Google’s 2.4% Effective Tax Rate is Deceptive.
In order for the plan to be of any use to you, you need to consider the following:
- The money must stay out of the United States. If the money were to re-enter the US, then you would be repatriating the income and it would be taxed under US corporate and personal income tax.
- You should have enough income to maintain your lifestyle within the US or you’d have to distribute enough income from international sources. The alternative would be for you to live overseas for a majority of your time.
- You should be comfortable with having your assets held in a foreign country.
Google’s effective tax rate as reported by Bloomberg is 2.4% and everyone has been clamoring about (1) that it’s unethical, (2) Google is evil and (3) how do I do that? I recently made an offer to provide tax help to startup entrepreneurs and a surprisingly number of people wanted to implement the Double Irish or the Dutch Sandwich tax plan. I love how they get these sexy names from the newspapers.
I’m here to burst your bubble. You won’t be getting any sandwiches or doubling down anything.
(1) How long do you think it would take to plan and implement a $3.1 billion dollar tax savings plan across 3 foreign sovereign nations (Ireland, Netherland, and Bermuda) mentioned in the Bloomberg article?
It isn’t unreasonable to assume that it would take two to three years to implement such a complicated tax plan. It generally took six months in my experience with corporate America to gather enough information to extract the facts necessary to begin researching the tax implications; this is assuming that everything went swimmingly – unrealistic. (Picture your box of receipts and the sad excuse you call your “books” in QuickBooks that you never update and extrapolate that to a goggle and you’ll understand why. Accounting is a back office function to a business that is always an afterthought).
Then, add the time it takes for you to negotiate private letter rulings (PLR) and advanced pricing agreements (APA) with the IRS. Historically, it would take 4 to 6 months per request. (I will let you assume how often the first try is going to be a winner) Why would you explain your grand tax scheme to the IRS? Because, are you going to be the one who takes responsibility for a $9.3 billion dollar gamble? (After penalties and interest, the rule of thumb is to multiply your tax due by 3 and you’d get an idea of how screwed you are)
PLRs and APAs are guaranties that the IRS gives to taxpayers. If they say that your transaction is okay, then you’re safe because the auditors must honor the PLR and APA. But, the IRS withholds the right to recant retroactively the PLR and APA if they feel that the facts and circumstances have “changed.”
(2) How much do you think it cost Google to implement said plan?
The professional fees Google, Microsoft and Forest Laboratories paid to major accounting and white shoe law firms must’ve been at least 20 million starting as a very very conservative estimate. If I really cared I could’ve gone through the financial statements and dug up the information roughly, but I don’t have that kind of free time.
You may be asking yourself why seek out Ernst & Young, Deliotte & Touché, PwC, or KPMG? You must consider the risk in the United States as well as internationally. How are you going to find and trust a foreign professional services provider? They could be a charlatan in sheep’s clothing. Thus, you’d need a major accounting firm with an international presence for your own peace of mind. But, peace of mind comes at a hefty price.
Also, PLRs are 14k a pop ($625 if your making less than 250k) and APAs are 25k a pop. Google has an entire family of corporations that fold into the parent company and each will need its own PLR and APA. (Note, if the PLR is exactly the same for entity then its 2k a pop)
Disclaimers, if the IRS thinks your letter is stupid, frivolous, or is a transaction they’re just unwilling to speak about like listed transactions, then you lose your money with no questions asked. You’re paying for their review of your situation, not a conclusion. Also, you must renew your APA agreements – yay!
(3) How sure are you that said plan is going to work? Remember everything is fine and dandy till you get audited.
Lastly, you can be sure that implementing such an aggressive tax plan will not go unnoticed for long. When the IRS begins to audit your books and records that leads to additional fees to the accountants and lawyers. But, more importantly, there’s always the chance that you may lose the audit and be assessed the tax you thought you saved. (Win or lose you’ve now become a top 10 favorite on the IRS must audit list) Nothing is guaranteed and I’ve seen enough tax plans and audits to know that even the best laid plans is for naught when you get punched in the face.
Conclusion.
You probably can’t afford to implement the Google tax plan and it’s not as cut and dry as you were lead to believe. You’d have to invest millions in professional fees and years in time to finally taste the unguaranteed fruits of your labor.
But…
That doesn’t mean that you can’t utilize a different tax plan. =)