Google Inc. v. Rockstar Consortium US LP et al

Filing 78

REPLY (re 67 MOTION to Transfer Case or, in the Alternative to Stay ) filed byMobileStar Technologies LLC, Rockstar Consortium US LP. (Attachments: # 1 Declaration (Supplemental) of Joshua Budwin, # 2 Exhibit 36, # 3 Exhibit 37, # 4 Exhibit 38, # 5 Exhibit 39, # 6 Exhibit 40, # 7 Exhibit 41, # 8 Exhibit 42, # 9 Exhibit 43, # 10 Declaration (Supplemental) of Donald Powers, # 11 Declaration (Supplemental) of John Veschi)(Budwin, Joshua) (Filed on 5/30/2014)

EXHIBIT 39

The Tax Haven That's Saving Google Billions - Businessweek

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The Tax Haven That's Saving Google
Billions
By Jesse Drucker

Most Popular
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Discussed

October 21, 2010

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The heart of Google's (GOOG) international operations is a silvery glass office
building in central Dublin, a block from the city's Grand Canal. In 2009 the office,
which houses roughly 2,000 Google employees, was credited with 88 percent of the
search juggernaut's $12.5 billion in sales outside the U.S. Most of the profits,
however, went to the tax haven of Bermuda.
To reduce its overseas tax bill, Google uses a complicated legal structure that has
saved it $3.1 billion since 2007 and boosted last year's overall earnings by 26
percent. While many multinationals use similar structures, Google has managed to
lower its overseas tax rate more than its peers in the technology sector. Its rate
since 2007 has been 2.4 percent. According to company disclosures, Apple (AAPL),
Oracle (ORCL), Microsoft (MSFT), and IBM (IBM)—which together with Google
make up the top five technology companies by market capitalization—reported tax
rates between 4.5 percent and 25.8 percent on their overseas earnings from 2007
to 2009. "It's remarkable that Google's effective rate is that low," says Martin A.
Sullivan, a tax economist who formerly worked for the U.S. Treasury Dept. "This
company operates throughout the world mostly in high-tax countries where the
average corporate rate is well over 20 percent." The corporate tax rate in the U.K.,
Google's second-largest market after the U.S., is 28 percent.
In Bermuda there's no corporate income tax at all. Google's profits travel to the
island's white sands via a convoluted route known to tax lawyers as the "Double
Irish" and the "Dutch Sandwich." In Google's case, it generally works like this:

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The Tax Haven That's Saving Google Billions - Businessweek

When a company in Europe, the Middle East, or Africa purchases a search ad
through Google, it sends the money to Google Ireland. The Irish government taxes
corporate profits at 12.5 percent, but Google mostly escapes that tax because its
earnings don't stay in the Dublin office, which reported a pretax profit of less than 1
percent of revenues in 2008.

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Irish law makes it difficult for Google to send the money directly to Bermuda
without incurring a large tax hit, so the payment makes a brief detour through the
Netherlands, since Ireland doesn't tax certain payments to companies in other
European Union states. Once the money is in the Netherlands, Google can take
advantage of generous Dutch tax laws. Its subsidiary there, Google Netherlands
Holdings, is just a shell (it has no employees) and passes on about 99.8 percent of
what it collects to Bermuda. (The subsidiary managed in Bermuda is technically an
Irish company, hence the "Double Irish" nickname.)

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Transfer Pricing
All of these arrangements are legal. "Google's practices are very similar to those at
countless other global companies operating across a wide range of industries," says
Jane Penner, a company spokeswoman who declined to address the particulars of
Google's tax strategies. Irving H. Plotkin, a senior managing director at
PricewaterhouseCoopers' national tax practice in Boston, says that "a company's
obligation to its shareholders is to try to minimize its taxes and all costs, but to do
so legally."
The setup lowers Google's overseas tax bill, but it also affects U.S. tax revenues as
the government struggles to close a projected $1.4 trillion budget gap. Google
Ireland licenses its search and advertising technology from Google headquarters in
Mountain View, Calif. The licensing agreement allows Google to attribute its
overseas profits to its Irish operations instead of the U.S., where most of the
technology was developed. The subsidiary is supposed to pay an "arm's length"
price for the rights, or the same amount an unrelated company would. Yet because
licensing fees from the Irish subsidiary generate income that is taxed at 35 percent,
one of the highest corporate rates in the world, Google has an incentive to set the
licensing price as low as possible. The effect is to shift some of its profits overseas
in an arrangement known as "transfer pricing."
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Tax Bill
This, too, is legal. In 2006 the IRS approved Google's transfer pricing
arrangements, which began in 2003, according to Google's SEC disclosures.
Transfer pricing arrangements are popular with technology and pharmaceutical
companies in particular because they rely on intellectual property, which is easily
transportable across borders. Facebook is preparing a structure similar to Google's
that will send earnings from Ireland to the Cayman Islands, according to company

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The Tax Haven That's Saving Google Billions - Businessweek

filings and a person familiar with the arrangement. Microsoft and Forest
Laboratories (FRX), maker of the blockbuster antidepressant Lexapro, have used a
similar Irish-Bermuda transfer pricing arrangement. Facebook, Forest, and
Microsoft declined to comment.
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Drucker is a reporter for Bloomberg News.

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The Tax Haven That's Saving Google Billions - Businessweek

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