Google Moved $12B Via Double Irish Dutch Sandwich In 2014

[HardOCP News]

I don't care what you say, $12 billion is a lot of double Irish Dutch sandwiches. Do you ever wonder who makes up the names for these tax strategies?


Google moved 10.7 billion euros ($12 billion) through the Netherlands to Bermuda in 2014, as part of a structure which allows it to earn most of its foreign income tax free. Accounts for Google Netherlands Holdings BV published on Thursday show the unit transferred almost all its revenue, mainly royalties from an Irish affiliate through which most non-U.S. revenue is channeled, to a Bermuda-based, Irish-registered affiliate called Google Ireland Holdings. The tax strategy is known to accountants as the "double Irish, Dutch Sandwich'.

 

[Clickjocky]

We need to keep raising the taxes here in the US on these mega corporations, that will make sure they pay, and keep jobs here too.

 

[Retronym]

good

 

[kbrickley]

We need to keep raising the taxes here in the US on these mega corporations, that will make sure they pay, and keep jobs here too.

Problem: Companies do not pay enough taxes due to loopholes in the tax code and excessive USA corporate tax system
Solution: Increase the tax rates to even less competitive levels?

Corporations that are based in the USA with USA employees pay plenty of taxes besides the corporate taxes. They must pay the other half of the SS payment on all USA employees, they must pay the 12% unemployment insurance payment, they must sometimes pay local taxes like property taxes, etc

We need to find a balance where we are getting a reasonable payment from the companies that is competitive with other countries where they might be based

 

[ShagnWagn]

Did they use an oven?

 

[Jagger100]

That's the one with two borderline underage red heads, isn't it?

 

[Clickjocky]

Problem: Companies do not pay enough taxes due to loopholes in the tax code and excessive USA corporate tax system
Solution: Increase the tax rates to even less competitive levels?

Corporations that are based in the USA with USA employees pay plenty of taxes besides the corporate taxes. They must pay the other half of the SS payment on all USA employees, they must pay the 12% unemployment insurance payment, they must sometimes pay local taxes like property taxes, etc

We need to find a balance where we are getting a reasonable payment from the companies that is competitive with other countries where they might be based

I agree, if we don't do this we will loose.

 

[Gigus Fire]

eh... you don't need to be globally competative with taxes. How can you compete with africa and others which have no real infrastructure or talent?
You compete and keep it sane with tarrifs. That increases the cost of doing business by leveraging a even playing field.

The main problem is that lobbyists added the loopholes to begin with. It didn't just appear in the tax code and left alone for years by mistake.

Only really big corporations can take advantage of these loopholes. Raising taxes will hurt the smaller businesses that have to eat the brunt of taxes.

It's not like google has a tower of cash they pour tax money into and swim around in it. There are many shareholders that get dividends each year. While anyone can invest, it's really only the rich who own thousands of shares and can live off the profits each year who benefit the most. There's no desire to change the system.

While articles like this raise awareness, it's ridiculous to think that by pointing out what they do is going to shame them into changing their tactics. Any CEO who announced they wouldn't be using loopholes would immediately be fired by the board of directors. They need to do this while it exists. It's not a choice.

 

[Retronym]

Google doesn't offer a dividend.

 

[Dwango]

We need to keep raising the taxes here in the US on these mega corporations, that will make sure they pay, and keep jobs here too.

No it won't. It will only force them to relocate to some other country (as many have already done). Google (and Apple, Amazon, Microsoft, etc.) have an enormous number of accountants and financial planners who will always be able to figure out ways to have the company pay as little in tax as they possibly can. Sometimes that means funneling your foreign earned money through a double irish dutch sandwich and sometimes it means re-incorporating your headquarters in another nation while actually continuing to run the operation from the US. The only thing you would do by raising taxes in the US is kill small businesses quicker at the expense of the large ones and force true entrepreneurs across the borders where the business climate is friendlier.

There is no silver bullet for this kind of thing and there never has been. And despite the media only recently ratcheting up coverage on to this kind of thing it's been going on for as long as there have been corporate taxes to pay.

 

[v6maro]

No it won't. It will only force them to relocate to some other country (as many have already done). Google (and Apple, Amazon, Microsoft, etc.) have an enormous number of accountants and financial planners who will always be able to figure out ways to have the company pay as little in tax as they possibly can. Sometimes that means funneling your foreign earned money through a double irish dutch sandwich and sometimes it means re-incorporating your headquarters in another nation while actually continuing to run the operation from the US. The only thing you would do by raising taxes in the US is kill small businesses quicker at the expense of the large ones and force true entrepreneurs across the borders where the business climate is friendlier.

