Double Irish

It sounds like a type of coffee, a stiff drink, or if you run it through Google Image Search, a quilt pattern (above). But it’s not. It’s a tax avoidance scheme — a legal way for American corporations to, in large part, dodge a 35% corporate income tax.  Who uses it?  Google, for one — to the tune of $1 billion a year.  Here’s how it works, using Google as an example. (But don’t think only Google pulls this off — many multinational companies do the same thing.)

First, Google created a wholly-owned subsidiary in Ireland called Google Ireland Holdings (which we’ll call “Ireland-Bermuda”) and then licenses its technology to that subsidiary.  Ireland-Bermuda relocated its headquarters to Bermuda, which makes it a “tax resident” both there and back in Ireland. The Irish government allows this subsidiary to subject itself to Bermuda tax law instead of Ireland’s, which means that the subsidiary pays the Bermuda corporate income tax of 0%.  Ireland-Bermuda is merely a shell employing few people, most of whom are in Bermuda.

Then, Ireland-Bermuda created a business unit — which is not its own corporation, for some arcane tax reason — called Google Ireland Limited (which we’ll call “Ireland-Sales”). Ireland-Bermuda farms out all the work to Ireland-Sales.  Ireland-Sales is based in Ireland both on paper and in practice.  As of October of 2010, Ireland-Sales employs about 2,000 people, and is in charge of operating Google’s businesses throughout Europe, the Middle East, and Africa, including collecting all the ad sales revenue Google makes in those areas.

Each year, Ireland-Sales writes Ireland-Bermuda a big royalties check — monies which Ireland-Bermuda demands for the pleasure of allowing Ireland-Sales to carry out all the work. Ireland-Sales deducts these royalties as an expense, allowing it to come very close to operating without any profits at all, in large part avoiding Ireland’s (relatively low) 12.5% corporate tax rate.

Through this mechanism, Ireland-Bermuda ends up with a huge amount of money, tax free.  Because Ireland has tax treaties with the rest of the European Union, and because Ireland treats Ireland-Bermuda as being a tax resident of both nations, Ireland-Bermuda can fund Google’s other holdings throughout the Eurozone without incurring taxes there — so Google avoids the UK’s 28% corporate income tax, too. (Note that if the money came directly from Bermuda, the EU nations would be able to tax that transfer; the Bermudan corporation needs to also be an Irish one.)

Finally, as the money never enters the United States, the U.S. can’t tax it. Two companies, both Irish, leading to much lower corporate income tax obligations. The net result?  Reportedly, Google pays only 2.4% tax on its non-U.S. income.

Of course, there is a downside for Google here: all of that money is stuck overseas, and can’t be brought into the United States without paying a 35% repatriation tax.  This leads to some silly outcomes.  For example, Google, overall, is worth well over $150 billion and is sitting on as much as $40 billion in cash.  But in April, Google decided to take on some debt, with a $3 billion bond offering. Many believed that Google was simply taking advantage of the low cost of borrowing at the time, but others think that this is part and parcel of Google’s use of the above-described tax dodge — it’s cheaper to issue debt than to repatriate the money collected through the Double Irish.

Bonus fact: Like many companies, Google has a Code of Conduct which employees must abide by.  Unlike most companies, Google’s has a “Dog Policy,” which states: “Google’s affection for our canine friends is an integral facet of our corporate culture. We like cats, but we’re a dog company, so as a general rule we feel cats visiting our offices would be fairly stressed out.”

From the Archives: Google’s Lawn Mowing Goats: Yes, Google uses goats to mow some of their campus’ lawns.

Related: “The Search: How Google and Its Rivals Rewrote the Rules of Business andTransformed Our Culture” by John Battelle. 111 reviews averaging 4.5 stars.