French state claims €1 billion in taxes from Google

Photo: Flickr.com/findyoursearch

While the President of the French Republic, François Hollande, and the executive chairman of Google debated over the creation of a “Google tax”, the French direction générale des Impôts(the nation’s central governmental tax agency) sent a registered letter to Google last week asking for €1 billion in back taxes over its profits for the last four years. The company pays almost €5 million per annum in taxes to France, although it could pay up to €500 million, according to a senatorial report.

Indeed, to minimize its taxation, Google took advantage of the attractive Irish rules, in particular the company tax rate of 12.5% (compared to a French minimum of 33%). In this way, Google Ireland Ltd. had to impute 12,5% of taxes over its turnover, which was €12,5 billion in 2011. But it had a before-tax profit of €24,5 million, and an after-tax profit of only €2,5 million, paying out €22 millions in taxes. The company also made use of fiscal techniques known as the “Double Ireland” and the “Dutch sandwich,” whereby all profits not originating in the United States pass through Ireland, the Netherlands, and Bermuda before coming back to the American parent. “The double Ireland is not to be drank but is discretely prepared,” commented the French newspaper Liberation. “Not in a pub but in the upholstered offices of the best tax lawyers on the planet.”

The first step of the mechanism is that Google US, Inc. concedes its rights over patents and trademarks of the group to its subsidiary Google Holdings Ireland, the parent company of Google Ireland Ltd. The latter manages all the activities of the group outside the US, in the Middle East, Africa and Europe, the whole of which amount to €8.5 billion in profits. In practice, when a French company purchases advertising links from Google, the operation is declared by Google Ireland Ltd. and the customer’s credit card is charged to an Irish bank account. In this way, Google Ireland is in fact conducting a business in France, using human and material resources of Google France, but does not pay French taxes.

The Ireland tax law dictates a low rate of taxation on royalties. Thus, to avoid paying taxes over its profits, Google Ireland Ltd. sends €4,16 billion in royalties to its parent, Google Holdings Ireland. The sum is moreover a deductible expense from its income tax.

Furthermore, under Irish law, the earnings from IP rights are exempted from taxes if transferred to certain member states of the European Union, including the Netherlands. Enter the “Dutch sandwich.” Google Ireland Holdings transfers the sums received form its daughter to Google Netherlands Holding BV, a company without any employees. The latter then sends the funds to an entity entirely managed by lawyers in Bermuda, where there is no income tax. Finally, to add another wrinkle to the mechanism, Google Bermuda Ltd. became Google Bermuda Unlimited in 2006, as unlimited companies do not even need to publish accounts in the archipelago.

The consulting firm Conyers Dill & Pearman confirmed to newspaper OWNI.fr that it was administrating Google affairs in Bermuda, but added, “we do not share any information relative to our client.” For its part, Google stated in a press release that the group “adheres to the tax legislation of every country in which the company operates, and to European rules.”

The last step is the repatriation of profits from Bermuda to the United States. A 35% taxation rate ordinarily applies under US law, but profits repatriated from foreign countries to the US are taxed at a mere 5%. Thus, Google has everything to gain in this clever legal arrangement.

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  1. […] the French press had been aiming to propose a law that would require search engines to pay royalties every time Google News cited French headlines, as this gave viewers free access to the papers’ […]

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