Google's Tax Rate Still Seems Very Low

The search giant's business is booming, but why is it only paying a 19 percent tax rate?

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Google's third quarter earnings report blew analysts predictions out of the water. Revenue nearly grazed the eleven-digit mark at $9.72 billion, a healthy couple hundred million above the $9.45 billion analysts expected. That amounts to 33 percent year-over-year growth, and the good news for shareholders doesn't stop there. Having recently opened to the public Google+ has attracted 40 million users, a healthy bump up from the last report of 25 million in August. Google also added nearly 3,000 jobs worldwide, bringing their total tally up to 31,353. It also now have $42.6 billion in cash. That's roughly equivalent to the nominal GDP of Bulgaria. But one number seems a little bit low: Google's taxes. Last year, Google paid 19 percent in income tax. (Updated below: Bloomberg reports that the IRS is currently auditing Google.)

The debate over corporate income tax has been understandably vibrant this year. As The New York Times reported in May, the United States has one of the highest corporate tax rates in the world. Our top-end rate of 35 percent is second only to Japan, where the rate is nearly 40 percent. But there's a catch:

The paradox of the United States tax code--high rates with a bounty of subsidies, shelters and special breaks--has made American multinationals "world leaders in tax avoidance," according to Edward D. Kleinbard, a professor at the University of Southern California who was head of the Congressional joint committee on taxes. This has profound implications for businesses, the economy and the federal budget.

Google is an American company with a global reach, and on the Q3 2011 earnings call, chief financial officer Patrick Pichette said the rate was "driven by a mix of earnings in domestic and international markets." Indeed, 55 percent of Google's revenue in the third quarter came from outside the United States, and as The Times suggests, the company is able to keep that much of that revenue in tax havens. A report from Bloomberg last October detailed how Google shifted revenues to international subsidiaries, bringing its overall tax rate to 22.2 in 2009. It paid even less this year.

"It's remarkable that Google's effective rate is that low," tax economist and U.S. Treasury Department veteran Martin A. Sullivan told Bloomberg last year. "We know this company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 percent."

Based on the initial earnings report, it would appear that Google is continuing to bring that tax rate down. This comes at the same time that  a consortium of companies, including Google, are employing an army of lobbyists in Washington to promote the idea of a tax holiday that would provide a $78.7 billion tax break for multi-national corporations. They say that the break would boost revenue and create jobs, but critics have some serious doubts. They point to a similar plan passed by Congress in 2004 that produced mixed results and suggested that multi-national corporations don't have a strong incentive to hire more people in the United States, when it has the option of lower wages in other countries. In the report, Google didn't specify any granular details about where it added jobs, but that information will likely come out in the coming days.

In the meantime, everybody agrees: Google's growth is pretty impressive. To borrow a cheesy phrase from the financial blog 24/7 Wall Street, it's kicking "assets".

Update: According to Bloomberg's sources, Google is currently being audited. Jesse Drucker reports:

The U.S. Internal Revenue Service is auditing how Google Inc. (GOOG) avoided federal income taxes by shifting profit into offshore subsidiaries, according to a person with knowledge of the matter.

The agency is bringing more than typical scrutiny to how the company valued software rights and other intellectual property it licensed abroad, said the person, who requested anonymity because the audit isn’t public. The IRS has requested information from Google about its offshore deals after three acquisitions, including its $1.65 billion purchase of YouTube, the person said. 

This article is from the archive of our partner The Wire.