During its earnings announcement, Google noted how higher than expected taxes caused the company to miss Wall Street expectations.

Google Tosses IRS Under The BusGoogle CFO George Reyes talked about the impact of taxes on the search advertising company’s bottom-line, an impact that caused their earnings-per-share to fall short of market expectations:

Our effective tax rate for Q4 increased to 41.8% this quarter and to 31.6% for the year, above expectations of approximately 30% for the year. The amount of tax expense we recognize in any particular quarter is driven by our estimates for the year. And as we have said in the past, our estimates for the year are sensitive to the mix of earnings in the US and overseas.

At the end of the year, we must true up the tax provision for the year, which could, and in the case of Q4, did have a disproportionate impact on the fourth quarter.

Google pays more tax in the US than it does in international markets. That impact resulted in the swift and merciless punishment of the stock by investors, who wiped out $20 billion of Google’s market capitalization the day after the announcement.

The tax issue also raised another question that a Reuters article attempted to answer today: if Google knew this in advance, should it have informed investors?

"The senior management team should disclose that to the board," said Craig Dunn, executive director of the Corporate Governance Institute at San Diego State University, when asked about the Google quarterly results. "The board, then, I think has a duty to report that to investors, whom they represent."

At least one analyst said the 12 per cent drop in Google stock in extended trade sparked by the earnings miss might prompt the company to revisit the forecast issue.

"This may prove that their policy barring preannouncement and giving earnings guidance may not be the wisest policy," said Robert Willens, accounting analyst at Lehman Brothers. "It’s not as if providing guidance is a sign of poor governance."

Google famously does not provide such guidance, a point reiterated by its CEO, Eric Schmidt during the conference call: "I’d like to remind everybody that our policy is to not to give any forward guidance and we are going to continue that policy for the indefinite future."

That may cause some of the large institutional investors who hold Google in their portfolios to prompt the company to change its tune, especially with Google insiders selling over $500 million in stock in January 2006 prior to the announcement.

While those sales likely followed the automated selling process Google pre-established for its executives, it’s a substantial sum of money and a lot of stock to move. In the world of high-finance, someone is going to ask Google, very quietly, some uncomfortable questions about its knowledge of the tax rate hit to the bottom-line.

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