

How does Google pay 2.4%? - camz
http://cameronkeng.com/hn-how-do-i-pull-a-google/

======
ChuckMcM
Back when Commodore was a company I had the opportunity to get a look at its
tax structure (I was interviewing for a VP position with the parent company).
It was pretty impressive how effectively one could exploit nominal loop-holes
in various jurisdiction tax codes to achieve near zero taxation.

One of the more dubious strategies was having a company in the Cayman Islands
that owned the cars that people drove and paid for the gas and maintenance out
of corporate accounts, and paid rent and bought food for folks. So your salary
could be 'poverty' level and yet you could have quite a nice lifestyle. The
poor company in the Caymans was losing money quite rapidly.

As a systems guy I had to be impressed at how they worked that particular
system. A CPA friend of mine once quipped that if laziness was the mother of
invention, taxation was the father of innovative accounting.

~~~
camz
Lol. It sounds like I worked with your friend.

I'd like to note that the US is also a noted tax haven for foreign countries.
We aggressively allow our country act as a tax shield for European and Asian
companies so we should be throw rocks either when we live in a glass house

~~~
jrockway
I'm not sure that makes sense. Let's say, hypothetically, the Europe and Asia
have a tax rate of 99%. We offer a tax rate to foreign companies of 2%, to
make it obviously worthwhile to funnel their money through the US. At the same
time, we tax US companies at 98%. This makes sense because it maximizes
revenue -- US companies aren't going to go abroad, and everyone else in the
world will want to give us 2% of their money. Epic win.

I doubt the real world works like this, though.

~~~
BCM43
Would wouldn't the U.S. companies just move abroad and funnel their money
though the US?

~~~
danssig
Move where? Everyone else taxes at 98%.

~~~
BCM43
Not if they funnel their money though the US. Then they're taxed at 2%.

------
hncommenter13
The reality is much more complicated than the article or the blog post makes
it out to be. Google's foreign tax rate is 2.4% (quite low), and they shift
lots of their earnings offshore where it is not subject to US tax ($17.5B
cumulatively, per Note 15 of the 10K).

However, it is not the case that Google only pays 2.4% of their US operating
profit to the IRS, as a look at Note 15 of their 10K shows. There are lots of
reasons that a corporation's effective tax rate will differ from the statutory
tax rate of 40% (35% federal + ~5% state). To name a couple of common ones:

1\. Prior net operating losses (net of valuation allowances)

2\. Stock option exercises by employees (see 1999-2000 when over 50% of major
tech companies' cash flows were from option exercise, and lots of them--
entirely legally--paid zero or "negative" tax, or so it appeared; in reality,
the taxes were just paid out of a different pocket). There is a bill in
Congress to remove this deduction.

3\. Adjustments for overseas taxes paid

4\. Use of NOLs, impairment charges, changes in valuation allowances, lots of
technical items.

Some of the entries in Note 15 of GOOG's latest 10K that lowered its provision
for US income taxes (effective rate) in the current period include:

\- Foreign rate differential (due to tax treaties with foreign countries,
income taxed overseas is often not taxed again in the US)

\- Federal research credit

\- Tax exempt interest (interest from tax exempt bonds)

(Search for "Note 15" here:
[http://edgar.sec.gov/Archives/edgar/data/1288776/00011931251...](http://edgar.sec.gov/Archives/edgar/data/1288776/000119312511032930/d10k.htm))

The rest of Note 15 elaborates on their capital losses from investments,
impairments of acquired goodwill, etc. Tax disclosures are some of the most
complicated areas of financial statements, and they're very easy to misread.
However, they can be very informative, as tax info can provide a window into
the difference between accrual-based earnings and cash inflow/outflow.

Just for future reference, NOTHING in a financial statement is what it seems
until you read the notes, period. That is the first thing they teach you in
financial accounting.

Think of it as the equivalent of a typical developer's reaction to a blog post
claiming "X outperforms Y"--usually, the first comment is "did you take into
account setting Z?" The footnotes contain "setting Z."

