Senate Investigates Google Tax Avoidance, Exposes 2.4% Foreign Tax Rate

On May 21, 2013, the Senate Permanent Subcommittee on Investigations held hearings examining multinational corporation tax avoidance, with Google as a primary focus. The investigation exposed that Google paid only a 2.4% tax rate on foreign profits—avoiding approximately $2 billion annually in taxes through offshore structures—yet the company faced no penalties and successfully lobbied to prevent legislative reform.

The Senate Investigation

Chairman Carl Levin (D-MI) and Ranking Member John McCain (R-AZ) led the Subcommittee’s investigation into corporate offshore tax avoidance, focusing on tech companies including Google, Apple, and Microsoft.

Key Findings on Google

Effective tax rate: 2.4% on $21 billion in foreign profits Tax avoidance: ~$2 billion per year in avoided US and foreign taxes Structure: Double Irish Dutch Sandwich routing through Ireland, Netherlands, Bermuda IP manipulation: Transferred valuable intellectual property to tax havens at artificially low prices Shell companies: Minimal substance entities in Netherlands and Bermuda purely for tax avoidance

Chairman Levin’s Statement

“The resulting loss of revenue is one significant cause of the budget deficit and adds to the tax burden that ordinary Americans bear. When major corporations shift their profits overseas to avoid U.S. taxes, everyday Americans end up paying higher taxes and bearing more of the burden to support our police, our courts, our military, and all the other functions of government.”

The investigation detailed how Google’s $2 billion in annual avoided taxes represented funds that would have supported schools, infrastructure, defense, and other public services—instead becoming shareholder profits.

Eric Schmidt’s “Proudly Capitalistic” Defense

Google Chairman Eric Schmidt appeared at congressional hearings and gave media interviews defending the company’s tax avoidance:

To Bloomberg: “We are proudly capitalistic. I’m not confused about this.”

To BBC News: Schmidt said he was “perplexed” by debate over Google’s tax contributions, stating “I view taxes as not optional” while simultaneously defending structures designed to minimize taxes.

To Senate: Google maintained it “complies with tax law” in all jurisdictions—technically true but ethically hollow, as the structures existed solely to exploit legal loopholes.

The Arrogance

Schmidt’s “very proud” statement exemplified Silicon Valley’s attitude toward tax avoidance:

• No shame about avoiding societal obligations
• Characterizing tax avoidance as “capitalism” rather than free-riding
• Claiming legality as moral justification
• Dismissing concerns about societal harm

For a company promising to “do no evil,” public pride in tax avoidance revealed the hollowness of ethical rhetoric.

The Investigation’s Detailed Findings

The Subcommittee’s report documented Google’s tax avoidance mechanisms:

Transfer Pricing Manipulation

Setup: Google “sold” non-US intellectual property rights to Bermuda subsidiary (Google Ireland Holdings) at artificially low price

Effect: Minimal US taxes on transfer, massive royalty payments to Bermuda accumulating tax-free

IRS failure: Agency didn’t challenge undervalued IP transfer despite obvious tax avoidance motive

Cost-Sharing Arrangements

Claim: Foreign subsidiaries bore portion of R&D costs, justifying IP ownership

Reality: Most R&D occurred in US with US-employed engineers, but costs were allocated to offshore entities to justify profit shifting

Result: US taxpayers funded research (through educated workforce, infrastructure) while profits accrued offshore

Check-the-Box Gaming

Loophole: IRS “check-the-box” rules allowed Google to treat foreign subsidiaries as branches for US tax purposes while entities in foreign jurisdictions

Effect: Payments between entities weren’t taxable in US, enabling profit shifting without tax consequences

Scale: Critical to Double Irish structure functioning

The Numbers

The Senate investigation quantified Google’s tax avoidance:

2008-2010 period:

• Foreign profits: ~$21 billion
• Taxes paid: ~$500 million
• Effective rate: 2.4%
• If paid at standard rate (35%): Would owe ~$7.3 billion
• Avoided taxes: ~$6.8 billion over 3 years

Projection: At 2013 rates, Google avoided ~$2 billion annually

Lost revenue 2003-2013: Estimated $20+ billion in cumulative avoided taxes

UK Parliamentary Hearings (May 2013)

Concurrent with US Senate investigation, UK Public Accounts Committee also investigated Google:

Margaret Hodge (Committee Chair) accused Google of being “calculated and unethical” over its UK tax avoidance, where the company paid only £6 million in tax on £395 million in UK sales.

