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Google's Alphabet restructure could get boost from Delaware tax loophole Google's Alphabet restructure could get boost from Delaware tax loophole
(about 1 hour later)
Google’s Street View cameras have photographed locations across the world, allowing armchair tourists a view of anything from the Tower of London to Tiananmen Square. But one address is notable by its absence. The office building at 2711 Centerville Road in Wilmington, Delaware, a small town just south of Philadelphia, has not been captured by the Street View cameras. And yet this is the official address of Google Inc, the holding company of one of the world’s most successful software groups.Google’s Street View cameras have photographed locations across the world, allowing armchair tourists a view of anything from the Tower of London to Tiananmen Square. But one address is notable by its absence. The office building at 2711 Centerville Road in Wilmington, Delaware, a small town just south of Philadelphia, has not been captured by the Street View cameras. And yet this is the official address of Google Inc, the holding company of one of the world’s most successful software groups.
Related: Why Google is restructuring, why the name Alphabet and how it affects youRelated: Why Google is restructuring, why the name Alphabet and how it affects you
Google was founded in California and incorporated there in 1998, but in August 2003, a year before its initial public offering, the group reincorporated in Delaware. The creation of Alphabet Inc maintains the status quo, with Google confirming the new entity will also be registered in the small north-eastern coastal state whose tolerance of corporate secrecy and business friendly tax laws have seen it labelled as one of the world’s top tax havens.Google was founded in California and incorporated there in 1998, but in August 2003, a year before its initial public offering, the group reincorporated in Delaware. The creation of Alphabet Inc maintains the status quo, with Google confirming the new entity will also be registered in the small north-eastern coastal state whose tolerance of corporate secrecy and business friendly tax laws have seen it labelled as one of the world’s top tax havens.
One of the main attractions for many firms is section 1902 (b) (8) of the Delaware corporation income tax code, which exempts from corporation tax any company whose main activities are “confined to the maintenance and management of their intangible investments … and the collection and distribution of the income from such investments or from tangible property physically located outside of this state”. Intangible investments, the code states, include not only stocks and bonds, but patents and trademarks. There are more companies than people in Delaware. Over 1 million corporate entities are registered in a state with a population of just 936,000. One of the main attractions for many firms is section 1902 (b) (8) of the Delaware corporation income tax code, which exempts from corporation tax any company whose main activities are “confined to the maintenance and management of their intangible investments … and the collection and distribution of the income from such investments or from tangible property physically located outside of this state”. Intangible investments, the code states, include not only stocks and bonds, but patents and trademarks. Essentially, companies with no real operations in Delaware pay no tax there.
Companies like Toys R Us and Kmart have famously used this exemption, known as the Delaware loophole, to reduce taxable profits in other states. The Delaware holding company owns the intellectual property, for which subsidiaries in other states make royalty payments. These payments reduce the taxable profits of the subsidiaries.Companies like Toys R Us and Kmart have famously used this exemption, known as the Delaware loophole, to reduce taxable profits in other states. The Delaware holding company owns the intellectual property, for which subsidiaries in other states make royalty payments. These payments reduce the taxable profits of the subsidiaries.
Whether or not Google has taken advantage of the Delaware loophole is unknown, because Delaware does not require the filing of public accounts. Google’s tax affairs in Ireland have received far more attention, partly because the Irish state does at least insist on high levels of transparency, with annual accounts freely available online, as they are in the UK, through the Companies Registration Office. Whether or not Google has taken advantage of the Delaware loophole is unknown, because Delaware does not require the filing of public accounts. Google’s tax affairs in Ireland have received far more attention, partly because the Irish state does at least insist on high levels of transparency, with annual accounts for Google’s subsidiaries here freely available online, as they are in the UK, through the Companies Registration Office.
But the big tax savings appear to have been made outside the US. According to stock exchange filings – Google is listed on Nasdaq – the company’s effective tax rate on its worldwide income was 19% last year. This is some way short of the US federal tax rate of 35%, and of the average combined federal and state rate of 39.1%. That is mainly because Google’s corporation tax rate outside America is so low. In 2014, Google estimated it would have to pay $774m on taxable foreign income of $9.3bn, giving a tax rate of just 8.3% on its earnings from outside the US. US state and federal taxes provided for last year add up to $2.6bn, about 32% of its $7.9bn in domestic income. Add back a federal research credit of $318m, and the tax rate rises to 36% – close to the 39.1% average. But the big tax savings appear to have been made outside the US. According to stock exchange filings – Google is listed on Nasdaq – the company’s effective tax rate on its worldwide income was 19% last year. This is some way short of the US federal tax rate of 35%, and of the average combined federal and state rate of 39.1%. That is mainly because Google’s corporation tax rate outside America is so low. In 2014, Google estimated it would have to pay $774m on taxable foreign income of $9.3bn, giving a tax rate of just 8.3%. US state and federal taxes provided for last year add up to $2.6bn, about 32% of its $7.9bn in domestic income. Add back a federal research credit of $318m, and the tax rate rises to 36% – close to the 39.1% average.
But there is another big advantage to retaining the Delaware incorporation. A 2010 settlement of a case brought by shareholders in the Delaware courts allowed Google’s founders Larry Page and Sergey Brin to retain control of the company using three classes of shares, each with different voting rights. The founders hold 55.7% of the voting rights, despite owning just 15% of the stock. There is another advantage to retaining the Delaware incorporation. A 2013 settlement of a case brought by shareholders in the Delaware courts allowed Google’s founders Larry Page and Sergey Brin to retain control of the company using three classes of shares, each with different voting rights. The founders hold just under 55% of the voting rights, despite owning a mere 13% of the stock.