~~~
camz
I agree with your thoughts and I will definitely take that into consideration
in the future, the post was meant to simply the concept of how they tax plan
their business and how difficult it is to enact such a plan.

To clarify, Google's foreign tax rate is 2.4% and their US tax rate is 21.2%.
But, I believe it is important to delve further than the surface of these
numbers. The 2010 fiscal year has been the most profitable year yet for Google
and $17.5B is more than 7x the net income presented on their current financial
statements. Also, they've refused to disclose the amount of income that is
transferred to their offshore activities through their APA.

But, note that their income from foreign sources is equated to 52% of their
overall revenues of approximately $30B. This would suggest that at a minimum
their foreign sourced income held overseas is at least more than 50%. The APA
is designed to help the company shift the tax incidence to different tax
regimes, thus it would be more than likely that the true number is much
higher. But, it would be impossible to determine without access to a number of
documents beginning with the agreement (which lasts for 5 years before they
must renegotiate for a new plan).

We could make this much more complicated, but I wanted to focus on the tax
plan since most people were interested in that aspect.

------
shawnee_
There's a great slide from my "Taxes for Hax0rs" (SHDH 44) presentation
<http://www.transparentaccounting.org> regarding the history of the Federal
Income Tax. In a nutshell, the way it was originally written was meant to tax
corporate income only and only the most wealthy Americans, not common folk.

One needed to make >= $4000/year in deflated 1893 dollars to even be eligible
to need to pay any taxes. Not sure, but one computation I came up with
(adjusted) puts that around 100K in today's dollars. Imagine making anything
up to 100K tax-free.

The goal was always to tax corporations more heavily than people.

Today even the poorest Americans likely end up short more than 2.4 percent
(effective annual rate) in tax payments when their employers "withold"
earnings.

So when corporations go out of their way and spend a lot of money to
accomplish tax avoidance, that seems kinda wrong.

~~~
camz
Ironically, corporate taxes these days generates less than 20% of the fiscal
revenues for the government. Generally, 1040 individual taxes still make up
the bulk of the taxes paid.

In addition, more than 35% of all taxpayers pay zero tax or pay no tax and get
refunds. This number is constantly changing, especially recently with the
economy. I've seen it go as high as 60%.

Lastly, when the government talks about corporate tax breaks and etc.
Honestly, they barely matter anymore because we've essentially marginalized
the revenue generated from corporations and businesses already. So, the amount
of revenue and savings potential in the greater scheme of things is almost
non-consequential.

~~~
gabrielh
Its important to note that if a person doesn't owe taxes directly, the
probably do contribute through payroll tax. [1]

[1]
[http://money.cnn.com/2011/04/14/pf/taxes/who_pays_income_tax...](http://money.cnn.com/2011/04/14/pf/taxes/who_pays_income_taxes/index.htm)

~~~
invalidOrTaken
Just saying they "contribute" doesn't get the whole point across. _They do pay
taxes, it's just not visible._ Payroll taxes have to be the most ingenious
method of hiding taxes from voters ever.

------
joshfraser
Why hasn't someone created a company that handles this setup for small to
midsize companies? Think of it as the Paychex for legal tax evasion. Their
clients could all share the same legal addresses in Ireland and the
Netherlands. They could keep up with the shifting tax laws and take care of
opening all the appropriate banks accounts and filling out the right forms.

Of course, the loopholes should be closed, but until they are we could at
least keep things fair by making the same techniques available to anyone.

~~~
camz
Well technically it is available for small to midsize companies. There a
number of websites that market these plans, but usually they're pretty sketchy
haha. As an example, "www.escapeartist.com" are what's usually available
openly.

Most tax professionals that are capable will provide these tax plans to their
clients, but they'll do so quietly because its not something you'd want to
advertise and also people generally dont like it when they find out you've
gone "offshore" and etc.