Matt Brittin (Google VP Europe) defended practices but couldn’t explain why UK operations showed minimal profits despite massive UK revenues.

Finding: Google routed UK revenues through Ireland to avoid UK taxes, despite substantial UK operations.

Congressional Inaction

Despite bipartisan investigation exposing massive tax avoidance, Congress failed to act:

No legislation passed closing loopholes No penalties imposed on Google No enforcement actions by Treasury/IRS Business as usual: Google continued same practices 7 more years

Why Reform Failed

Multiple factors prevented legislative response:

Tech industry lobbying: Google and peers spent tens of millions lobbying against tax reform Corporate campaign contributions: Both parties received substantial tech industry donations Complexity: Tax loopholes too technical for public pressure International coordination required: US couldn’t fix problem alone (required Ireland, Netherlands, etc. cooperation) Budget politics: Tax reform became partisan issue preventing bipartisan action

Other Companies Examined

The investigation also examined:

Apple: Even more aggressive tax avoidance through Irish structures Microsoft: Similar offshore profit shifting Hewlett-Packard: Complex international tax structures

Combined avoidance: Tech industry avoided tens of billions annually in US taxes

The Broader Pattern

Senate investigation documented that:

Fortune 500 companies held ~$1.9 trillion offshore to avoid US taxes Tax havens enabled corporations to avoid $150-200 billion annually in US taxes Race to bottom: Countries competed to offer lowest taxes, eroding global tax base Ordinary Americans paid: Corporate tax avoidance shifted burden to individuals and small businesses

Google’s Lobbying to Prevent Reform

Following the investigation, Google intensified lobbying:

2013: $14.06 million spent on federal lobbying 2014-2015: Continued multi-million dollar lobbying expenditures Focus: Preventing international tax reform, opposing country-by-country reporting Success: No significant reform enacted until 2017 Trump tax bill (which actually reduced corporate taxes further)

The Public Relations Problem

The Senate hearings created temporary public relations crisis for Google:

Media coverage: Widespread reporting on Google’s tax avoidance Public opinion: Surveys showed public opposed corporate tax dodging “Don’t be evil” mockery: Critics highlighted hypocrisy of ethical motto vs. tax avoidance

Google’s response: Increased PR spending, emphasized job creation, claimed tax compliance

Long-Term Ineffectiveness

The Senate investigation, despite thorough documentation, failed to produce meaningful reform:

2013-2019: Google continued Double Irish structure 2020: Structure closed only due to Ireland’s policy change, not US enforcement 2020+: Google shifted to new tax avoidance structures

The investigation proved that exposure without enforcement doesn’t stop corporate tax avoidance.

Significance

The 2013 Senate investigation demonstrated:

Congressional oversight is insufficient: Detailed investigation changed nothing Corporate lobbying defeats reform: Despite bipartisan concern, industry blocked legislation Tax avoidance goes unpunished: No penalties despite exposing $20+ billion avoidance Ordinary Americans bear burden: Corporate tax avoidance shifts obligations to individuals International coordination required: Unilateral reform impossible

The hearing’s failure to produce reform showed that corporate political power had reached levels where even documented, large-scale tax avoidance could occur with impunity—demonstrating the need for international coordination (OECD BEPS) and potentially more aggressive unilateral action to ensure corporations contribute their fair share to societies they profit from.

Senator Levin’s investigation provided crucial documentation of tech industry tax avoidance, but without enforcement mechanisms, transparency alone proved insufficient to restore tax justice.