shoppers slapping one-star reviews on products, saying. 'Don't shop here. Amazon doesn't pay tax.' Your move, Eric Schmidt.

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