How about a Double Irish?
Research for Online Investors

by John Dalt

10/25/10

We wrote last summer about investor confidence in the economy.  Investors felt uncertain about future changes to tax law, cap and trade, and health care legislation.  The President has bashed U.S. companies that move operations overseas and do not pay the U.S. corporate tax rate of 35% on all their earnings.

Bloomberg broke the story that Google pays an effective tax rate of 2.4% on overseas earnings by employing the “Double Irish” or “Dutch Sandwich” tax strategy.  What is the Double Irish, if not a drink?  A company transfers income to low tax countries and expenses to high tax countries.  How do they do it?

In Google’s case they transferred intellectual property for their search engine and advertising technology (that was developed in the U.S.) to an subsidiary called Google Ireland Holdings.  Google Ireland Holdings owns the rights for Europe, the Middle East and Africa.  This allows non U.S. profits from the technology go to the Irish operating company.

The interesting part is that Google Ireland Holdings is based in Bermuda.   Bermuda has no corporate income taxes.  The Bermuda Company licenses the use of its technology to a subsidiary that is actually located in Ireland.  The Ireland office employs almost 2,000 people in Dublin and collected almost 88% of Google’s $12.5 billion in foreign income.  The Dublin office then remitted $5.4 billion to the Bermuda office in licensing fees.

The Irish Times tells us that fees to Bermuda had to go through an office in the Netherlands first.  This takes advantage of an EU tax loophole that exempts royalties to companies in other EU countries.

The Amsterdam office lists no employees and the Bermuda office list two attorneys and a manager at a local law firm.  Bottom line, Google produces $12.5 billion in sales, $5.4 billion in profits, with very little tax consequences.  Of course they pay the salaries of 2,000 people in Ireland rather than the U.S., and more than a few tax attorneys and accountants.

Once the money is in Bermuda, the company is somewhat stranded.  The money cannot be brought back to the U.S. without paying corporate taxes on it.  The taxes on it are ‘deferred’ until that time.  This creates an incentive for the company to hire more overseas employees.  Our tax laws and high rates directly encourage overseas investment for our largest companies.  They are able to afford the tax strategies required to shield their income from U.S. taxes.

It is always interesting to see the biggest world improvers taking advantage of loopholes that run counter to their public comments.  Google’s stated mantra of “Do no Evil” seems to fall aside when it comes to paying taxes.  Eric Schmidt, Google CEO, has been one of Obama’s biggest supporters.  We wonder what he thinks of the President’s attacks on U.S. companies that move operations overseas to avoid U.S. taxes.

Google’s actions to avoid taxes wouldn’t be the first time we have seen the emperor acting differently than his public comments.  Who can forget Bono lambasting Bush for more aid to the world’s poor, while he moved his tax domicile to Ireland from Britain, thereby avoiding the very taxes that support aid.  President Bill Clinton famously itemized his used underwear in order to take an itemized charitable deduction.  Vice-President Biden loves to give money away, as long as it is from some other pocket.  According to USA Today, he averaged $369 per year for the ten years before being elected Vice-President.

To the mailbox:
Hey John, You know how there is honk your horn day etc., why don't we declare Nov. 2nd, "National Flush Your Toilet Day". Dare you to print it.---paid up subscriber D.F.

John’s reply:  Is that a double dog dare?

Did you see that GE is moving a refrigerator assembly plant back to Indiana?  Wouldn’t it be good news if plants started moving back to the U.S. and used non-union labor?---paid up subscriber J.P.

John’s reply:  Yes it would, but more likely they will move to Singapore, Korea or Vietnam.  It is important to let money flow where it is treated best.  Money is not treated well in the U.S.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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