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Google's headquarters in California. Photograph: David Paul Morris/Getty ImagesUS tax authorities are investigating the strategies used by Google to cut its tax bill by about $1bn (£635m) a year by funnelling profits from the US and Europe to subsidiaries with low tax rates.
The Internal Revenue Service has requested information from Google about its offshore deals following three acquisitions including its purchase of YouTube in 2006, according to Bloomberg.
Sources said it was "bringing more than typical scrutiny" to techniques known as the "Double Irish" and "Dutch Sandwich", which move revenues through units in Ireland, the Netherlands, and Bermuda.
The complex revenue shuffle is legal and is used by countless US multi-nationals. However, the tactic cost the US treasury an estimated $90bn in tax revenues in 2008, according to Kimberly Clausing, an economics professor at Reed College.
Over three years Google is estimated to have saved $3.1bn in tax revenues using a subsidiary located in Bermuda where the corporate tax rate is zero.
A Google spokesperson said there was nothing unusual about the audit. "We are considered a large case company, which means we are under a continuous audit by the IRS so of course they would be reviewing our treatment of all acquisitions."
In 2009, the most recent year for which records are available, the Bermuda subsidiary collected €4.34bn (£3.9bn) in royalties from a Google unit in the Netherlands, according to a Dutch corporate filing.
The search engine giant is using Ireland as a conduit for European revenues but in turn the Irish subsidiary is being charged royalties for its intellectual property – use of the brand and technology such as Google's algorithms.
The 2009 Google Ireland Ltd accounts show the company turned over €7.9bn in Europe for the year ending 2009 and a profit of just €45m after "administrative expenses" of €5.467bn were stripped out.
Administrative expenses largely refer to royalties (or a licence fee) Google pays its Bermuda HQ for the right to operate.
Notes to the accounts show "administrative expenses" rose significantly between 2008 and 2009 – by €794m – because of increases in headcount, sales and marketing and the "royalties paid as a result of increases in recorded turnover".
The IRS has already approved a major part of Google's strategy. In 2006, the agency signed off on a 2003 intracompany transaction that moved foreign rights to its search technology to an Irish subsidiary managed in Bermuda called Google Ireland Holdings.
That deal – known as a "buy in" in tax parlance – meant subsequent profit overseas based on those copyrights has been attributed to foreign subsidiaries rather than to Google in the US where the technology was developed.
A Google spokesperson told the Guardian: "We have an obligation to our shareholders to set up a tax-efficient structure, and our present structure is compliant with the tax rules in all the countries where we operate. We make a very substantial contribution to local and national taxation and provide employment for over a thousand people in the UK. We also generate significant revenues for other companies, and last year gave more than $6bn to our AdSense publisher partners, including newspapers and broadcasters across the world."
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