The Truth Behind Google's Teeny-Tiny Tax Rate

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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.

Profitable fixes
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.

Let us know your thoughts on the matter by leaving a comment below.

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Longtime Fool contributor Selena Maranjian owns shares of Google. Google is a Motley Fool Rule Breakers pick. The Fool has a bull call spread position on Cisco Systems. Motley Fool Options has recommended buying calls on Intel. The Fool owns shares of Google and Intel, which are both Motley Fool Inside Value recommendations. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.

Read/Post Comments (3) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 28, 2010, at 8:33 PM, yeyow wrote:

    you dont even know what you are talking about.

    corp tax in us is ridiculously high. 35-39pc? please. worldwide average is about 20pc. of course corporations will avoid taxes in the us in every possible way.

    and then people are asking why is there so high unemployment and why business isnt growing. you cant be that blind.

    lower corp taxes and america will rise again. big time.

  • Report this Comment On October 29, 2010, at 5:46 AM, rjg0915 wrote:

    Google, this company that preaches socialism and donates huge amounts to the democRATS avoids paying taxes. One would think like they would be happy to pay the maximum and then some, but no, democRATS only spend other's money.

  • Report this Comment On October 29, 2010, at 11:40 AM, lakeman47 wrote:

    If they are going to close those loop holes, then they also must make it easier to repatriate foreign profits back to the US so US companies can invest more in the US using their foreign country profits. Many of the multinationals keep their profits outside of US including those mentioned in the article.

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