------
gvb
Simple. They pay accountants a substantial portion of the taxes not paid.

The actual amount any country can tax it citizens and corporations is a
complex relationship between its own tax laws, every other country in the
world's tax laws, and the cost of the tax lawyers that figure out how to
shuffle funds around to minimize their tax liability.

When politicians say "we will close this loophole and collect $xxx MM more in
taxes" my BS meter pegs. There is _not_ going to be a 1:1 relationship between
a loophole's current deduction and collected taxes if that loophole is closed.
There will be some increase in collected taxes (presumably), but people will
minimize their taxes using different "loopholes" so the "recovered taxes" will
never be as much as the politicians sell it as.

------
lbarrow
Fixing this sort of loophole should be far higher on Congress's list of
priorities than it is now. There is no reason why a massively profitable
corporation like Google should pay so little in taxes when poor Americans are
nickel-and-dimed with sales, payroll and income taxes.

~~~
yummyfajitas
The problem goes far beyond Google Ireland and Google Netherlands. What about
Tata, Reliance, Baidu and Guinness? None of them pay their fair share to the
US government.

Something must be done about these evil corporations which exist outside the
US, don't bring money into the US, do no business in the US, and pay no taxes
in the US!

~~~
recampbell
Would google exist if not for investments in education and r&d made by US
taxpayers over the past 50 years?

~~~
yummyfajitas
Should US corporations pay the Indian and Chinese governments taxes if they
employ people educated by the Indian and Chinese governments? Should all
computing companies worldwide pay the British government for their investments
in foundations of computing?

------
mahyarm
If your not attached to the USA you can just move you and your business to a
territorial based corporate income tax country (singapore, etc). Income not
repatriated into the country and not generated from the country is tax free.
If your an american citizen you'll still have to pay personal federal income
tax to the USA, even if you don't live in the USA, and to your country of
residence but you can work with that much better with the ~$100k not living in
the USA tax deduction that the US gives you.

~~~
mahyarm
I also want to note that the USA is the only country in the world to base
income taxation on citizenship/green card and residency, vs residency only for
the rest of the world. Be a citizen of anywhere else and you can be really tax
free/low tax.

~~~
travisp
Not only does the US tax its citizens who live and work abroad, it will also
do so for 10 years after one renounces citizenship.

~~~
Jach
How do they enforce that one, or even get a hold of your income to know how
much they're missing out? Or is it just a general "set foot on this country
again and it's prison time for you"?

~~~
mahyarm
You have to submit accurate tax returns with possible audits resulting
extraditions and criminal charges if you don't. And there is FBAR.

------
digisth
Here's another idea: drop the corporate tax rate to 0% and raise income, high-
end property (let's say houses that cost 2x the median in a particular area),
and high-end consumption taxes (a "yacht tax".)

Another handy related idea would be to have a maximum income multiplier.
Something like "the highest paid employee cannot make more than 20x the lowest
paid in total compensation", so if you want to make one million a year, the
lowest paid employee must be making 50k.

~~~
tsuraan
_Here's another idea: drop the corporate tax rate to 0% and raise income,
high-end property (let's say houses that cost 2x the median in a particular
area), and high-end consumption taxes (a "yacht tax".)_

