The Tax Haven That's Saving Google Billions

OK, so what does all this have to do with Google? Well the problem is that such companies are welcomed when they set up overseas, and great expectations accompany them. And in the short term, there seems to be a distinct increase in prosperity - but people tend to extrapolate the growth trend endlessly into the future, and spend the money almost as fast as they make it. When the inevitable inflation ensues, they tend to feel they got a bad deal and go protectionist or sometimes enact draconian new tax policies. Oh, and the Irish government is also in bad odor with other European countries, who have felt for a while that the country took advantage of its small size to get away with significantly undercutting its neighbors on corporate taxes during the good times, leaving a correspondingly deep fiscal hole now.

Back in California, people look at the overseas investment made by the multinational and conclude that if the expansion actually cost the firm a lot less than imagined, then the favorable domestic tax treatment of the overseas operations (an indirect export subsidy, in effect) essentially amounted to the US taxpayer bankrolling their overseas expansion without any of the benefits coming back to the US Treasury later. But isn't that good for overall US competitiveness? Maybe, but who was Google (or Yahoo, or...) competing with internationally when it set up shop in Europe - Baidu? I can't even name a UK or Euro search competitor of any significance off the top of my head.

So it's not obvious what US taxpayers gained by letting Google out of paying US taxes on Euro/Eastern Hemisphere operations. Sure, Google expanded its operations and brand, and indirectly the economic reach of the USA, but as they were also getting a sweet legal/taxation regime at the other end - much lower than the headline 12.5% corporate tax rate in Ireland - then it seems as if the vast bulk of the benefits went to Google. OK, they have to pay tax somewhere, but Bermuda, like most tax havens, is such a small country that even a tiny slice in 'fees' is a huge feast. Again, like most tax havens, Bermuda's actual contribution to the global economy is almost nil; about the only argument you can make in their favor is that they contribute to increased liquidity.

There's a worthy philosophical debate here about the ultimate economic value of exporting low tax rates. But in the short term, the pragmatic result is that governments of more developed countries feel scammed, because they obeyed the popular wish of investing in things like infrastructure and education in hope of a long-term payoff, and now that they find themselves distinctly short of cash it's hard to explain why the payoff has failed to materialize (or why they didn't manage it very well, when it did). Of course, there's a little bit of hypocrisy going on here - well, actually a lot. Governments are often getting sweetheart deals on the back end; this arguably represents a transfer of wealth from the US to the populations of other countries, even if only in terms of lost wages for jobs that are not location-specific.

As neither the US nor the Irish or Dutch treasuries saw a great direct benefit, routing all the money through Bermuda has the political (not legal) appearance of a money-laundering operation. Particularly in Ireland, where people paying 20-40% in personal income taxes and almost 20% in VAT (sales taxes) are wondering what is the point of having one of the world's lowest rates of corporate tax (12.5%) if the government doesn't even collect most of it from large foreign firms. This is exactly the sort of thing that tends to give people the idea that it might be better to just have their treasury own shares in the company instead, a strategy employed with varying degrees of success in places like Venezuela and France.

I want to make it clear that I personally don't subscribe to the idea of state-owned industry or the idea that you can tax your way to economic success. There are reasons Europe doesn't produce the kind of industrial giants the US does, and why the European software industry is much less competitive than that in the US - they're not all to do with heavy-handed industrial/tax policy or regulation, mind, but those things do play a big part.

But when there is a good deal on offer (such as Ireland's low corporate tax rates, much cited in the US during recent years), the short-term tax savings of trying to further minimize tax liability have to be weighed against the long-term skepticism that manifests at the bottom of a business/economic cycle. Google is a smart company and may decide it has an interest in writing a $500m check or so to the Irish government now, rather than risk being frozen out of the European market in the future by penal regulation or hit with fines from the EU's muscular competition commission. Possibly the US government too, rather than being subjected to excruciating Congressional hearings. At the very least, they are probably going to have to give up using the 'double Irish' method of moving their money around. Bermuda will have to sit through some chilly diplomatic meetings and make some concessions about the transparency of its financial reporting or the accounting standards it uses, as have other tax havens of yore such as Jersey, Monaco and so on.

To sum up, I agree with George that from a legal (and short-term economic) point of view, running profits through Dublin and then putting them through some quirky Dutch-Bermudan slimming diet before running them back through Dublin is an entirely rational course of action. And it may well be a superior moral course of action, if you consider that Google contributes significantly towards the common good by making a wide variety of high-quality services available to the public for nothing - services on which large chunks of the US economy have come to depend, and I include myself in that. I honestly can't think of another company that makes such a generous value proposition, and don't find the price of personally-targeted advertising very onerous.

But from a political point of view, the practice is unsustainable and deeply unwise. Entrepreneurs and fiscal/transactional engineers are a small minority of the population. Some chunk of the population leans left and thinks corporations should be taxed much, much more severely, because the infrastructural foundation of their business model was heavily subsidized by the public. Another chunk leans right and while not being in favor of taxes much, sees no reason why the US taxpayer should be indirectly subsidizing people in other countries like Bermuda or Ireland. Then you have centrist voters who may not understand or care much about the details but are worried about US jobs going abroad, a rising deficit, and can grasp the basic idea that Google is using a legal fiction to reduce tax liability. Go there's a good chance that Google is going to find itself being the national punching bag for the next week or three.