Google, the internet giant which makes profits at a rate of $1m every hour, is shielding billions of dollars from tax across the world by using complex financial structures known in the industry as "the Double Irish" and "the Dutch Sandwich".
The tax-avoidance measures were revealed yesterday, forcing the search engine pioneer once again to defend itself in the light of its corporate motto: "Don't be evil".
The company is pushing the bulk of its non-US business revenues, including all the revenue generated in the UK, through an Irish subsidiary, and then on to the Caribbean tax haven of Bermuda – a structure that tax experts say is entirely legal and is becoming increasingly common among multinational corporations.
Tax planners at accounting firms routinely advise companies to set up a web of subsidiaries to take advantage of contradictory and arcane tax rules and tax rates in different jurisdictions, and money flows between them by way of inter-company licensing fees and contracts for services. The Obama administration has promised to crack down on some of the practices, but has made little headway in Congress.
A practice known in the industry as the Double Irish involves setting up two companies in Ireland, one of which is only a shell with operations in low or no-tax jurisdictions in the Caribbean, which shields it from tax even from the Irish Government. A Dutch Sandwich involves setting up a middle company in the Netherlands, with which Ireland has favourable tax agreements. Revelations that both structures are used by Google prompted a flurry of critical commentary on social networks such as Twitter yesterday, forcing the company on the defensive.
The company said in an emailed statement: "Google's practices are very similar to those at countless other global companies operating across a wide range of industries, such as technology, pharmaceuticals and retail. Google complies completely with the tax laws of all the countries in which we have operations. As a result, we make a very substantial contribution to local and national taxation and provide employment for thousands of people globally."
Last week, Google reported net income of $2.2bn (£1.4bn) for the third quarter of 2010, on revenues 23 per cent higher than in the same period a year ago. It reported an average global tax rate of 20 per cent, but with the US corporate income tax rate set at 35 per cent, the figure masked a dramatically lower rate on its overseas operations.
According to a Bloomberg BusinessWeek analysis, Google's overseas tax rate has averaged just 2.4 per cent over the past three years, the lowest of the world's five largest technology companies, and saved it $3.1bn in taxes. The Double Irish was described in a 2007 paper by US tax attorneys Joseph Darby and Kelsey Lemaster as a means of shielding overseas earnings from the US tax authorities and reducing the overall global tax bill, something the authors said "more than doubles the tax savings".
The Dutch central bank is among those upset with the Dutch Sandwich, noting that more than 13,000 entities have been "established by foreign multinational corporations for the purpose of channelling financial assets from one country to another", with €12.3tr (£10.9tr) moving in and out of them in 2008.
The social networking giant Facebook is also reportedly preparing a corporate structure similar to Google's that will send earnings from Ireland to the Cayman Islands. Facebook would not comment last night.
How the internet giant saves its billions
Google has paid no tax in Britain since 2007, even though the country is its most important overseas market, because income from selling advertising on its UK website goes straight to its Irish subsidiary.
Last year, UK advertisers accounted for a little over $3bn (£1.9bn), or 13 per cent, of Google's revenues, and the company employs about 850 people in the country, but its Google UK subsidiary has reported losses for several years.
That is because Google UK is structured so that its business is defined as "the provision of marketing services to Google Ireland Ltd and the provision of research and development services to Google Inc" – services for which it was paid £169m, an increase on 2008 but still not enough to cover all the company's UK expenses.
The latest filing by Google UK at Companies House in London shows that "administrative expenses" rose by £21.6m, eclipsing an increase of £19.8 in revenue and resulting in a loss of £9.7m. The losses were due in part to the increased costs of stock-based compensation, it is understood.
The legality or otherwise of tax-avoidance structures used by multi-national corporations hinges on whether service agreements and other inter-company payments are set at market prices, rather than at artificial rates. Google says it abides by all applicable laws, and has an obligation to its shareholders to limit its global tax bill.
When it was revealed at the end of last year that Google had paid no UK tax, the then deputy leader of the Liberal Democrats, Vince Cable, who is now the Business Secretary, called on the company to pay its "fair share", because not doing so meant higher taxes for other individuals and companies in Britain.
"Avoidance like this is hard to stomach at the best of times, but when the country is in recession, it really sticks in the throat," he said at the time.