If corporations don't pay taxes, then won't everybody who can afford to just
do all their business (income and all) through shell corporations? Sort of the
way that currently wealthy people skirt the estate tax by having a company own
their land, so their next of kin can just inherit the CEO position of the
company?

~~~
lucasjung
This already happens to varying degrees, because if you make enough money the
corporate tax structure doesn't hit you as hard as the personal income tax
structure. There are plenty of other tricks available as well, such as
deferring income, etc.

If you also eliminate income taxes and shift completely to consumption-based
taxes, it gets a lot harder for wealthy people to avoid taxes; in fact, the
only way to avoid consumption taxes is to live the lifestyle of a less-wealthy
person. Even illegal sources of income get taxed when you switch to a
consumption-based tax system: you can't tax the income of a gangster with no
declared income, but you can tax all of the shiny stuff he buys. Regardless of
the source of income, the same truth applies: if you want to enjoy your
wealth, you will end up paying taxes on it.

Of course, some wealthy people will choose to live more frugal lifestyles in
order to avoid taxes (many wealthy people already do so, for a variety of
reasons). The reduced consumption might hurt the economy some, but they have
to put their money somewhere, and that somewhere is generally some sort of
investment, which helps the economy.

The biggest problem with consumption-based taxes is that they tend to be
highly regressive because there is generally an inverse relationship between
income and the percent of income spent on consumption. However, there are ways
to correct for this. You can target specific categories of goods which only
the wealthy can afford (the aforementioned "yacht tax,"), but this tends to be
very destructive to those industries and can cause big distortions throughout
the rest of the economy. You can exempt certain categories of goods, such as
groceries and other basic necessities, but this also creates huge distortions,
and also creates a situation where industries buy politicians in order to get
their products exempted. Another approach is to offer rebates equal to the
consumption taxes paid by a typical low-income family, so that such families
will pay zero net tax, but that's complex and expensive to administer.

------
latch
Anyone interested in this will also be interested in learning about IKEA:
[http://www.economist.com/PrinterFriendly.cfm?story_id=691913...](http://www.economist.com/PrinterFriendly.cfm?story_id=6919139)

And, more recently, some details about how they do it:
[http://www.ft.com/intl/cms/s/0/2437643c-2985-11e0-bb9b-00144...](http://www.ft.com/intl/cms/s/0/2437643c-2985-11e0-bb9b-00144feab49a.html#axzz1SbQvblTs)

~~~
camz
I've actually been asked about IKEA in the past as well. The crux of the issue
is that IKEA is the largest single employer and GDP powerhouse of Sweden. So,
the country has been more than understanding of their "tax plan."

The founder of ikea essentially owns everything through a charity and avoid
all taxes for effective purposes.

~~~
mbesto
Yup, I have a number of Swedish friends. When I mention "That guy [Kamprad] is
a crook" they all say "But he [IKEA] has done so much for the economy and
providing jobs for Sweden."

------
01Michael10
Google has an effective tax rate of 2.4%? They are being robbed as GE not only
pays no taxes but also gets a refund.

Personally, I am tired of millionaires (or well of people like John)
complaining about taxes.

~~~
camz
GE is a special case. Their tax department has been compared to the big four
accounting firms as the unspoken big 5.

They pay their tax staff very well and truly are some of the best in the field
within every tax specialty.

But it's unfair to single out John. I'm sure given the opportunity you'd
attempt to maximize your profit. It's quoted from judge Learned Hand of New
York, one of the most respected legal minds that it is your legal right and
American duty to tax plan.

The code is set this way obviously due to politics but also because the
American people value jobs over taxes. We would rather have high employment
that additional Corp tax revenue.

~~~
yummyfajitas
GE is also a special case because they are using a loss carryforward. GE
Capital lost billions in 2008 and 2009 which means GE's profit averaged over
the past few years is close to zero.

This allows them to pay yearly taxes as if they made little profit.

This is actually a good thing - it avoids disproportionately taxing companies
with volatile incomes.

------
draz
"Generally, Google and companies of similar size are audited every year. Thus,
the IRS actually has a permanent office within the Googleplex compound because
they audit them year-round" I think this statement is incorrect. The auditors
hired (PwC, Deloitte, E&Y, whoever) are at the Googleplex all year round, but
not the IRS

~~~
camz
I misspoke, I stated auditors but I wasn't specific about his. Pwc, deliotte
and friends are financial auditors meant to provide assurance. But the IRS
auditors are there for tax audits.

