7 ms·

How does Google pay 2.4%?

• georgieporgie 15y ago
  Just searching "Double Irish" should explain it well enough. http://www.google.com/search?q=double+irish http://www.google.com/search?q=double+irish
  • camz 15y ago
    I answered this question a while back for an HN member back on the day the article first hit the web. I have a bunch of questions from members that I've answered over the last year that I'm unloading onto my website. I figured its makes more sense economically if I shared my advice openly instead of giving it to individuals specifically. The problem with googling this is that it only tells you the basic premise and fails to tell you the problems and the reality of actually applying these tax models. As someone who's worked on these tax models in the past, I can tell you that its never as picture perfect as they make it sound. These companies are always getting audited even though these plans were drafted, approved and done by the "big 4 accounting firms." It was a running joke that the big 4 plans it and the law firms would defend it. It was like we were self-generating projects for us to work on by creating a new "plan" every other year. The IRS always comes back and audits these clients.
    • shareme 15y ago
      its not like it was years ago when CitiCorp set up theri stock trading units in the Islands for a similar purpose..
      • btilly 15y ago
        Citi went farther. They did things like declare a particular desk in a skyscraper in NY to be legally in the Cayman Islands. The IRS was not amused.
        • ttdi 15y ago
          Do you have a source on this? I'd love to read more about this.
          • btilly 15y ago
            I wish I did. I heard about it because I used to work with someone who had worked there some years previous.
            • camz 15y ago
              I'm vaguely aware of Citi's tax plan, but I'd have to look into it. If I can learn the details, I'll start a series of case studies that break down the tax strategies of different fortune 500 companies.
              • btilly 15y ago
                The incident I was discussing was back in the 90s. It was resolved a long time ago.
  • gaius 15y ago
    I thought you were referring to Bono then, who is also rather fond of tax avoidance http://www.guardian.co.uk/commentisfree/2006/oct/22/comment.theobserver http://www.guardian.co.uk/commentisfree/2006/oct/22/comment....
• ppereira 15y ago
  With Double Irish slices of bread and Dutch cheese in the middle, the Dutch Sandwich "leaves no tax behind to taste".
• shawnee_ 15y ago
  There's a great slide from my "Taxes for Hax0rs" (SHDH 44) presentation http://www.transparentaccounting.org http://www.transparentaccounting.org regarding the history of the Federal Income Tax. In a nutshell, the way it was originally written was meant to tax corporate income only and only the most wealthy Americans, not common folk. One needed to make >= $4000/year in deflated 1893 dollars to even be eligible to need to pay any taxes. Not sure, but one computation I came up with (adjusted) puts that around 100K in today's dollars. Imagine making anything up to 100K tax-free. The goal was always to tax corporations more heavily than people. Today even the poorest Americans likely end up short more than 2.4 percent (effective annual rate) in tax payments when their employers "withold" earnings. So when corporations go out of their way and spend a lot of money to accomplish tax avoidance, that seems kinda wrong.
  • camz 15y ago
    Ironically, corporate taxes these days generates less than 20% of the fiscal revenues for the government. Generally, 1040 individual taxes still make up the bulk of the taxes paid. In addition, more than 35% of all taxpayers pay zero tax or pay no tax and get refunds. This number is constantly changing, especially recently with the economy. I've seen it go as high as 60%. Lastly, when the government talks about corporate tax breaks and etc. Honestly, they barely matter anymore because we've essentially marginalized the revenue generated from corporations and businesses already. So, the amount of revenue and savings potential in the greater scheme of things is almost non-consequential.
    • gabrielh 15y ago
      Its important to note that if a person doesn't owe taxes directly, the probably do contribute through payroll tax. [1] [1] http://money.cnn.com/2011/04/14/pf/taxes/who_pays_income_taxes/index.htm http://money.cnn.com/2011/04/14/pf/taxes/who_pays_income_tax...
      • camz 15y ago
        That's a very good point. I should've pointed that out. Another thing that everyone should keep in mind, if your company fails to remit the proper amount of payroll tax (social security and medicare), then it is your responsibility to make up the difference on your 1040. The line for this item is on the second page of the 1040 under the Self-Employment tax. We're all paying into a system thats falling apart =/..