There is no silver bullet for this kind of thing and there never has been. And despite the media only recently ratcheting up coverage on to this kind of thing it's been going on for as long as there have been corporate taxes to pay.

Correct. In fact I bet if you were to eliminate corporate tax, the U.S. economy would be boosted immensely by the amount of cash brought back in.

 

[Zarathustra[H]]

I don't blame Google or Apple or whatever large multinational company when these things come up.

They can't afford not to. It quickly becomes a race to the bottom, when wall Street demands that they reduce their tax liabilities, and if even one of their competitors do it, they wind up I a competitively disadvantaged situation, and can spend less on R&D, etc etc.


That being said, I disagree with the sentiment that we should just be fine with the way things are and accept that they don't pay a lot of taxes.

They benefit greatly from the courts, police, military and fire services that protect them, the education system that help educate their workforce, the roads they use to distribute products (or in internet/software companies, at least helps their employees get to work) etc. etc.

Their successes are their own, but I don't think anyone would argue that they wouldn't be tougher to accomplish without the infrastructure and governance in place to support them.

This is why we need to revisit how we tax corporations and multinationals.

Republicans like to talk about how the corporate tax rate is too high, and they are right to a point. The rate on paper is high compared internationally, but we also have more loopholes than anyone else resulting in average effective tax rates being internationally low.

We should lower the tax rates on paper to where they are reflective of what is actually paid, and then eliminate all the loopholes that allow the biggest corporations an unfair advantage compared to their smaller competitors without armies of tax lawyers.

Next we need to tackle transfer pricing. We need to come up with a better way of assessing in what jurisdiction value is created, so theycant juat ahuffle profits to a po box in a country with low rates.

This becomes very tricky, because do it wrong, and you could quickly disincentivise companies from hiring people within your borders, and no one wants that.


Once this methodology is developed, we need to work on hetting agreement internationally, resulting in international treaty such that we have a level playing field, and we get rid of the race to the bottom we are seeing.

This doesn't mean we make the rates the same everywhere, but instead that the rules regarding how companies transfer profits internally are the same and regulated heavily. Every country can then determine their own rate, and come up with their own value proposition regarding which services they provide, and businesses can choose where to operate.

What we have today is businesses that take advantage of services paid for by the tax payer in high rate countries, and then shuffle their profits internally to low rate countries with no services or support, but they don't need those services, because all they have there is a P.O. box.


This will certainly not be easy, but I don't see any other way around it. The current situation is untenable.

 

[tetris42]

eh... you don't need to be globally competative with taxes. How can you compete with africa and others which have no real infrastructure or talent?
You compete and keep it sane with tarrifs. That increases the cost of doing business by leveraging a even playing field.

The main problem is that lobbyists added the loopholes to begin with. It didn't just appear in the tax code and left alone for years by mistake.

Only really big corporations can take advantage of these loopholes. Raising taxes will hurt the smaller businesses that have to eat the brunt of taxes.

It's not like google has a tower of cash they pour tax money into and swim around in it. There are many shareholders that get dividends each year. While anyone can invest, it's really only the rich who own thousands of shares and can live off the profits each year who benefit the most. There's no desire to change the system.

While articles like this raise awareness, it's ridiculous to think that by pointing out what they do is going to shame them into changing their tactics. Any CEO who announced they wouldn't be using loopholes would immediately be fired by the board of directors. They need to do this while it exists. It's not a choice.

Yeah this is it all over. What's funny is that closing the loopholes on corporations would almost certainly receive bipartisan support from citizens, since EVERYBODY wants that. Problem is it's not liberal v. conservative, it's big money v. everyone else.

 

[MisterClean]

Why does the us government think they should have any claim to profits made outside of the country that have never been inside the country?

 

[UrielDagda]

Why does the us government think they should have any claim to profits made outside of the country that have never been inside the country?

Because they're getting the benefits of living here in the US while our military defends their interests to the tune of hundreds of billions of dollars, all while they benefit from using resources without contributing otherwise.

