Preston Gralla

Microsoft and Google as one-percenters: Overseas tax dodges net both companies billions

December 11, 2012 10:55 AM EST

Fresh off a presidential campaign in which overseas tax havens and top earners paying little in taxes were big issues comes evidence that both Microsoft and Google use overseas tax dodges to avoid paying billions in taxes to the U.S. and other countries. It's all legal. But it's not all right.

Bloomberg reports that Google has managed to avoid paying approximately $2 billion in taxes to various countries by "by shifting $9.8 billion in revenues into a Bermuda shell company, almost double the total from three years before." Bloomberg reports:

By legally funneling profits from overseas subsidiaries into Bermuda, which doesn't have a corporate income tax, Google cut its overall tax rate almost in half. The amount moved to Bermuda is equivalent to about 80 percent of Google's total pretax profit in 2011.

The techniques that Google uses to avoid paying taxes sound like sexual positions taken from the Kama Sutra or an internationally themed porn movie: the Double Irish and the Dutch Sandwich. Using them, Bloomberg reports, Google was able to pay only 3.2 percent in taxes on its overseas profits, even though most of the company's foreign sales were in countries where tax rates range from 26 percent to 34 percent.

The countries where the taxes are being avoided are not amused, and countries throughout Europe are either investigating, holding hearings, or proposing changes to tax laws.

Microsoft appears to be doing something similar, both overseas and in the U.S. The U.K.-based Telegraph reports that using overseas tax dodges, Microsoft pays no taxes on 1.7 billion Euros of online revenue for purchases of Windows 8 and other Microsoft software. It's managed to do that by funneling the revenues to an Irish and Luxembourg subsidiaries.

Microsoft has come under fire in the U.S. for similar practices. Back in September, Bloomberg reported that a U.S. Senate subcommittee said that Microsoft used similar techniques in the United States to avoid paying at least $6.5 billion in taxes. The memo said that Microsoft used complicated transactions with subsidiaries in Puerto Rico, Ireland, Singapore and Bermuda to avoid paying  taxes.

None of this, by the way, is illegal. But it's still wrong. The companies shouldn't be allowed to use tax dodges and shell games to avoid paying their fair share of taxes. Laws should close the loopholes.

Ironically, both Microsoft and Google pride themselves on their philanthropic arms, and for good reason. Both companies are quite generous with their private giving.

But private donations are no substitute for contributing to the public good. The loopholes that allow Microsoft and Google to avoid paying billions in taxes should be closed. Until then, the companies should immediately stop using the tax dodges. They should even consider doing what Starbucks has done in the U.K.: Voluntarily paying to governments some or all of the taxes they have avoided through the tax schemes.