• mahyarm 15y ago
  If your not attached to the USA you can just move you and your business to a territorial based corporate income tax country (singapore, etc). Income not repatriated into the country and not generated from the country is tax free. If your an american citizen you'll still have to pay personal federal income tax to the USA, even if you don't live in the USA, and to your country of residence but you can work with that much better with the ~$100k not living in the USA tax deduction that the US gives you.
  • camz 15y ago
    That's a good point. If you're lover of travel or foreign countries, then there are a number of different countries or economic zones that are similar tax havens. Singapore, Hong Kong and etc are tax havens that don't take foreign sourced income. You only pay tax on income earned from the country. Also, singapore and hong kong have much lower tax rates. You'd be able to take a tax credit on foreign taxes paid in the US 1040 individual tax (this calculation is a little awkward though) or you could choose to exclude 90k+ of income entirely from you 1040 but you'd lose the foreign tax credit. You need make the calculation to see which is the better tax savings. Obviously, if you're earning less than 90k then you should use that. But, to get the 90k exclusion you must remain without the US territories for the majority of the year.
  • ced 15y ago
    the ~$100k not living in the USA tax deduction that the US gives you Could you provide more details? I tried Googling for it, and I could only find: You can also claim an additional exclusion from your U.S. taxes in excess of the $91,500, if the rent, utilities, etc. you pay on your residence abroad and other living expenses exceed a standard amount (which is currently approx $13,300 per year) established by the IRS. This exclusion only comes into play when your earnings are in excess of the $91,500 foreign income exclusion. Is this it?
    • camz 15y ago
      Yes that was what we were discussing.
  • 15y ago
• VladRussian 15y ago
  and we were laughing at the mobster furious as his 4% percent in "The Firm"! Ultimately, he happens to be right as paying 4% instead of 2.4% seems to be a pretty valid reason to be furious...
• 01Michael10 15y ago
  Google has an effective tax rate of 2.4%? They are being robbed as GE not only pays no taxes but also gets a refund. Personally, I am tired of millionaires (or well of people like John) complaining about taxes.
  • camz 15y ago
    GE is a special case. Their tax department has been compared to the big four accounting firms as the unspoken big 5. They pay their tax staff very well and truly are some of the best in the field within every tax specialty. But it's unfair to single out John. I'm sure given the opportunity you'd attempt to maximize your profit. It's quoted from judge Learned Hand of New York, one of the most respected legal minds that it is your legal right and American duty to tax plan. The code is set this way obviously due to politics but also because the American people value jobs over taxes. We would rather have high employment that additional Corp tax revenue.
    • yummyfajitas 15y ago
      GE is also a special case because they are using a loss carryforward. GE Capital lost billions in 2008 and 2009 which means GE's profit averaged over the past few years is close to zero. This allows them to pay yearly taxes as if they made little profit. This is actually a good thing - it avoids disproportionately taxing companies with volatile incomes.
• ry0ohki 15y ago
  Don't many companies pay nothing? IE if my company earns $100k and I pay out $100k in salaries and overhead, there is nothing left to tax as all my expenses were deductible? Google may pay 2.4% but presumably the money is getting taxed at a higher rate when it gets to individuals.
  • camz 15y ago
    Well in this circumstance that's not true because thy aren't paying any tax on more than 95 percent ifthe income because it sits outside the united states jurisdiction in a foreign Corp in the caymans. Until they decide to repatriate the income or bring it back into US territories then it is legal untaxable.
  • redsymbol 15y ago
    In the first paragraph, yes the tax due would be zero, in general (certain industries and/or countries could harbor exceptions). The final amount paid is independent of the tax rate on profits, though: if revenues are offset completely by expenses, it doesn't matter if the effective rate is 2.4%, 40% or 90%, it still comes to 0. But you want the former if your company is highly profitable. For your second point, I don't know the specifics in this case. But even if it's just deferring taxes that have to be paid eventually, that can be a huge win, since it lets you collect interest or store funds for an emergency. There are probably other financial benefits too though; maybe someone who knows can comment.
• lbarrow 15y ago
  Fixing this sort of loophole should be far higher on Congress's list of priorities than it is now. There is no reason why a massively profitable corporation like Google should pay so little in taxes when poor Americans are nickel-and-dimed with sales, payroll and income taxes.
