Bermuda is Google’s new Tax Haven

US tech giant Google moved some $23 billion in profits to a Bermuda tax haven in 2017, an increase of $4bn from 2016, newly released filings reveal. Google has exploited the loophole in the EU tax system for years.

Background

A tax haven is a country that offers foreign individuals and businesses little or no tax liability in a politically and economically static environment. Tax havens also share limited or no financial information with foreign tax authorities. Tax havens do not require residency or business presence for individuals and businesses to benefit from their tax policies.

Due to the globalization of business operations, an increasing number of U.S. corporations, including Microsoft, Apple and Alphabet (Google’s Parent Company), are keeping cash in offshore tax havens to minimize corporate taxes.

Bermuda is a British Overseas Territory in the North Atlantic Ocean. Its population is approximately 64,000, the joint-highest of the British Overseas Territories along with the Cayman Islands. Bermuda's two largest economic sectors are offshore insurance and reinsurance, and tourism.

Analysis

Google has used a Dutch shell company, called Google Netherlands Holdings BV, to shift billions of dollars to its another affiliate, Google Ireland Holdings, based in Bermuda, for years, to avoid being subjected to much higher US and European income taxes.

The documents, filed by Google at the Dutch Chamber of Commerce on December 21, revealed that the Alphabet – owned company routed $22.7 billion through its Dutch company and on to a notorious offshore. The same documents show that Google paid some $3.4mn in taxes in the Netherlands that year.

The scheme, popular with many international tech conglomerates, such as Apple and Microsoft, is known as 'Double Irish With A Dutch Sandwich' and typically involves two Irish companies and one registered in the Netherlands.

Taking advantage of low Irish corporate tax rate (just 12.5 per cent compared to 21 per cent in the US), a big chunk of Google's profits are transferred to an Irish affiliate as royalties and then moved to a Dutch subsidiary. The funds then go to a second Irish company, a shell paying taxes in Bermuda, which has zero corporate tax rate. The scheme has allowed Google to slash its overseas tax bill by billions as it has now diverted profits offshore for more than a decade.

Google's and other tech firms' tax avoidance strategy, although technically legal, has long drawn anger from US and EU lawmakers, who eventually pressured Ireland to abolish the controversial arrangement starting 2015. However, big tech companies, Google included, were given a grace period up to January 2020 to prepare for a smooth exit.

Google insists its way of handling its finances is in line with the law and hence perfectly normal, as it brushed off criticism in a statement on Thursday. "We pay all of the taxes due and comply with the tax laws in every country we operate in around the world," it said, noting that the company has "paid a global effective tax rate of 26 per cent over the last 10 years."

The company seems to be far from apologetic about its extensive use of the scheme.

Countries like the UK and France, that lack millions of dollars in taxes due to the loophole, have been challenging the scheme with a wide-ranging crackdown on tax-avoiding Big Tech.

The UK is set to introduce a so-called 'Google tax' in 2020.  Chancellor Philip Hammond announced in October that The Digital Services Tax (DST) would impose a 2 per cent levy to revenues from the activities of the UK users of search engines, social media, and online platforms.

A Europe-wide tax of similar nature is being pushed by France while facing predictable opposition from Ireland and several other EU member-states. Getting ahead of the field, France has introduced its own GAFA tax named after Google, Apple, Facebook and Amazon in January in hopes to raise €500 million ($572 million) with levies.

Assessment

Our assessment is that Google is using a “legal loophole” in the EU tax code to shift as much revenue streams from Europe to the tax Haven Bermuda. We believe that this is not the first time Google has done this and we also feel that as international business operations become more complex, companies like Google will keep finding innovative ways to ‘legally’ evade taxes.