 

[dandirk]

Yeah this is it all over. What's funny is that closing the loopholes on corporations would almost certainly receive bipartisan support from citizens, since EVERYBODY wants that. Problem is it's not liberal v. conservative, it's big money v. everyone else.

You are also forgetting its the people vs politician's jobs and their backers...

The law and tax complexity is there due to politics (and peoples lack of common sense). It's layers and layers of deal after deal and temporary issue on top of temporary issue. One of the reasons for the mortgage interest rebate was to combat HIGH interest rates at the time. Now that interest rates are lower than ever no one wants to get rid of it cause who wants to suffer the backlash of the common-senseless.

Politicians are paid for what they can get people next... they certainly don't get more money for what breaks they remove. This leads to higher tax rates that screw some, benefit others and are higher than need be due to the loop holes and breaks they have to make up for.

Yes a wipe of the tax policy would help... until it gets weighted down again by deal after deal again.

 

[kbrickley]

Yeah this is it all over. What's funny is that closing the loopholes on corporations would almost certainly receive bipartisan support from citizens, since EVERYBODY wants that. Problem is it's not liberal v. conservative, it's big money v. everyone else.

They would love the higher corporate taxes until corporations started closing plants, laying off workers, raising prices, etc. Corporations are not just money pits for taxes any more than regular people are. If you take more of their income there will be a reaction. This is no different than arguments around trade deficits. People love the theory (made in America) but they hate the reality (higher prices). Given the choice between a lower priced TV and a fully taxed TV corporation or made in America TV they will always vote with their wallets and go for lower prices.

 

[MisterClean]

Because they're getting the benefits of living here in the US while our military defends their interests to the tune of hundreds of billions of dollars, all while they benefit from using resources without contributing otherwise.

Pretty sure the taxes they pay on profits made in the u.s. covers that. So why does the government get to lay claim to all the money made (and already taxed ) elsewhere, money that is not living here in the us?

 

[alxlwson]

Pretty sure the taxes they pay on profits made in the u.s. covers that. So why does the government get to lay claim to all the money made (and already taxed ) elsewhere, money that is not living here in the us?

I think the money is only taxed if there are agreements with other governments, or if such doesn't exist, then even the money "enters" US U.S. soil.

 

[Zarathustra[H]]

Pretty sure the taxes they pay on profits made in the u.s. covers that. So why does the government get to lay claim to all the money made (and already taxed ) elsewhere, money that is not living here in the us?

The problem lies with how you define "profits made".

If you look purely at sales, that's one way of doing it. But what about the value created by manufacturing? What about R&D activities? If you imagine instead several businesses each doing one piece of the pie, it is easy.

Let’s assume for a moment that we have 4 separate companies each doing specialized tasks.

- Design Owner Company located in country1
- R&D Contractor located in country2
- Manufacturing company located in country3
- Sales & Distribution company located in country4

The design owner company would have a contract with the R&D company to develop the product and hand them the IP at the end. They would then have a contract with a contract manufacturer, paying them to manufacture each part. The manufacturing company would ship the finished goods to the Sales and Distribution company which would have some sort of contract with the design owner. Each of these would have negotiated rates and each company would earn something close to the value of what they were producing (if in a competitive market)

Based on each of these companies contracts they would each earn some money for their roles paid to them by the design owner, and pay corporate income tax on that in each of their respective countries (2 & 3 and 4) The design owner would earn an income of what is left, and pay corporate income tax on that in country 1. Simple and fair.

Now what happens if all of these disparate parts are part of the same company. The activities are still spread out over several countries as above, but now one corporate entity can decide the value of each step. Maybe the corporate tax rate is high where the manufacturing site is, so in order to minimize taxes paid at the manufacturing site, that side sells the products for pennies to the sales and distribution company, and instead shifts their income to the country in which the sales and distribution company is located, instead paying that lower rate.

The value is still being created in the same place, but now the reported revenue has been shifted through accounting tweaks into countries where the rates are low. The corporation doesn’t care, because the money is still in the family, so to speak. This is what’s called transfer pricing. The corporation gets do decide – with little to no regulation – the price which it charges its different divisions located in different countries.

Now lets take it even further. Because they are all the same company, the R&D company sells the intellectual property of what they have developed to a holding company in a 5th country, also a part of the same multinational corporation. This holding company then turns around and charges licensing fees for that intellectual property from the manufacturing site in country 3 for the right to manufacture under those patents. The corporation still doesn’t care, because it’s all within the family.