  • benmccann 15y ago
    The standard arguments against corporate taxation are that it's double taxation (the shareholders are already taxes on capital gains and dividends) and that higher corporate taxes lead corporations to choose to base their operations in other countries (e.g. Ireland).
  • yummyfajitas 15y ago
    The problem goes far beyond Google Ireland and Google Netherlands. What about Tata, Reliance, Baidu and Guinness? None of them pay their fair share to the US government. Something must be done about these evil corporations which exist outside the US, don't bring money into the US, do no business in the US, and pay no taxes in the US!
    • recampbell 15y ago
      Would google exist if not for investments in education and r&d made by US taxpayers over the past 50 years?
      • william42 15y ago
        I wonder what the world would be like if Google were still tied into Stanford.
      • mahyarm 15y ago
        How much of SV are immigrant engineers in general although? Is it really the USA or just the fact it became a hollywood and it's gravity keeps it going?
      • yummyfajitas 15y ago
• ja30278 15y ago
  Actually, no company _really_ pays taxes. Taxes are another cost of doing business which is passed on to the consumer
  • eru 15y ago
    Either to the consumer, or to the shareholders or bondholders. But that's just viewing a company as a hollow shell.
  • _delirium 15y ago
    Not generally true; companies already attempt to charge the highest rates that the market can bear, so if they could easily just raise prices, they would've already raised them before the tax to gain more profits. In the general case, an increase in costs will come out of some combination of: 1) increased prices passed onto consumers; 2) decreased wages at the firm; and 3) decreased profits at the firm. There's no economic law that says they'll all come out of #1, unless it's such a perfectly-competitive commodity business that everyone is charging barely above cost for their services to begin with (not the usual case in Silicon Valley). Consider the flip side: If all cost reduction were automatically passed on directly into price cuts, there would be no incentive for companies to trim costs. But that isn't the case, of course; one reason firms aim to reduce their costs is that reducing costs while keeping prices fixed is one way to increase profits. Similarly, increased costs without the ability to raise prices can reduce profits. In both cases it depends on the surrounding market.
  • corin_ 15y ago
    That's just ridiculous logic, you could extend that to "no companies actually have expenses".
• ChuckMcM 15y ago
  Back when Commodore was a company I had the opportunity to get a look at its tax structure (I was interviewing for a VP position with the parent company). It was pretty impressive how effectively one could exploit nominal loop-holes in various jurisdiction tax codes to achieve near zero taxation. One of the more dubious strategies was having a company in the Cayman Islands that owned the cars that people drove and paid for the gas and maintenance out of corporate accounts, and paid rent and bought food for folks. So your salary could be 'poverty' level and yet you could have quite a nice lifestyle. The poor company in the Caymans was losing money quite rapidly. As a systems guy I had to be impressed at how they worked that particular system. A CPA friend of mine once quipped that if laziness was the mother of invention, taxation was the father of innovative accounting.
  • camz 15y ago
    Lol. It sounds like I worked with your friend. I'd like to note that the US is also a noted tax haven for foreign countries. We aggressively allow our country act as a tax shield for European and Asian companies so we should be throw rocks either when we live in a glass house
    • jrockway 15y ago
      I'm not sure that makes sense. Let's say, hypothetically, the Europe and Asia have a tax rate of 99%. We offer a tax rate to foreign companies of 2%, to make it obviously worthwhile to funnel their money through the US. At the same time, we tax US companies at 98%. This makes sense because it maximizes revenue -- US companies aren't going to go abroad, and everyone else in the world will want to give us 2% of their money. Epic win. I doubt the real world works like this, though.
      • BCM43 15y ago
        Would wouldn't the U.S. companies just move abroad and funnel their money though the US?
        • 15y ago
• magicalist 15y ago
  Isn't that a tax rate of 2.4% on foreign income? Or does "effective tax rate" mean taxes across all income? If they've only saved "$3.1 billion since 2007" (to October 2010), it seems like they haven't saved that much (er, relatively...).
• latch 15y ago
  Anyone interested in this will also be interested in learning about IKEA: http://www.economist.com/PrinterFriendly.cfm?story_id=6919139 http://www.economist.com/PrinterFriendly.cfm?story_id=691913... And, more recently, some details about how they do it: http://www.ft.com/intl/cms/s/0/2437643c-2985-11e0-bb9b-00144feab49a.html#axzz1SbQvblTs http://www.ft.com/intl/cms/s/0/2437643c-2985-11e0-bb9b-00144...
