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Google says it is trying to deal with the European ruling in a resonsible way

Google funnelled €8.8bn of royalty payments to Bermuda last year, a quarter more than in 2011, underlining the rapid expansion of a strategy that has saved the US internet group billions of dollars in tax.

By routing royalty payments to Bermuda, Google reduces its overseas tax rate to about 5 per cent, less than half the rate in already low-tax Ireland, where it books most of its international sales.

The figures were revealed in the latest filings by one of Google’s Dutch subsidiaries, and means that royalty payments made to Bermuda – where the company holds its non-US intellectual property – have doubled over the past three years. This increase reflects the rapid growth of Google’s global business.

The company has been at the centre of the international controversy over corporate tax avoidance because it earns “substantially all” its foreign income in Ireland and pays relatively little tax in the countries where its customers are based.

It has also faced criticism for its use of a “double Irish” structure that exploits differences between the US and Irish tax codes to move the profits from Ireland to Bermuda. It also routes the profits through the Netherlands to avoid withholding taxes, using a structure known as a “Dutch sandwich”. Google declined to comment.

Revelations about Google’s tax planning have stoked widespread public anger, prompting politicians to launch an international crackdown on corporate profit shifting. The problems raised by digital companies is one of the central issues being addressed by the initiative launched by the G20 group of leading economies this summer.

In principle, multinationals such as Google that pay relatively little tax overseas will face big bills in the US when they bring their earnings back to the US. But Google has not provided for extra US tax because it intends to permanently reinvest $33bn of offshore profits outside the US.

The new figures come from the accounts of Google Netherlands Holdings, which represents the “Dutch sandwich” part of the tax structure. It received €8.6bn in royalties from Google Ireland Ltd and €232.8m in royalties from Google’s Singapore operation. All but €10.4m of this was paid out to Google Ireland Holdings, a company that is incorporated in Ireland but controlled in Bermuda.

Differences between the Irish and US tax codes mean that this dual-resident company is viewed as Irish for US tax purposes but Bermudan for Irish purposes. It acquired much of Google’s intellectual property in 2003, which it licensed to Google Ireland Ltd, a Dublin-based business that is at the heart of its global operation. The business, which employed 2,199 people last year, paid €17m in Irish corporation tax, having reported pre-tax profits of €153.9 on turnover of €15.5bn.

Google’s UK operation, which provides marketing services to the Irish affiliate, paid £11.5m in corporate tax in 2012, nearly double the bill for 2011 but far less than many MPs and other critics believe it should have paid. The UK is Google’s second-biggest market, responsible for almost 10 per cent of its sales, or almost $4.9bn last year.

In a stormy parliamentary hearing earlier this year, Margaret Hodge, chair of the Public Accounts Committee denounced Google as “evil” and accused it of “devious, calculating and unethical” behaviour by booking sales in Ireland. But Google said this was an unfair representation of the way it operated in which sales activity took place in Britain but only the Irish business had the right to close the transaction.

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