Oh, but did I mention that country5 is a country with poor infrastructure that spends nothing on supporting businesses. No one would want to do business there. And that’s why they don’t. The holding company is just a PO box and a voicemail redirect, both of which get checked occasionally. It doesn’t have a single employee. Why would they do this? Because country5 also happens to have ridiculously low corporate income taxation. So now, without actually doing ANYTHING AT ALL in country 5, they have shifted their revenue there, and pay the lowest income tax they can.

Countries2 and 3 are understandably pissed about this, because the multinational corporation has taken advantage of their infrastructure, their patent systems, their workforce education, their police, fire and military defense – all of which costs money – to design and manufacture the part, but all the income is reported in country 5 which has provided nothing, only because they have the lowest rate.

THIS is what people are pissed about and think should be fixed.

It has nothing to do with individual income taxation which is all screwed up. I agree with you, why should a U.S. citizen pay individual income tax to the U.S. if living and working abroad and not taking advantage of anything the U.S. provides? That one baffles even me, but it is a completely separate issue from the transfer pricing issue this article is about.

Maybe all this sounds far fetched to you? It shouldn't. EVERY SINGLE multinational out there does a version of this to reduce their income tax liabilities.

 

[Deleted member 93354]

My plan to solve this problem is easy:

If 23% of your profits come from the USA, then 23% of your profits are taxed.

Problem solved.

 

[Zarathustra[H]]

My plan to solve this problem is easy:

If 23% of your profits come from the USA, then 23% of your profits are taxed.

Problem solved.

Read my post above, and tell me how you define where the profits come from. Would you go strictly by sales?

It's not that easy. A corporation is made up of many functional groups, each of which creating value and earning income - so to speak.

If an R&D organization didn't develop a product, sales would have nothing to sell. So which portion of that sale is due to R&D, which may be located in one country vs sales force located in another?

If that is the case, then what about a company that is located in one country, and primarily exports products. They use all the services in the country where they are located, but pay absolutely nothing for them.

 

[cageymaru]

No it won't. It will only force them to relocate to some other country (as many have already done). Google (and Apple, Amazon, Microsoft, etc.) have an enormous number of accountants and financial planners who will always be able to figure out ways to have the company pay as little in tax as they possibly can. Sometimes that means funneling your foreign earned money through a double irish dutch sandwich and sometimes it means re-incorporating your headquarters in another nation while actually continuing to run the operation from the US. The only thing you would do by raising taxes in the US is kill small businesses quicker at the expense of the large ones and force true entrepreneurs across the borders where the business climate is friendlier.

There is no silver bullet for this kind of thing and there never has been. And despite the media only recently ratcheting up coverage on to this kind of thing it's been going on for as long as there have been corporate taxes to pay.

I say let them leave the USA and charge them just like every other foreign corporation doing business in America.

 

[MisterClean]

Read my post above, and tell me how you define where the profits come from. Would you go strictly by sales?

It's not that easy. A corporation is made up of many functional groups, each of which creating value and earning income - so to speak.

If an R&D organization didn't develop a product, sales would have nothing to sell. So which portion of that sale is due to R&D, which may be located in one country vs sales force located in another?

If that is the case, then what about a company that is located in one country, and primarily exports products. They use all the services in the country where they are located, but pay absolutely nothing for them.

So, your answer is "It's complicated, so tax it all." I'm glad a majority of countries don't have this mentality and actually compete for businesses and their tax dollars instead of trying to use an iron fist to take all the money they can.

 

[Zarathustra[H]]

So, your answer is "It's complicated, so tax it all." I'm glad a majority of countries don't have this mentality and actually compete for businesses and their tax dollars instead of trying to use an iron fist to take all the money they can.

No, my solution is "its complicated, so get the best minds on the subject matter in a room, have them come up with a standard fair method for evaluating the source of income within an organization, replacing current come up with an international treaty to make sure everyone does it the same way, then charge income tax based on that determination of the creation of value, taking it out of the hands of the corporations to make this determination.

 

[alxlwson]

Read my post above, and tell me how you define where the profits come from. Would you go strictly by sales?

It's not that easy. A corporation is made up of many functional groups, each of which creating value and earning income - so to speak.

If an R&D organization didn't develop a product, sales would have nothing to sell. So which portion of that sale is due to R&D, which may be located in one country vs sales force located in another?