It is IRS policy to generally audit fortune 500 companies annually. Usually
they hold an area for the IRS because it makes sense for them to be kept away
from daily operations. A former coworker works in the LMSB dept that handles
these cases.

When the IRS starts printing special forms for you because the lines don't fit
your revenues, you know you've made it lol.

------
Symmetry
Why on Earth do we bother with a corporate income tax at all? Just get rid of
it and bump up capital gains to compensate.

~~~
jamespetersonau
Great question. My understanding was that the (primary) purpose of corprate
income tax is not to directly collect revenue, but rather to encourage
reinvestment by firms in the economy. Increasing CGT would discourage
investment. Can others please enlighten us?

~~~
camz
Well the corporate tax is meant to collect revenue but it's secondary goal is
promote certain activities. Mainly, they want to promote job creation and
increased productivity, which is in theory done through reinvestment.

When you reinvest into equipment, the logic goes that the productivity
increases and new higher paid jobs are created even though the lower end labor
is eliminated or reduced.

Increasing capital gains tax would in effect make everyone accelerate the sale
of their company before the taxes are effective, so it was a mass liquidation
of capital.

But, I don't believe it would discourage investment because people would
simply tax plan around the capital gains tax. A while back, during Reagan and
friends presidency, the personal income tax as well as capital gains tax was
more than 35%. People actually invested more into corporations because the
corporate tax rates were lower (ironically).

~~~
mahyarm
I think as a side effect it encourages companies to use credit as a financial
buffer (single digit interest rate vs. double digit tax rate) vs. savings
since corporate taxes are effectively a tax on corporate savings longer than a
few months to a year.

------
ppereira
With Double Irish slices of bread and Dutch cheese in the middle, the Dutch
Sandwich "leaves no tax behind to taste".

------
mckoss
Our congressional representatives are corrupt, doling out tax breaks to
wealthy corporations, while ordinary people are left to pay high tax rates on
ordinary income. I think Google should be ashamed to be part of this corrupt
system.

It's BS to say that they owe it to their shareholders to try to defraud the
federal government of as much tax revenue as possible. They should instead be
fighting for corporate tax reform and closing loopholes to make a level
playing field and not rewarding "scumbag" corporations.

~~~
mahyarm
It's not fraud, there is no lying involved in this. Your an international
company that gets money from everywhere, your based everywhere, and you have
employees everywhere. Who deserves the bulk of the tax revenue?

Should Toyota pay the majority of it's taxes to the US because they sell a
large amount of cars there, or only the income taxes of their employees in the
US and the profits they receive from car sales in the USA? Should Japan get
the majority of Toyota's tax revenue because they are headquartered there?
Even though the majority of Toyota's income from Japan is minor vs the rest of
the world combined? What incentive would they have other than personal reasons
to stay then vs just use it as a net-loss R&D center and minor manufacturing
plant to avoid tariffs?

These things are significantly more gray than you think.

~~~
mckoss
The highest marginal federal tax rate for corporations is 35%. I think that's
too high. But Google, a US Corporation, who derives most of it's earnings from
it's US operations, is paying but a small fraction of that.

I think in the case of Google, they should at least be paying higher tax rates
on all advertising earnings from US users; it seems to me they are maying
barely 1 tenth of that amount currently.

Just as "selective enforcement" of laws leads to corruption, so too does
gaming the tax system. Large corporations pay legislators to create these tax
loopholes for them.

------
stickfigure
One of the big problems with our overcomplicated tax system is that it creates
these sorts of moral ambiguities. Is person X or corporation Y paying their
fair share of taxes? Only the accountants and (maybe) the IRS have any idea.
So people with a negative view of business can get all riled up and angry, and
people with a positive view of business can get all riled up and angry.

The presence of ambiguities in the system breeds mistrust among the citizenry.
This cannot be healthy for society.

------
ry0ohki
Don't many companies pay nothing? IE if my company earns $100k and I pay out
$100k in salaries and overhead, there is nothing left to tax as all my
expenses were deductible?

Google may pay 2.4% but presumably the money is getting taxed at a higher rate
when it gets to individuals.

