Wednesday, May 25, 2022
Stephen Curtis (Cross Border Analytics), Google's Cost Sharing Arrangement: Bride of Frankenstein:
This paper performs a forensic analysis of Google's transfer pricing cost sharing arrangement based on forensic economic analysis of public information, including tax litigation in France, tax hearings conducted in the United Kingdom, information from a related U.S. tax court case, documents disclosed in a European data privacy investigation, published materials containing insider accounts of Google’s operations, books, periodicals and other sources. The paper finds that Google appears to have violated U.S. transfer pricing laws in 2009 and later years, in ways that appear to have invalidated its cost sharing arrangement but which were not detected by the IRS. These tax violations appear to have led to the potential of tax assessments by the IRS of more than $38 billion and up to $50 billion. Google is now a subsidiary of Alphabet Inc., and the company's reserves for Uncertain Tax Positions were $3.8 billion as of December 31, 2020 – reserves that are about 90% less than this tax adjustment risk. The ability of the IRS to apply periodic adjustments is not limited by any statute of limitations.
Google’s cost sharing arrangement also appeared to violate the economic substance doctrine, and regulations governing the taxation of effectively connected income, primarily because its cost sharing arrangement in 2003 was implemented as a sham transaction with an Irish shell company, for which the IRS nevertheless awarded it an Advanced Pricing Agreement (APA) in 2006. Interestingly, the IRS is currently challenging what looks to be a similar profit shifting arrangement at Perrigo Company plc, despite having reviewed and approved Google’s arrangement, that continued without any apparent IRS challenge before Google eliminated it after the 2019 tax year.