If that is the case, then what about a company that is located in one country, and primarily exports products. They use all the services in the country where they are located, but pay absolutely nothing for them.

I don't think it's fair to quote R&D, especially if being done by the company itself.

What comes out of R&D aren't things that immediately go to sale. Just because you come up with something doesn't mean that you should get taxed on it, corporate entity or individual. You haven't made a financial gain off of it yet. Once these developments enter the marketplace, or are sold off, at that point money has changed hands. If you sell something, you pay your taxes. If you buy something, you pay your taxes. If money changes hands outside the company, you pay taxes.

As for your last point, that is a tricky question. However, again, the money still comes back stateside, and should be taxed. If any money returns stateside, whether to pay a bill, a bonus, whatever, then it should be taxed as normal corporate taxes. If the money never enters the country, well then the country that the company is HQ in has no rights to the taxes.

Say I have a business, we'll call it Bob's Custom Computers with HQ in Lexington, KY. Now, lets say that I sell lots of computers in the states via website. Now, let's say that I have started to receive a bunch of orders from Europe, but damn, shipping delays, custom's fee's, VAT, etc...shew, really slows things down and makes it more expensive than it should. Then, I have an idea! I have a friend, Antonio, that lives in Naples, Italy!!!! So I give him a ring and find out if he'd be interested in opening a Bob's Custom Computer "branch" (not a franchise) in Caserta. It's a small town, I lived there for three years, and crime is low. Antonio agrees. So, I fly in to Rome and have him pick me up at the airport. We spend some time together, enjoy some delicious pizza and wash it down with a few Peroni. We head in to Caserta, and find a perfect place to start up the first European branch. Secure a business loan for start-up costs, insurance, training, hiring, parts, shelves, furniture, etc.. and get a business license. SWEET! We are in business!!! So, Bob's Custom Computers now has a foreign subsidiary, with production in both Kentucky and Italy. The US HQ is doing very well, and so is the European branch with Antonio as VP of foreign offices. Antonio, under my guidance, continues to earn great profit and begins expansion of his facility, while I do the same at the corporate location. Both offices are doing equally as well and there is no need to "float" one with the other's profits.

If BCC, Italia never sends a dime to it's parent company in the USA, why the fuck is the IRS privy to that money????? And if BCC, USA never sends a dime to its foreign subsidiary, why would the EU be privy to BCC, USA profits?

Is this not exactly the same scenario?

 

[Zarathustra[H]]

If BCC, Italia never sends a dime to it's parent company in the USA, why the fuck is the IRS privy to that money????? And if BCC, USA never sends a dime to its foreign subsidiary, why would the EU be privy to BCC, USA profits?

Is this not exactly the same scenario?

If its split that neatly, and there are no shell companies for tax purposes then that is fine. I don't think anyone is suggesting that the U.S. should charge corporate income tax on a foreign subsidiary if it does all it's own work, and keeps its own revenues.

If - however - you now bring profit back in tot he U.S., I think there is an argument to be made to charge a corporate income tax. I'm not sure I agree with it, but I do believe it is there.

The problem is real;ly more about these intentional evasions, like my example with the shell company in country5 above (the the double dutch Irish sandwich, is a version of this).

The companies then have the gall to request bringing these revenues back to the U.S. tax free, after moving their incomes to Ireland to benefit from their lower tax rates, without actually having any operations in Ireland other than a P.O box.

 

[swimming pool]

Mmmmmm.... Double Irish Dutch Sandwich.


/Homer

 

[tetris42]

They would love the higher corporate taxes until corporations started closing plants, laying off workers, raising prices, etc. Corporations are not just money pits for taxes any more than regular people are. If you take more of their income there will be a reaction. This is no different than arguments around trade deficits. People love the theory (made in America) but they hate the reality (higher prices). Given the choice between a lower priced TV and a fully taxed TV corporation or made in America TV they will always vote with their wallets and go for lower prices.

there would be a reaction, but the long term effects are more debatable. After all, if you look at countries that have strong sanctions on corporations, they're not exactly floundering. You think Corporations still wouldn't want to be able to sell their products in America, even with a higher cost involved? It's not like the USA market is huge or anything.

That's actually besides the point though. The point is this is anti-democratic. People would vote to close the damn loopholes and make giant corporations have to play fair like smaller businesses. Christ, you could even LOWER taxes but bring in more money if the loopholes were closed. It's big money interests that prevent that from happening. You think the American people voted to have the bank bailout? They voted AGAINST it, though Henry Paulson and friends found a way to get it pushed through Congress anyway.

