Google and Other U.S. Companies Dodge Billions in Taxes, Bloomberg Reports

Oct. 21, 2010— -- Google and other U.S. companies are using legal corporate tax loopholes to avoid paying the U.S. Treasury billions of dollars in corporate income taxes every year, according to a new report by Bloomberg News.

"Over the last three years, Google has saved over $3 billion," said Bloomberg reporter Jesse Drucker, who broke the story.

Google, with its informal motto of "don't be evil," employs a strategy called the "Double Irish" to help it pay a tax rate of just 2.4 percent on overseas profits, according to Bloomberg. The corporate income tax rate in the U.S. is 35 percent.

Watch "World News with Diane Sawyer" for more on this story tonight on ABC.

How does Google do it? Even though the company is headquartered in Northern California, it licenses some of its intellectual property overseas. Any profits made outside of the U.S. never get taxed in this country.

Thanks to its lenient tax law, Ireland is one of the top places for Google and other companies to license their intellectual property. Profits from the licensed property go to a Google subsidiary in Ireland, but they're not getting taxed in that country, either.

Instead, according to Bloomberg News, Google uses Ireland's lax laws to send the subsidiary's profits on a quick detour through the Netherlands to avoid taxes in the EU. The money eventually ends up in Bermuda, where the corporate tax rate is zero percent.

For all those billions in profit, Google has little to show on the ground in Bermuda. When Bloomberg's Drucker visited the islands, he found Google in a simple office building. Records indicate that just three employees work there -- two lawyers and a manager.

The intellectual property fueling those profits was created almost entirely in the U.S., Bloomberg News reported.

"Not only that, in the early days, it was funded by you and me," Drucker added. "The taxpayer funded a lot of research that led to Google's creation."

What Google is doing is perfectly legal. In fact, Microsoft uses a similar strategy, and Facebook is in the process of doing so, too, Bloomberg reported. All three companies declined to comment to ABC News on this story.