Google Tax Probe to Focus on Offshore Units - Bloomberg #MasterTech

The U.S. Internal Revenue Service is
auditing how Google Inc. avoided federal income taxes by
shifting profit into offshore subsidiaries, according to a
person with knowledge of the matter.

As of June 30, Google held $18.8 billion in cash in its foreign subsidiaries, almost half its total $39.1 billion in cash and marketable securities.

Google Tax Probe to Focus on Offshore Units

By Jesse Drucker - Oct 13, 2011

The U.S. Internal Revenue Service is auditing how Google Inc. (GOOG) avoided federal income taxes by shifting profit into offshore subsidiaries, according to a person with knowledge of the matter.

The agency is bringing more than typical scrutiny to how the company valued software rights and other intellectual property it licensed abroad, said the person, who requested anonymity because the audit isn't public. The IRS has requested information from Google about its offshore deals after three acquisitions, including its $1.65 billion purchase of YouTube, the person said. The transfer overseas of these kinds of rights has enabled Google to attribute earnings to foreign units that pay lower taxes, Bloomberg News reported a year ago.

While Google's potential liability isn't clear, similar deals between companies and offshore arms are often the subject of disputes over hundreds of millions of dollars in taxes, said Daniel Frisch, an economist at Horst Frisch Inc. which advises businesses on transfer pricing -- the allocation of income between units in different countries. In 2006, the IRS settled a case with drugmaker GlaxoSmithKline Plc (GSK) for $3.4 billion.

"The very biggest transfer-pricing tax disputes are over transfers of intangibles to offshore subsidiaries," said Frisch, whose firm is based in Washington.

Google, owner of the world's most popular search engine, has cut its worldwide tax bill by about $1 billion a year using a pair of strategies called the "Double Irish" and "Dutch Sandwich," which move profits through units in Ireland, the Netherlands and Bermuda. Google reported an effective tax rate of 18.8 percent in the second quarter, less than half the average combined U.S. and state statutory rate of 39.2 percent.

Tax Holiday

"This is a routine inquiry," said Jim Prosser, a spokesman for Mountain View, California-based Google. He declined to comment further.

Dean Patterson, a spokesman for the IRS in Washington, said federal law prohibits the agency from discussing specific taxpayers.

U.S. companies are sitting on at least $1.375 trillion in earnings in their foreign subsidiaries on which they have paid no federal income taxes, according to a May report by JPMorgan Chase & Co. Companies including Google, Cisco Systems Inc. (CSCO), Pfizer Inc. (PFE),Apple Inc. (AAPL) and Microsoft Corp. (MSFT) are lobbying Congress for a tax holiday on bringing home those profits, which would otherwise be subject to U.S. income tax at the 35 percent corporate rate with a credit for foreign taxes already paid.

The Obama administration is opposed to that tax break and has been stepping up criticism of tax preferences for various industries and millionaires. Last week, Senate Democrats proposed a new surtax on people earning at least $1 million a year, a move that would generate an estimated $453 billion over the coming decade.

France Probe

The French tax authority also began reviewing Google's income shifting in December, examining transactions between the company's French and Irish subsidiaries, according to two people with knowledge of the probe. The French inquiry was prompted by the October 2010 Bloomberg article on the company's tax-cutting strategy, the people said.

A spokesman for the French budget ministry, which oversees the tax authority, declined to comment, saying the agency cannot discuss individual cases.

Multinational companies cut their tax bills by shifting earnings into subsidiaries in offshore tax havens, a strategy that is drawing increased scrutiny from the IRS.

In May, the IRS appointed its first transfer-pricing director, Samuel Maruca. Last year, it announced the assignment of additional agents and attorneys to examine a few large companies as part of a pilot program. The IRS wouldn't discuss whether Google is one of those companies.

Valuable Patents

Moving profit abroad is particularly important for cutting the tax bills of technology and pharmaceutical companies because of their valuable and easily transportable collection of patents and copyrights. Google, Cisco, Facebook Inc., Microsoft and Forest Laboratories Inc. (FRX), maker of the blockbuster antidepressant Lexapro, have used tax-cutting strategies that move profits into units -- often with no employees or offices -- in havens such as Bermuda, the Cayman Islands and Switzerland, Bloomberg has reported.

In recent years, the IRS has engaged in a number of high profile disagreements with multinational companies over their transfer pricing. In 2006, the agency announced it was settling its dispute with GlaxoSmithKline.

In 2009, the IRS lost a closely watched U.S. Tax Court case with Veritas, now a part of computer-security software maker Symantec Corp. (SYMC) In that dispute, over intellectual property rights moved to an offshore subsidiary, the IRS sought $545 million.

Enforcement Setback

The win for Veritas was a major setback for the IRS's ability to enforce transfer-pricing rules, according to H. David Rosenbloom, an attorney at Caplin & Drysdale in Washington, and director of the International Tax program at New York University School of Law.

Income shifting by multinational companies cost the U.S. $90 billion in federal tax revenue during 2008, according to a March article in the trade journal Tax Notes by Kimberly Clausing, an economics professor at Reed College in Portland, Oregon.

Google cuts its tax bill by about $1 billion a year using a technique that allocates profits to a unit managed out of a law firm in Bermuda, where there is no corporate income tax. In 2009, the most recent year for which records are available, this subsidiary collected 4.34 billion euros (about $6.1 billion) in royalties from a Google unit in the Netherlands, according to a Dutch corporate filing.

As of June 30, Google held $18.8 billion in cash in its foreign subsidiaries, almost half its total $39.1 billion in cash and marketable securities.

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