 

[aaronspink]

No, my solution is "its complicated, so get the best minds on the subject matter in a room, have them come up with a standard fair method for evaluating the source of income within an organization, replacing current come up with an international treaty to make sure everyone does it the same way, then charge income tax based on that determination of the creation of value, taking it out of the hands of the corporations to make this determination.

Simple way to do this is: Required Equal Offer Acceptance. If company A is selling IP at a song to a subsidiary, any other company can buy that IP at the exact same price. Likewise for all the other parts. Companies can still set whatever internal prices they want, just if they try to game the system, they'll get gamed in return.

 

[alxlwson]

Simple way to do this is: Required Equal Offer Acceptance. If company A is selling IP at a song to a subsidiary, any other company can buy that IP at the exact same price. Likewise for all the other parts. Companies can still set whatever internal prices they want, just if they try to game the system, they'll get gamed in return.

That's not very free market, at all.... Actually, that sounds to be completely opposite.

 

[Skripka]

Correct. In fact I bet if you were to eliminate corporate tax, the U.S. economy would be boosted immensely by the amount of cash brought back in.

I'm glad you're happy to lose money...because your reasoning is fantastically flawed. 5th Junior Achievement business sense is all that is needed to know you're fantastically wrong. But you have *faith*.

 

[MisterClean]

I'm glad you're happy to lose money...because your reasoning is fantastically flawed. 5th Junior Achievement business sense is all that is needed to know you're fantastically wrong. But you have *faith*.

This just in: the government letting people keep their own money is somehow the same thing as losing money.

 

[Skripka]

This just in: the government letting people keep their own money is somehow the same thing as losing money.

I don't know what you're saying. I was referencing v6maro's willingness to bet and his bet being a straight up losing bet.

Somehow thinking that magically making corporations freeloaders on society will get them to spend billions of USD to move back to the USA when they've already spent billions to leave...is utter foolishness. The girl is gone ace, time to let her go. Thanks to things like NAFTA they're gone, and they are not coming back. Defunding the government and allowing corporations to destroy the environment here (like in China) won't get them back either. They are gone.

 

[MisterClean]

I

I don't know what you're saying. I was referencing v6maro's willingness to bet and his bet being a straight up losing bet.

Somehow thinking that magically making corporations freeloaders on society will get them to spend billions of USD to move back to the USA when they've already spent billions to leave...is utter foolishness. The girl is gone ace, time to let her go. Thanks to things like NAFTA they're gone, and they are not coming back. Defunding the government and allowing corporations to destroy the environment here (like in China) won't get them back either. They are gone.

I can't read and missed the betting part. I mostly agree with your point now that ai understand what you were saying. Lower taxes would provide an incentive for companies to want to be here. The thing is though, like you said, corporate taxes are only a small part of the picture. Prevailing wages and regulations also have a huge impact on where a company chooses to settle. Since they've already spent the capitol setting up someplace else, even if we cut all the taxes and slashed regs (which face it, will never ever happen in our crony corporatist state), it just wouldn't make financial sense for most companies to pull up and relocate from a country that already has these things.

 

[aaronspink]

That's not very free market, at all.... Actually, that sounds to be completely opposite.

What? That's perfectly free market. The company is allowed to price their internal transfer costs at whatever they want and the market is free to decide if their pricing is reasonable or not. This is no different than any other market based arbitrage scenario that keeps the free market working. The free market is BASED on arbitrage keeping things on the up and up, the problem with international intra-corporation transfers is that they are immune to market arbitrage resulting in massive abuse for tax purposes. Therefore, the current system is in fact the system that is not free market.

 

[alxlwson]

What? That's perfectly free market. The company is allowed to price their internal transfer costs at whatever they want and the market is free to decide if their pricing is reasonable or not. This is no different than any other market based arbitrage scenario that keeps the free market working. The free market is BASED on arbitrage keeping things on the up and up, the problem with international intra-corporation transfers is that they are immune to market arbitrage resulting in massive abuse for tax purposes. Therefore, the current system is in fact the system that is not free market.

I was referring to giving anyone the right to buy the results of R&D at the same price.

 

[toast0]

The problem lies with how you define "profits made".