  • camz 15y ago
    I've actually been asked about IKEA in the past as well. The crux of the issue is that IKEA is the largest single employer and GDP powerhouse of Sweden. So, the country has been more than understanding of their "tax plan." The founder of ikea essentially owns everything through a charity and avoid all taxes for effective purposes.
    • mbesto 15y ago
      Yup, I have a number of Swedish friends. When I mention "That guy [Kamprad] is a crook" they all say "But he [IKEA] has done so much for the economy and providing jobs for Sweden."
• draz 15y ago
  "Generally, Google and companies of similar size are audited every year. Thus, the IRS actually has a permanent office within the Googleplex compound because they audit them year-round" I think this statement is incorrect. The auditors hired (PwC, Deloitte, E&Y, whoever) are at the Googleplex all year round, but not the IRS
  • camz 15y ago
    I misspoke, I stated auditors but I wasn't specific about his. Pwc, deliotte and friends are financial auditors meant to provide assurance. But the IRS auditors are there for tax audits. It is IRS policy to generally audit fortune 500 companies annually. Usually they hold an area for the IRS because it makes sense for them to be kept away from daily operations. A former coworker works in the LMSB dept that handles these cases. When the IRS starts printing special forms for you because the lines don't fit your revenues, you know you've made it lol.
• Symmetry 15y ago
  Why on Earth do we bother with a corporate income tax at all? Just get rid of it and bump up capital gains to compensate.
  • jamespetersonau 15y ago
    Great question. My understanding was that the (primary) purpose of corprate income tax is not to directly collect revenue, but rather to encourage reinvestment by firms in the economy. Increasing CGT would discourage investment. Can others please enlighten us?
    • camz 15y ago
      Well the corporate tax is meant to collect revenue but it's secondary goal is promote certain activities. Mainly, they want to promote job creation and increased productivity, which is in theory done through reinvestment. When you reinvest into equipment, the logic goes that the productivity increases and new higher paid jobs are created even though the lower end labor is eliminated or reduced. Increasing capital gains tax would in effect make everyone accelerate the sale of their company before the taxes are effective, so it was a mass liquidation of capital. But, I don't believe it would discourage investment because people would simply tax plan around the capital gains tax. A while back, during Reagan and friends presidency, the personal income tax as well as capital gains tax was more than 35%. People actually invested more into corporations because the corporate tax rates were lower (ironically).
      • mahyarm 15y ago
        I think as a side effect it encourages companies to use credit as a financial buffer (single digit interest rate vs. double digit tax rate) vs. savings since corporate taxes are effectively a tax on corporate savings longer than a few months to a year.
  • nwatson 15y ago
    I speculate capital gains revenue would be much more volatile for government than a tax on profits.
• joshfraser 15y ago
  Why hasn't someone created a company that handles this setup for small to midsize companies? Think of it as the Paychex for legal tax evasion. Their clients could all share the same legal addresses in Ireland and the Netherlands. They could keep up with the shifting tax laws and take care of opening all the appropriate banks accounts and filling out the right forms. Of course, the loopholes should be closed, but until they are we could at least keep things fair by making the same techniques available to anyone.
  • camz 15y ago
    Well technically it is available for small to midsize companies. There a number of websites that market these plans, but usually they're pretty sketchy haha. As an example, "www.escapeartist.com" are what's usually available openly. Most tax professionals that are capable will provide these tax plans to their clients, but they'll do so quietly because its not something you'd want to advertise and also people generally dont like it when they find out you've gone "offshore" and etc.
  • a3_nm 15y ago
    Actually, making it easy to exploit loopholes is probably a good way to ensure that they are closed. (Possibly leaving more subtle ones open...)
• gvb 15y ago
  Simple. They pay accountants a substantial portion of the taxes not paid. The actual amount any country can tax it citizens and corporations is a complex relationship between its own tax laws, every other country in the world's tax laws, and the cost of the tax lawyers that figure out how to shuffle funds around to minimize their tax liability. When politicians say "we will close this loophole and collect $xxx MM more in taxes" my BS meter pegs. There is not going to be a 1:1 relationship between a loophole's current deduction and collected taxes if that loophole is closed. There will be some increase in collected taxes (presumably), but people will minimize their taxes using different "loopholes" so the "recovered taxes" will never be as much as the politicians sell it as.
