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By Root 548 0

Google pulled the curtain back just a bit on these practices.19 Google is an American-based corporation with earnings all over the world. Its main capital is its intellectual property (IP), specifically its powerful search engine. Under the U.S. tax code, the allocation of Google’s earnings around the world should reflect the reality that its core IP is U.S.-based. Specifically, when a Google foreign subsidiary sells search-engine services to a foreign client, the foreign subsidiary should transfer the bulk of those earnings back to the U.S. headquarters in the form of internal royalty payment for the use of the intellectual property. For allocating incomes among Google’s international operations for U.S. tax purposes, the internal transfers should take place at a royalty rate that mimics an arm’s-length commercial transaction between unrelated firms.

Google instead found friends in the IRS. In 2006, Google and the IRS reached a secret agreement whereby a wholly owned Google subsidiary could keep the revenues and profits abroad. Specifically, Google was allowed to license its IP at a noncommercial rate to a foreign subsidiary called Google Ireland Holdings. Google’s foreign operations pay IP royalties to Google Ireland Holdings, which thereby books almost all of Google’s profits earned in Europe, the Middle East, and Africa. Specifically, Google’s operations for those three regions are headquartered in Dublin in another entity called Google Ireland Ltd. Google Ireland Ltd. takes in around 90 percent of Google’s $12.5 billion in revenues from those markets and then channels the profits to Google Ireland Holdings as royalty payments. The last step of this wonderful chain is that Google Ireland Holdings, despite its name, is based in Bermuda, where it avoids taxation on the billions of dollars of royalties paid to it.

There are many other tax shelters for the super-rich, including the so-called carried interest provisions for hedge fund managers. A typical hedge fund manager receives as compensation a fraction of the assets under management and of the profits earned on the portfolio, for example the standard 2 and 20 rule, meaning 2 percent of assets and 20 percent of profits. Under an obscure IRS rule, the profit earnings are not treated as ordinary income for the manager, taxable at 35 percent, but rather as capital gains, taxable at 15 percent.20 Incredibly, this provision has survived the recent public outcry over Wall Street behavior, a remarkably vivid testament to the power of hedge fund campaign financing to smooth over any inconveniences of noxious tax rules.

We in the public are of course innocents in this remarkable process. How many people aside from the tax lawyers and their clients know of the “Double Irish” tax shelter or many other gimmicks like it? And which advocates of “free markets,” as they hail the technological wonders of Google (an admiration I share), realize that Sergey Brin’s ingenious work in creating Google’s search engine was supported by the National Science Foundation?

Google’s tax dodge exemplifies a vast system of corporate tax havens and tax shelters that operate with the connivance and support of the Internal Revenue Service. A recent report of the Government Accountability Office (GAO) on the subject makes frightening reading.21 Of the 100 largest public traded U.S. corporations, 83 reported operating in tax havens, and often in several simultaneously. A Congressional Research Service study suggested that tens of billions of dollars of revenues are lost per year as a result of shifting corporate profits out of the United States through transfer pricing and similar means.22

Whose Opinion Really Counts?

One of the most interesting insights about money in politics has come from studies examining how congressional votes are linked to the attitudes of constituents. Larry Bartels has studied how the votes of senators align with the survey attitudes of their constituents when divided into high-income, middle-income, and low-income groups. The results are clear, if not totally surprising: