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Google (NASDAQ:GOOG) parent Alphabet has declared in tax filings that it plans to abandon the use of a controversial, but legal, tax scheme that enabled the company to substantially reduce its US tax bill.
In tax filings first reported on by Reuters, the company said that it did not use the Double Irish, Dutch Sandwich scheme for its 2018 tax year. Google’s loophole “termination will take place as of 31 December 2019 or during 2020.”
“In line with the OECD’s BEPS [Base erosion and profit shifting] conclusions and changes to US and Irish tax laws, we’re now simplifying our corporate structure and will license our IP from the US, not Bermuda," a Google spokesperson has been quoted as saying. "Including all annual and one-time income taxes over the past ten years, our global effective tax rate has been over 23%, with more than 80% of that tax due in the US.”
The “Double Irish With A Dutch Sandwich” is one of the more common tax schemes used by large tech companies like Google. The scheme involves transferring IP to an Irish-registered company in Bermuda, then licensing it to a Dutch company, sublicensing it to an Irish company, then sending the royalties (profit from the IP) back to the Dutch company. A chart below explains the process:
According to reports, Google saved itself nearly $3.3 billion in tax in 2016 by transferring approximately $17 billion out of Europe via the Netherlands to an Irish-registered Bermuda shell company. According to Reuters, the company moved $23 billion to Bermuda in 2017 alone using this tax avoidance strategy. Due to pressure from the EU, the Irish government closed the tax loopholes “Double Irish” tax arrangements in 2015. However, companies already using the structure are allowed to continue using it until the end of 2020.
In response to the widespread use of such schemes, the French government announced earlier this year that it plans to place a tax on all digital services sold in the country at 3%. This tax is unique because it taxes large tech companies' local revenues -- and not profits. Britain, Spain, Austria, Canada, Denmark, and Portugal have also announced that they will be implementing a similar tax structure in the coming years according to a report by The New York Times.
In response, the White House announced that it would consider placing duties of up to 100% on French goods as the tax is "unusually burdensome" for US technology companies.