Skeptics who disbelieve
Google
's(Nasdaq:
GOOG
) "don't be evil" mantra recently gained fresh fuel for their
doubts: On its international revenue, the company has been enjoying
a 2.4% tax rate. (Overall, Google pays an effective rate around
22%.) But Google isn't being evil by paying so little in taxes;
it's simply capitalizing on the international tax system.
Like many companies with global revenue, Google's moving money
around in ways that cut down its tax bill.
Bloomberg BusinessWeek
recently traced the profitable path: The company routes much of its
foreign revenue through Ireland first, where the corporate tax rate
is 12.5%. But since the money doesn't stay there long, that rate
doesn't fully apply. The money is headed for Bermuda, which sports
a corporate tax rate of … 0%, making a necessary stop in the
accommodating nation of the Netherlands, where it passes through a
Google subsidiary there (with no employees).
An ethical dilemma
That all may sound rather outrageous, but it's all legal. You can
argue that Google shouldn't sidestep paying U.S. taxes, but by the
same token, it also owes an obligation to its shareholders to
maximize profits in any legal way possible. From that perspective,
Google isn't flawed; the system is.
According to a 2009 government study, 83 of the 100 biggest U.S.
companies have a presence in countries considered to be
international tax havens. One single address in the Cayman Islands
is home to more than 18,000 corporations. Clearly, Google is not
alone.
Citigroup
(NYSE:
C
) reportedly had 427 tax haven subsidiaries in 2007, while
Boeing
(NYSE:
BA
) had 38. These companies' tax tactics may be distasteful, but
they're
serving their shareholders
.
Profitable fixes
Faced with piles of lost revenue, the government has proposed
closing many of these loopholes. According to a 2009 White House
release, "In 2004, the most recent year for which data is
available, U.S. multinational corporations paid about $16 billion
of U.S. tax on approximately $700 billion of foreign active
earnings -- an effective U.S. tax rate of about 2.3%."
Various proposals may save $200 billion or more over the coming
decade, but business is fighting back. The Business Software
Alliance, a lobbying group that includes
Cisco Systems
(Nasdaq:
CSCO
) and
Intel
(Nasdaq:
INTC
) among its members, is arguing against proposed reforms.
It hurts me to say this, but it's hard to fault companies for
taking advantage of existing loopholes. However, doing so does cost
the nation, and taxpayers, an estimated $60 billion annually. If
the government wants that money back, it needs to close those
loopholes.
Let us know your thoughts on the matter by leaving a comment
below.
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