~~~
redsymbol
In the first paragraph, yes the tax due would be zero, in general (certain
industries and/or countries could harbor exceptions). The final amount paid is
independent of the tax rate on profits, though: if revenues are offset
completely by expenses, it doesn't matter if the effective rate is 2.4%, 40%
or 90%, it still comes to 0. But you want the former if your company is highly
profitable.

For your second point, I don't know the specifics in this case. But even if
it's just deferring taxes that have to be paid eventually, that can be a huge
win, since it lets you collect interest or store funds for an emergency. There
are probably other financial benefits too though; maybe someone who knows can
comment.

------
magicalist
Isn't that a tax rate of 2.4% on foreign income? Or does "effective tax rate"
mean taxes across all income? If they've only saved "$3.1 billion since 2007"
(to October 2010), it seems like they haven't saved that much (er,
relatively...).

------
ja30278
Actually, no company _really_ pays taxes. Taxes are another cost of doing
business which is passed on to the consumer

~~~
_delirium
Not generally true; companies already attempt to charge the highest rates that
the market can bear, so if they could easily just raise prices, they would've
already raised them _before_ the tax to gain more profits.

In the general case, an increase in costs will come out of some combination
of: 1) increased prices passed onto consumers; 2) decreased wages at the firm;
and 3) decreased profits at the firm. There's no economic law that says
they'll all come out of #1, unless it's _such_ a perfectly-competitive
commodity business that everyone is charging barely above cost for their
services to begin with (not the usual case in Silicon Valley).

Consider the flip side: If all cost reduction were automatically passed on
directly into price cuts, there would be no incentive for companies to trim
costs. But that isn't the case, of course; one reason firms aim to reduce
their costs is that reducing costs while keeping prices fixed is one way to
increase profits. Similarly, increased costs without the ability to raise
prices can reduce profits. In both cases it depends on the surrounding market.

------
VladRussian
and we were laughing at the mobster furious as his 4% percent in "The Firm"!
Ultimately, he happens to be right as paying 4% instead of 2.4% seems to be a
pretty valid reason to be furious...

------
georgieporgie
Just searching "Double Irish" should explain it well enough.

<http://www.google.com/search?q=double+irish>

~~~
camz
I answered this question a while back for an HN member back on the day the
article first hit the web. I have a bunch of questions from members that I've
answered over the last year that I'm unloading onto my website. I figured its
makes more sense economically if I shared my advice openly instead of giving
it to individuals specifically.

The problem with googling this is that it only tells you the basic premise and
fails to tell you the problems and the reality of actually applying these tax
models.

As someone who's worked on these tax models in the past, I can tell you that
its never as picture perfect as they make it sound. These companies are always
getting audited even though these plans were drafted, approved and done by the
"big 4 accounting firms."

It was a running joke that the big 4 plans it and the law firms would defend
it. It was like we were self-generating projects for us to work on by creating
a new "plan" every other year. The IRS always comes back and audits these
clients.

~~~
shareme
its not like it was years ago when CitiCorp set up theri stock trading units
in the Islands for a similar purpose..

~~~
btilly
Citi went farther. They did things like declare a particular desk in a
skyscraper in NY to be legally in the Cayman Islands.

The IRS was not amused.

~~~
ttdi
Do you have a source on this? I'd love to read more about this.

~~~
btilly
I wish I did. I heard about it because I used to work with someone who had
worked there some years previous.

~~~
camz
I'm vaguely aware of Citi's tax plan, but I'd have to look into it. If I can
learn the details, I'll start a series of case studies that break down the tax
strategies of different fortune 500 companies.

~~~
btilly
The incident I was discussing was back in the 90s. It was resolved a long time
ago.

