Google’s profit reporting for and the distribution of “intangibles” to foreign divisions is under review by the IRS, which is reviewing for illegal tax evasion strategies. The SEC and a French probe have conducted similar reviews.

Google’s Foreign Holdings and Licensing Under Review

According to a person familiar with the matter, the IRS is looking at Google’s foreign transactions with a great deal of scrutiny. The greatest focus is on how the company reported its intellectual property and software rights licensed abroad.

The licensing and copyrights being examined will come from YouTube, Postini, and Doubleclick intellectual properties that were transferred to foreign holdings. Other intangibles, such as recent patent portfolio acquisitions, may also be examined.

Many of Google’s foreign holdings have already seen an IRS review and sign-off. This is largely thanks to the 2003 approval of “Google Ireland Holdings,” a division of Google located in Ireland and managed in Bermuda that manages many of Google’s copyrights and other intangibles.

The current multinational tax tactics used by Google save the company billions each year. This includes $1 billion saved by allocating profits to a Bermuda-based law firm (where corporate income tax is non-existent), the use of the Google Ireland Holdings for licensing and intellectual properties, and the amount charged for licensing software between foreign divisions. Should the IRS review find that Google was in violation of U.S. law, the penalty could be in the billions.

Additional Tax Strategy Reviews

The IRS isn’t the only one putting a magnifying glass to Google’s multinational holdings strategy. The U.S. Security and Exchange Commission (SEC) requested in-depth details on the foreign profits reported by Google, especially in nations that had lower tax rates. In February, the SEC finalized its review, although it’s unclear if any action was taken.

In a similar case, a French probe launched in December of 2010 examined Google transactions between Google France and Google Ireland Holdings. An official statement on the conclusion of that probe has yet to be released.

Tight enforcement of tax policies for multinational companies such as Google has become part of a heated, ongoing political debate, with conservative politicians primarily favoring continued leniency and tax breaks for large corporations and liberal politicians favoring increased scrutiny and enforcement to increase U.S. tax revenue. According to economics professor Kimberly Clausing, multinational tax strategies reduced U.S. corporate taxes by $90 billion in 2010.