Google under fire for using tax loopholes to save $3bn

Google, the internet giant which makes profits at a rate of $1m every hour, is shielding billions of dollars from tax across the world by using complex financial structures known in the industry as "the Double Irish" and "the Dutch Sandwich".

The tax-avoidance measures were revealed yesterday, forcing the search engine pioneer once again to defend itself in the light of its corporate motto: "Don't be evil".

The company is pushing the bulk of its non-US business revenues, including all the revenue generated in the UK, through an Irish subsidiary, and then on to the Caribbean tax haven of Bermuda – a structure that tax experts say is entirely legal and is becoming increasingly common among multinational corporations.

Tax planners at accounting firms routinely advise companies to set up a web of subsidiaries to take advantage of contradictory and arcane tax rules and tax rates in different jurisdictions, and money flows between them by way of inter-company licensing fees and contracts for services. The Obama administration has promised to crack down on some of the practices, but has made little headway in Congress.

A practice known in the industry as the Double Irish involves setting up two companies in Ireland, one of which is only a shell with operations in low or no-tax jurisdictions in the Caribbean, which shields it from tax even from the Irish Government. A Dutch Sandwich involves setting up a middle company in the Netherlands, with which Ireland has favourable tax agreements. Revelations that both structures are used by Google prompted a flurry of critical commentary on social networks such as Twitter yesterday, forcing the company on the defensive.

The company said in an emailed statement: "Google's practices are very similar to those at countless other global companies operating across a wide range of industries, such as technology, pharmaceuticals and retail. Google complies completely with the tax laws of all the countries in which we have operations. As a result, we make a very substantial contribution to local and national taxation and provide employment for thousands of people globally."

Last week, Google reported net income of $2.2bn (£1.4bn) for the third quarter of 2010, on revenues 23 per cent higher than in the same period a year ago. It reported an average global tax rate of 20 per cent, but with the US corporate income tax rate set at 35 per cent, the figure masked a dramatically lower rate on its overseas operations.

According to a Bloomberg BusinessWeek analysis, Google's overseas tax rate has averaged just 2.4 per cent over the past three years, the lowest of the world's five largest technology companies, and saved it $3.1bn in taxes. The Double Irish was described in a 2007 paper by US tax attorneys Joseph Darby and Kelsey Lemaster as a means of shielding overseas earnings from the US tax authorities and reducing the overall global tax bill, something the authors said "more than doubles the tax savings".

The Dutch central bank is among those upset with the Dutch Sandwich, noting that more than 13,000 entities have been "established by foreign multinational corporations for the purpose of channelling financial assets from one country to another", with €12.3tr (£10.9tr) moving in and out of them in 2008.

The social networking giant Facebook is also reportedly preparing a corporate structure similar to Google's that will send earnings from Ireland to the Cayman Islands. Facebook would not comment last night.