Google has overhauled its global tax structure and consolidated all of its intellectual property holdings back to the US, signalling the winding down of a tax loophole estimated to have saved American companies hundreds of billions of dollars.
The internet search company said on Tuesday the move was designed to simplify its corporate tax arrangements and was in line with OECD efforts to limit international tax avoidance, as well as recent changes to US and Irish laws.
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Google's actions came ahead of the close of the so-called "double Irish" tax loophole, which has been used by US companies to channel international profits through Ireland and on to tax havens like Bermuda — putting them outside the US tax net. That led American companies to amass more than $1tn offshore as of the end of 2017, when President Donald Trump's tax reform changed the treatment of overseas profits.
Ireland bowed to international pressure five years ago and agreed to close the scheme, which was popular with technology and pharmaceutical businesses, but companies that already used it were given until the end of 2020 to end the practice.
Most companies acted well ahead of that deadline, replacing their double Irish arrangements with new structures that have the same benefits, said Ed Kleinbard, a tax law professor at the University of Southern California, Los Angeles. Google's move was unusual in that it suggested the company had acted later than others, he added.
A lack of disclosure requirements means that little is known about how specific companies have adjusted their tax arrangements, said Chris Sanchirico, a law professor at the University of Pennsylvania.
"Based on what we have been able to see in the past, there is no reason to think that planning [by multinationals] hasn't already evolved several generations beyond the kind of classic double Irish that is now officially coming to an end."
According to a report from the IMF last year, one popular new avoidance arrangement involved companies injecting intellectual property into new subsidiaries in Ireland, known as IP onshoring.
Under double Irish arrangements, companies could place IP like patents and trademarks in separate subsidiaries that were legally based in Ireland, but not treated as domiciled there for tax purposes, as long as they were managed and controlled from abroad. That IP could then eventually be channelled through to tax havens like Bermuda.
Google said by moving its IP from Bermuda to the US it was reacting to changes in US tax law designed to limit the ability of companies to cut their US tax bills by holding intangible assets offshore.
The Trump administration's tax reform, passed two years ago, imposed new taxes on companies' excess profits from IP held overseas, partly to encourage American businesses to bring IP back to the US.
American companies have in the past taken advantage of favourable Irish tax arrangements to shift profits out of the US tax net, even when their IP is held in the US.
Apple, for instance, keeps its IP in the US, but has used a research and development cost-sharing arrangement with a subsidiary in Ireland that allowed it to ascribe a large part of its international profits to that unit. Because the subsidiary was managed from Apple's headquarters in Cupertino those did not fall into the Irish and US tax net at the time.*
The Apple structure had most of the same benefits of the double Irish, which came later, said Mr Kleinbard.
Apple's Irish structure enabled it to defer tax on a large share of its overseas profits indefinitely. The Trump tax reform of 2017 eventually applied a lowered tax rate to foreign retained earnings such as this.
Written by: Richard Waters in San Francisco
© Financial Times