Friday, July 23, 2021

Google, Bermuda, and Effective Tax Rates

In its 2020 annual report Google noted that:

As of December 31, 2019, we have simplified our corporate legal entity structure and now license intellectual property from the U.S. that was previously licensed from Bermuda resulting in an increase in the portion of our income earned in the U.S.

As a result of this change, royalty payments from Ireland which previous ended up in Bermuda, via The Netherlands, now flow directly to the United States. Here we will assess the impact the structure had on Google’s taxes over its entire duration from 2003 to 2019.

Google Foreign Domestic and Tax 2003-2019

Over the full period, Google had an effective tax rate of 21.8 per cent.  The contributions to this were a foreign tax rate of 7.1 per cent and a domestic, i.e. US, tax rate of 39.8 per cent.

Much attention has been given to Google’s foreign tax rate, particularly those of 2005 to 2011 which averaged just 2.3 per cent.  This was primarily the result of a large share of Google’s foreign profit being reported in Bermuda, which, of course, does not have a corporate income tax.

However, the full picture requires the assessments to incorporate Google’s domestic, i.e. US, and then overall tax rates.  From 2005 to 2011, when its effective foreign tax rate averaged 2.3 per cent, Google’s overall effective tax rate averaged 24.7 per cent.

The domestic tax rate for 2017 is also notable. At 120 per cent the domestic tax charge for the year exceeded domestic pre-tax income.  This is because it included the US tax due under the “deemed repatriation tax”.  This is domestic US tax but is due on foreign profit.  As the company set out in its 2018 10K report:

The Tax Act requires us to pay U.S. income taxes on accumulated foreign subsidiary earnings not previously subject to U.S. income tax at a rate of 15.5% to the extent of foreign cash and certain other net current assets and 8% on the remaining earnings. We recorded a provisional amount for our one-time transitional tax liability and income tax expense of $10.2 billion.

Over the period 2003 to 2017 Google had a domestic tax rate of 49 per cent.  This is not because the US had corporate tax rates as high as that but because included in domestic taxes are the US taxes due on foreign profits, most notably the profits Google reported in Bermuda.

It is a numerator/denominator issue.  A focus on foreign income and foreign taxes omits the domestic, that is US, tax paid on those profits.  The effective tax rate on Google’s foreign profits was not the 2.3 per cent implied by the effective foreign tax rate.  Indeed the lower Google, and similar MNCs can get their foreign tax rate, the higher their domestic tax rate will be.  And, from 2003 to 2017, nearly 90 per cent of Google’s income tax charge was for US taxes.

The above table also illustrates the impact of the Tax Cuts and Jobs Act which came into effect from the start of 2018.  For the years shown, Google’s lowest domestic and overall effective tax rates arose in 2018 and 2019.  As a result of the TCJA, Google’s overall effective tax rate, which in aggregate terms was 25.8 per cent from 2003 to 2017, was reduced to 12.7 per cent when 2018 and 2019 are combined.

And finally a table from Google’s most recent 10K report which shows the impact of the company its licensing arrangements in Bermuda:

Google 10K 2020 Domestic Foreign Income

For 2020 there was a large rise in Google’s pre-tax income that was attributed to domestic operations and a commensurate fall in pre-tax income attributed to foreign operations.  Google’s profit is now being reported where most of it is generated: in the US. And because of the TCJA Google will have a lower overall effective tax rate than when it is was shifting tens of billions of profit to Bermuda.

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