• mckoss 15y ago
  Our congressional representatives are corrupt, doling out tax breaks to wealthy corporations, while ordinary people are left to pay high tax rates on ordinary income. I think Google should be ashamed to be part of this corrupt system. It's BS to say that they owe it to their shareholders to try to defraud the federal government of as much tax revenue as possible. They should instead be fighting for corporate tax reform and closing loopholes to make a level playing field and not rewarding "scumbag" corporations.
  • mahyarm 15y ago
    It's not fraud, there is no lying involved in this. Your an international company that gets money from everywhere, your based everywhere, and you have employees everywhere. Who deserves the bulk of the tax revenue? Should Toyota pay the majority of it's taxes to the US because they sell a large amount of cars there, or only the income taxes of their employees in the US and the profits they receive from car sales in the USA? Should Japan get the majority of Toyota's tax revenue because they are headquartered there? Even though the majority of Toyota's income from Japan is minor vs the rest of the world combined? What incentive would they have other than personal reasons to stay then vs just use it as a net-loss R&D center and minor manufacturing plant to avoid tariffs? These things are significantly more gray than you think.
    • mckoss 15y ago
      The highest marginal federal tax rate for corporations is 35%. I think that's too high. But Google, a US Corporation, who derives most of it's earnings from it's US operations, is paying but a small fraction of that. I think in the case of Google, they should at least be paying higher tax rates on all advertising earnings from US users; it seems to me they are maying barely 1 tenth of that amount currently. Just as "selective enforcement" of laws leads to corruption, so too does gaming the tax system. Large corporations pay legislators to create these tax loopholes for them.
• digisth 15y ago
  Here's another idea: drop the corporate tax rate to 0% and raise income, high-end property (let's say houses that cost 2x the median in a particular area), and high-end consumption taxes (a "yacht tax".) Another handy related idea would be to have a maximum income multiplier. Something like "the highest paid employee cannot make more than 20x the lowest paid in total compensation", so if you want to make one million a year, the lowest paid employee must be making 50k.
  • lliiffee 15y ago
    I worry that the maximum income multiplier would have distortive effects. For example, if all my employees make high salaries, I would have a strong incentive to hire a company that provides janitorial services, rather than hire a janitor in house. (Which is presumably more efficient, as most firms do that in the current structure.)
  • nradov 15y ago
    The "yacht tax" is proven to be a terrible idea; last time that was tried it basically killed the US boat industry. But otherwise I absolutely agree that we should eliminate corporate income tax and replace it with higher taxes on the individual owners of and creditors to those corporations. The government wouldn't be collecting any more revenue. This would encourage economic growth by avoiding the need for corporations to waste resources on tax planning.
  • tsuraan 15y ago
    Here's another idea: drop the corporate tax rate to 0% and raise income, high-end property (let's say houses that cost 2x the median in a particular area), and high-end consumption taxes (a "yacht tax".) If corporations don't pay taxes, then won't everybody who can afford to just do all their business (income and all) through shell corporations? Sort of the way that currently wealthy people skirt the estate tax by having a company own their land, so their next of kin can just inherit the CEO position of the company?
    • lucasjung 15y ago
      This already happens to varying degrees, because if you make enough money the corporate tax structure doesn't hit you as hard as the personal income tax structure. There are plenty of other tricks available as well, such as deferring income, etc. If you also eliminate income taxes and shift completely to consumption-based taxes, it gets a lot harder for wealthy people to avoid taxes; in fact, the only way to avoid consumption taxes is to live the lifestyle of a less-wealthy person. Even illegal sources of income get taxed when you switch to a consumption-based tax system: you can't tax the income of a gangster with no declared income, but you can tax all of the shiny stuff he buys. Regardless of the source of income, the same truth applies: if you want to enjoy your wealth, you will end up paying taxes on it. Of course, some wealthy people will choose to live more frugal lifestyles in order to avoid taxes (many wealthy people already do so, for a variety of reasons). The reduced consumption might hurt the economy some, but they have to put their money somewhere, and that somewhere is generally some sort of investment, which helps the economy. The biggest problem with consumption-based taxes is that they tend to be highly regressive because there is generally an inverse relationship between income and the percent of income spent on consumption. However, there are ways to correct for this. You can target specific categories of goods which only the wealthy can afford (the aforementioned "yacht tax,"), but this tends to be very destructive to those industries and can cause big distortions throughout the rest of the economy. You can exempt certain categories of goods, such as groceries and other basic necessities, but this also creates huge distortions, and also creates a situation where industries buy politicians in order to get their products exempted. Another approach is to offer rebates equal to the consumption taxes paid by a typical low-income family, so that such families will pay zero net tax, but that's complex and expensive to administer.
