No, Google’s restructuring isn’t about cutting taxes

Aaron Pressman Yahoo Finance
Google Inc to Become Alphabet Inc in Shakeup

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Google Incorporated is changing its operating structure by setting up a new company called Alphabet Incorporated, which will include the search business and a number of other units. Current Google CEO Larry Page said a in blog post he would become the chief executive of Alphabet Incorporated, while Senior Vice President Sundar Pichai will be CEO of Google. Alphabet Incorporated will replace Google as the publicly-traded entity. All shares of Google will automatically convert into the same number of shares of Alphabet, with all of the same rights. The surprise news sent shares of Google up as much as 7 percent to $708 in after hours trading.

Google’s (GOOGL) decision to restructure itselfunder a new holding company called Alphabet has generated a flood of theories about what the search giant is really up to, but some have reached the level of extreme wishful thinking, especially on Wall Street. Some analysts who follow Google say the changes will enable Google to avoid more taxes, bring back some of its billions trapped overseas without paying taxes or even lead to a tax inversion deal shifting its headquarters. It’s pure poppycock, according to leading corporate tax experts, who say there’s no tax benefit to the new structure over the existing set up. “I know there is a feeling on Wall Street that this maneuver was somehow tax motivated, but the consensus among tax professionals is just the opposite,” says Bob Willens, one of the best-known corporate tax advisers on Wall Street for decades. “We do not see any tax advantage to be gained from forming a holding company.” Shares of Google have gained modestly since the announcement after the market close on August 10, up 4%. That came on top of a much bigger boost over the past month of more than 15% from leaks and statements around its second-quarter earnings report about tighter expense discipline. Investors have been clamoring for Google to curb its spending and new CFO Ruth Porat seems to be signaling just such a slowdown. But one of Wall Street’s other great desires is for Google to somehow find a tax-free way to bring back the $40 billion of cash it has stashed outside of the United States. Like other big technology and pharmaceutical companies, including Apple (AAPL) and Gilead Sciences (GILD), Google’s use of legal avoidance strategies to lower its U.S. tax bill mean that it cannot easily repatriate vast overseas profits without paying the 35% U.S. corporate tax rate. Maybe Alphabet could help, some analysts and others have suggested. “While we are reluctant to detail potential specifics, we believe under a new holding company structure, Google could better position itself with respect to its tax efficiency and possibly employ novel cash repatriation strategies to the benefit of shareholders,” Nomura analyst Anthony DiClemente wrote after the Alphabet announcement. Reporters have also speculated on the possible tax motivation. Google’s Alphabet restructuring could get a boost from a Delaware tax loophole, according to a story in The Guardian. “I don’t get what they’re hinting at,” responds Edward Kleinbard, a professor at USC’s Gould School of Law and the former chief of staff of Congress’s Joint Committee on Taxation. “The company is still (based in the) U.S., and foreign earnings remain subject to all the same rules.” Google itself said the new structure, in which the company’s highly profitable, ad driven businesses will be separated from loss-making experiments like self-driving cars, was intended to improve oversight and management. “Our company is operating well today, but we think we can make it cleaner and more accountable,” CEO Larry Page said in a blog post accompanying the announcement. Many of the tax-related scenarios involve Google, or really Alphabet, ultimately spinning off one of its new units or combining a unit with a foreign-headquartered company. But Google doesn’t need to create a holding company structure to complete a spin off or merger. To be sure, the split structure could reduce the public relations headaches somewhat from a controversial tax saving deal. Dick Harvey, a law professor at Villanova University who previously worked at the Internal Revenue Service and Treasury Department, says it’s “not beyond the realm of possibility” that the restructuring could make some tax moves easier to pull off. But such benefits seem rather hard to fathom at this point. “It does not appear to be a tax-motivated restructuring,” says Harvey. Sorry, Wall Street. It looks like you’ll have to find another way to bring home all that foreign cash.