Skeptics who disbelieve Google's (Nasdaq: GOOG ) "don't be evil" mantra recently gained fresh fuel for their doubts: On its international revenue, the company has been enjoying a 2.4% tax rate. (Overall, Google pays an effective rate around 22%.) But Google isn't being evil by paying so little in taxes; it's simply capitalizing on the international tax system.
Like many companies with global revenue, Google's moving money around in ways that cut down its tax bill. Bloomberg BusinessWeek recently traced the profitable path: The company routes much of its foreign revenue through Ireland first, where the corporate tax rate is 12.5%. But since the money doesn't stay there long, that rate doesn't fully apply. The money is headed for Bermuda, which sports a corporate tax rate of … 0%, making a necessary stop in the accommodating nation of the Netherlands, where it passes through a Google subsidiary there (with no employees).
An ethical dilemma
That all may sound rather outrageous, but it's all legal. You can argue that Google shouldn't sidestep paying U.S. taxes, but by the same token, it also owes an obligation to its shareholders to maximize profits in any legal way possible. From that perspective, Google isn't flawed; the system is.
According to a 2009 government study, 83 of the 100 biggest U.S. companies have a presence in countries considered to be international tax havens. One single address in the Cayman Islands is home to more than 18,000 corporations. Clearly, Google is not alone. Citigroup (NYSE: C ) reportedly had 427 tax haven subsidiaries in 2007, while Boeing (NYSE: BA ) had 38. These companies' tax tactics may be distasteful, but they're serving their shareholders.
Faced with piles of lost revenue, the government has proposed closing many of these loopholes. According to a 2009 White House release, "In 2004, the most recent year for which data is available, U.S. multinational corporations paid about $16 billion of U.S. tax on approximately $700 billion of foreign active earnings -- an effective U.S. tax rate of about 2.3%."
Various proposals may save $200 billion or more over the coming decade, but business is fighting back. The Business Software Alliance, a lobbying group that includes Cisco Systems (Nasdaq: CSCO ) and Intel (Nasdaq: INTC ) among its members, is arguing against proposed reforms.
It hurts me to say this, but it's hard to fault companies for taking advantage of existing loopholes. However, doing so does cost the nation, and taxpayers, an estimated $60 billion annually. If the government wants that money back, it needs to close those loopholes.
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