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Google runs into tax trouble in India, fined $14.5mn [Dutch Sandwich]

In India Online by Jayadevan P K

Search giant Google’s troubles with tax authorities aren’t limited to Europe where officials are questioning the company’s executives for alleged tax evasion or the US, where it came under criticism for shaving off $3.1 billion from its tax bill over 3 years between 2007- 2009. In India, the tax department has slapped Rs 76 crore (~$15mn) penalty on the company [via].

Google India has misled the authorities, said the tax department which was assessing Google’s tax liabilities for the year 2008-09. According to the penalty order cited in the Economic Times report,

The entire activity of (Google’s) AdWords Programme and the revenue earned thereon has happened in India with both the advertisers as well people making use of the advertisements situated in India. To this extent, the income of M/s Google Ireland Ltd was held to be accrued as well as arisen in India itself.

In Britain, top executives of Google, Amazon and Starbucks were grilled by Members of Parliament over allegations of tax evasion today . Google executives were accused of being “deliberately evasive” when asked about the company’s profits at a high decibel session orchestrated by the House of Commons Public Accounts Committee. Google has faced similar allegations in the US as well.

Double Irish and Dutch Sandwich

Companies like Google employ methods called the “double Irish” or the “Dutch Sandwich” to minimize tax liabilities. In 2010, Google reduced its taxes by $3.1 billion by moving profits through Ireland and Netherlands to Bermuda which is a tax haven.

How does it work?

A report published by Bloomberg explains how Google operates to cut taxes. Essentially, it involves setting up an office in Ireland and selling advertising outside of US through the subsidiary. The tax department in India has alleged that it has transferred an amount of Rs 119.83 cr to Google Ireland without deducting tax at source as required by treaties between India and Ireland. Once the money reaches Ireland, Irish tax laws come into effect (effective taxes are lower in Ireland). But then, the Ireland subsidiary pays out “royalties” to Google Ireland Holdings based in Bermuda.

The Bermuda entity is held by two Irish companies, one of which generates expenses which the other pays. The money is collected in Bermuda, by the other company. It goes through Netherlands, where Irish laws exempt royalties to other EU member nations.

Does Google need to publish a transparency report for its operations in different geographies?