How Google Became One of America’s Biggest Tax Dodgers

Yesterday San Francisco’s politicians announced that Google, Apple, and other Silicon Valley companies will be charged for the use of the city’s bus stops. Until yesterday the private buses, untold numbers of them, entered the city each morning to pick up thousands workers headed for corporate campuses in San Mateo and Santa Clara counties to the south. Each evening they return to drop employees off, and while they clog city streets and impede the movement of the city’s public buses, the companies haven’t been made to pay a dime for using taxpayer infrastructure.

Private tech company buses are arguably the most conspicuous symbol of inequality and displacement that is tearing California’s Bay Area apart. The hyper-mobility they provide for tech company employees translates into rising rents in the Bay Area’s urban cores of San Francisco and Oakland and displaces those whose incomes aren’t keeping pace with real estate prices. The tech company buses are also a lesson in how many Silicon Valley giants have become incredibly valuable. The biggest tech companies thrive off taxpayer supports, be they bus stops, public universities, or telecommunications infrastructure. At the same time they aggressively avoid taxes themselves. They’re the archetype of the free rider, the shameless citizen who takes from the collective to amass private wealth and doesn’t give back to community without a fight.

Google, for example, will now pay San Francisco about $100,000 a year to run its buses into the city, according to the Metropolitan Transportation Agency’s director Ed Reiskin. Google, however, is one of the most aggressive tax avoiders. $100,000 is insignificant to Google’s bottom line. It’s 0.000002 percent of Google’s 2012 revenue. It’s one one-hundredth of one percent of Google CEO Eric Schmidt’s 2011 compensation. It’s hardly a rounding error in the company’s quarterly accounting reports.

The statutory U.S. corporate income tax rate is 35%, meaning that a corporation should be expected to pay 35 cents of every dollar in earnings to the feds. Depending on who you ask, Google pays much less than this, mainly by employing a strategy known as transfer pricing.

Through transfer pricing Google assigns ownership of valuable intellectual property to foreign subsidiaries, and claims that certain economic activities take place in a specific jurisdiction that are outside of the Internal Revenue Service’s reach, and inside a low tax jurisdiction. This jurisdiction is Ireland, where many of the tech companies have established offices in order to take advantage of virtually non-existent tax rates. Google and its tech industry peers state ritualistically in their securities filings that all revenues assigned to these low-tax, offshore jurisdictions will be indefinitely reinvested abroad. Here’s what Google actually wrote in their 2012 annual report:

“As of December 31, 2012, $31.4 billion of the $48.1 billion of cash, cash equivalents, and marketable securities was held by our foreign subsidiaries. If these funds are needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.”

According to a Thompson-Reuters report from last year, Google’s 2012 effective tax rate on overseas earnings was 2.6% on 5.8 billion in profits. That’s more cash for the pile of offshore ocean money. Microsoft paid a rate of approximately 9.4% on a much larger $20.6 billion in profits. Apple dodged and weaved the best, paying a mere 1.9% on 36.8 billion.

So what’s wrong with setting up shop in the lowest tax jurisdiction? If it’s legal we can hardly blame the tech companies, right?

The problem is that transfer pricing is an illusion that is dishonest about what makes these companies valuable, and how they generate these profits. The value of these companies’ brands, their technologies, their most productive workforces, and the physical and regulatory infrastructure they use to build their markets exists in the United States, and in other nation’s with higher tax rates. These high tax rates support these complex institutions that create value. What the tech companies are doing, in essence, is using the public sector’s store of goods to obtain valuable services—from education for skilled labor, to transportation infrastructure, to federally funded research for new product ideas and fields—but they’re not paying back into the tills that support these goods.

In Google’s case there are clear examples of this one way flow of value. Google Maps is an amazingly useful product that brings a lot of traffic through Google’s servers, helping the company cache valuable data related to user queries, user-created maps, and to place millions of ads. Google, however, didn’t invent these maps from scratch. Instead, beginning in the 1980s, long before Google existed, the federal government funded an effort to gather and organize a huge trove of geographic data through the US Census Bureau. That project evolved into TIGER, the Census Bureau’s mapping project, and eventually Google, Microsoft, Apple and other tech companies came along and asked for the raw data. The Census Bureau handed it over at virtually no cost.

“I’m not aware of any pressure to try to recoup the cost,” Michael Ratcliff of the US Census Bureau told me last year in an interview. “Everybody realizes there’s been an enormous benefit to companies that use it. The American public has already paid for it. This is public data.” The Census gave it away to Google and other tech companies just as it would give the product away to anyone who wanted to use it.

Google has now made enormous money from its maps product, even though the heaviest lifting on this technology was done by federal employees using federal funds. Google certainly added value to the maps with new features, and by making the tool accessible. The company’s aggressive tax avoidance means, however, that a share of this value isn’t being returned to one of the major sources of its creation: the federal government. Therefore the burden to fund programs like the Census Bureau’s geography program is shifted onto those who aren’t poised to game the tax code with offshore strategies.

This is basically the tech sector’s model today. It’s why protesters have been blocking Google and Apple buses in San Francisco and demanding that the companies be made to pay back into the budgets of the cities and states that they’re siphoning value from.

Darwin Bond-Graham, a contributing editor to CounterPunch, is a sociologist and author who lives and works in Oakland, CA. His essay on economic inequality in the “new” California economy appears in theJuly issue of CounterPunch magazine. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion