Global search engine provider Google managed to keep its effective tax rate overseas at a low 2.4 per cent in 2009. The company had a transfer pricing arrangement approved by the US Internal Revenue Service in 2006. Under the arrangement, Google’s operations in Dublin, Ireland, licenses its search and advertising technology to the US parent. The Irish corporate tax rate of 12.5 per cent compares favourably with other jurisdictions, but Google pays little tax in Ireland as its profits are shifted through the Netherlands to a Bermuda subsidiary. This process is referred to by tax experts as the ‘Dutch Sandwich’.

According to a Bloomberg news report (22 Oct., 2010), 99.8 per cent of revenues recorded in its Irish operations reach Bermuda. Most of the revenues come from European markets. In Bermuda, the corporate tax rate is zero, so Google avoids taxes on a large share of its profits. From 2007 to 2009, Google’s effective tax rate has been 2.4 per cent.This is a low effective tax rate considering a 28 per cent rate in the UK, the company’s second largest market.Indeed most of the countries Google operates in have corporate tax rates above 20 per cent. According to the report Google is not alone in its efforts.Apple, Oracle, Microsoft and IBM reported tax rates between 4.5 percent and 25.8 percent on their overseas earnings from 2007 to 2009.

Questions 

1 Considering the arm’s-length principle, would it be easy to estimate a price for Google’s licensing of its technologies?

2 Do you think the arrangements like those of Google are ethical, despite being legal?