• hncommenter13 15y ago
  The reality is much more complicated than the article or the blog post makes it out to be. Google's foreign tax rate is 2.4% (quite low), and they shift lots of their earnings offshore where it is not subject to US tax ($17.5B cumulatively, per Note 15 of the 10K). However, it is not the case that Google only pays 2.4% of their US operating profit to the IRS, as a look at Note 15 of their 10K shows. There are lots of reasons that a corporation's effective tax rate will differ from the statutory tax rate of 40% (35% federal + ~5% state). To name a couple of common ones: 1. Prior net operating losses (net of valuation allowances) 2. Stock option exercises by employees (see 1999-2000 when over 50% of major tech companies' cash flows were from option exercise, and lots of them--entirely legally--paid zero or "negative" tax, or so it appeared; in reality, the taxes were just paid out of a different pocket). There is a bill in Congress to remove this deduction. 3. Adjustments for overseas taxes paid 4. Use of NOLs, impairment charges, changes in valuation allowances, lots of technical items. Some of the entries in Note 15 of GOOG's latest 10K that lowered its provision for US income taxes (effective rate) in the current period include: - Foreign rate differential (due to tax treaties with foreign countries, income taxed overseas is often not taxed again in the US) - Federal research credit - Tax exempt interest (interest from tax exempt bonds) (Search for "Note 15" here: http://edgar.sec.gov/Archives/edgar/data/1288776/000119312511032930/d10k.htm http://edgar.sec.gov/Archives/edgar/data/1288776/00011931251...) The rest of Note 15 elaborates on their capital losses from investments, impairments of acquired goodwill, etc. Tax disclosures are some of the most complicated areas of financial statements, and they're very easy to misread. However, they can be very informative, as tax info can provide a window into the difference between accrual-based earnings and cash inflow/outflow. Just for future reference, NOTHING in a financial statement is what it seems until you read the notes, period. That is the first thing they teach you in financial accounting. Think of it as the equivalent of a typical developer's reaction to a blog post claiming "X outperforms Y"--usually, the first comment is "did you take into account setting Z?" The footnotes contain "setting Z."
  • camz 15y ago
    I agree with your thoughts and I will definitely take that into consideration in the future, the post was meant to simply the concept of how they tax plan their business and how difficult it is to enact such a plan. To clarify, Google's foreign tax rate is 2.4% and their US tax rate is 21.2%. But, I believe it is important to delve further than the surface of these numbers. The 2010 fiscal year has been the most profitable year yet for Google and $17.5B is more than 7x the net income presented on their current financial statements. Also, they've refused to disclose the amount of income that is transferred to their offshore activities through their APA. But, note that their income from foreign sources is equated to 52% of their overall revenues of approximately $30B. This would suggest that at a minimum their foreign sourced income held overseas is at least more than 50%. The APA is designed to help the company shift the tax incidence to different tax regimes, thus it would be more than likely that the true number is much higher. But, it would be impossible to determine without access to a number of documents beginning with the agreement (which lasts for 5 years before they must renegotiate for a new plan). We could make this much more complicated, but I wanted to focus on the tax plan since most people were interested in that aspect.
• stickfigure 15y ago
  One of the big problems with our overcomplicated tax system is that it creates these sorts of moral ambiguities. Is person X or corporation Y paying their fair share of taxes? Only the accountants and (maybe) the IRS have any idea. So people with a negative view of business can get all riled up and angry, and people with a positive view of business can get all riled up and angry. The presence of ambiguities in the system breeds mistrust among the citizenry. This cannot be healthy for society.