IRS audits Google for funneling profits to Ireland

The US Internal Revenue Service is auditing strategies that Google uses to cut its tax bill by about $1 billion a year by funneling profit into subsidiaries located in territories with low or non-existent rates, according to a published report citing unnamed officials.

The agency is “bringing more than typical scrutiny” to techniques known as the “Double Irish” and “Dutch Sandwich,” which move profits through units in Ireland, the Netherlands, and Bermuda, Bloomberg News reported on Thursday. Last year, Bloomberg reported that the practice had saved Google $3.1 billion in just three years.

In 2009 alone, a Google subsidiary located in Bermuda, where there's no corporate income tax, collected about $6.1 billion in royalties from a separate Google unit located in the Netherlands, Bloomberg reported. By transferring profits out of the US and other territories where rates are high, Google is able to drastically lower its costs. On Thursday, Google reported an effective tax rate of about 19 percent for third quarter, less than half the average combined US and state statutory rate of 39.2.

Google is by no means alone in pursuing the strategy. US companies are sitting on at least $1.375 trillion in earnings in their foreign subsidiaries that aren't subject to income taxes. If the earnings were transferred to the US, they would face a 35-percent corporate rate. Microsoft, Apple, and Cisco Systems use similar vehicles to avoid federal income taxes, but it's not clear they do so with the same spectacular success.

In 2006, the IRS approved much of Google's tax arrangement when it signed off on a 2003 intracompany transaction that moved foreign rights to its search technology to Google Ireland Holdings, an Irish subsidiary managed in Bermuda. The deal allowed future profit derived from those copyrights to be recognized in foreign subsidiaries rather than in the US, where the underlying technology was developed, Bloomberg said.

But the IRS assent covered rights Google held as of 2003 and doesn't cover technology the company acquired since then. Since that time, Google has made at least three major acquisitions that the IRS is now examining, Bloomberg said. They include the $1.65 billion purchase of YouTube in 2006, $3.2 billion for email security service Postini in 2007, and $3.2 billion for DoubleClick in 2008.

A Google spokesman told Bloomberg: “This is a routine inquiry.” He didn't answer a Bloomberg reporter's question about whether the company intended to assign patents acquired in its $12.5 billion purchase of Motorola Mobility to foreign subsidiaries. ®