If you look purely at sales, that's one way of doing it. But what about the value created by manufacturing? What about R&D activities? If you imagine instead several businesses each doing one piece of the pie, it is easy.

Let’s assume for a moment that we have 4 separate companies each doing specialized tasks.

- Design Owner Company located in country1
- R&D Contractor located in country2
- Manufacturing company located in country3
- Sales & Distribution company located in country4

The design owner company would have a contract with the R&D company to develop the product and hand them the IP at the end. They would then have a contract with a contract manufacturer, paying them to manufacture each part. The manufacturing company would ship the finished goods to the Sales and Distribution company which would have some sort of contract with the design owner. Each of these would have negotiated rates and each company would earn something close to the value of what they were producing (if in a competitive market)

Based on each of these companies contracts they would each earn some money for their roles paid to them by the design owner, and pay corporate income tax on that in each of their respective countries (2 & 3 and 4) The design owner would earn an income of what is left, and pay corporate income tax on that in country 1. Simple and fair.

Now what happens if all of these disparate parts are part of the same company. The activities are still spread out over several countries as above, but now one corporate entity can decide the value of each step. Maybe the corporate tax rate is high where the manufacturing site is, so in order to minimize taxes paid at the manufacturing site, that side sells the products for pennies to the sales and distribution company, and instead shifts their income to the country in which the sales and distribution company is located, instead paying that lower rate.

The value is still being created in the same place, but now the reported revenue has been shifted through accounting tweaks into countries where the rates are low. The corporation doesn’t care, because the money is still in the family, so to speak. This is what’s called transfer pricing. The corporation gets do decide – with little to no regulation – the price which it charges its different divisions located in different countries.

Now lets take it even further. Because they are all the same company, the R&D company sells the intellectual property of what they have developed to a holding company in a 5th country, also a part of the same multinational corporation. This holding company then turns around and charges licensing fees for that intellectual property from the manufacturing site in country 3 for the right to manufacture under those patents. The corporation still doesn’t care, because it’s all within the family.

Oh, but did I mention that country5 is a country with poor infrastructure that spends nothing on supporting businesses. No one would want to do business there. And that’s why they don’t. The holding company is just a PO box and a voicemail redirect, both of which get checked occasionally. It doesn’t have a single employee. Why would they do this? Because country5 also happens to have ridiculously low corporate income taxation. So now, without actually doing ANYTHING AT ALL in country 5, they have shifted their revenue there, and pay the lowest income tax they can.

Countries2 and 3 are understandably pissed about this, because the multinational corporation has taken advantage of their infrastructure, their patent systems, their workforce education, their police, fire and military defense – all of which costs money – to design and manufacture the part, but all the income is reported in country 5 which has provided nothing, only because they have the lowest rate.

THIS is what people are pissed about and think should be fixed.

It has nothing to do with individual income taxation which is all screwed up. I agree with you, why should a U.S. citizen pay individual income tax to the U.S. if living and working abroad and not taking advantage of anything the U.S. provides? That one baffles even me, but it is a completely separate issue from the transfer pricing issue this article is about.

Maybe all this sounds far fetched to you? It shouldn't. EVERY SINGLE multinational out there does a version of this to reduce their income tax liabilities.

This is a great summary of the issue. Given the five subsidiary companies (assuming the 5th in country 5, because it will be there), how is the income allocated. Tax authorities have some ability to investigate inappropriate transfer pricing, but it's not easy to investigate as there are no clear answers when you look into the details either, it takes forever, and there aren't resources to do many investigations, so few investigations happen. You could require subsidiaries to have individual profit margins within some margin of each other, but that might not actually be reasonable; manufacturing and sales are not actually expected to have similar profit margins. Maybe you could have the income tax liability shift to stockholders somehow; although I'd guess stockholders would just find a way to move to Country 5 for tax purposes, instead of the companies themselves.

And that still leaves out countries where a product is used, but without local presence at all, through digital distribution or parcel post -- these countries would often like to see some income tax as well.

 

[Xrave]

Don't hate the player. Hate the game.

 

[mesyn191]

Don't hate the player. Hate the game.

The "players" get to influence if not outright set the rules via lobbying though.

By doing so over a period of decades they have essentially created the "game".

I'm not suggesting a conspiracy or even a coordinated effort of any sort. One is not necessary at all. You just need a bunch of powerful corporations and rich people constantly pushing for loopholes in tax law and a easing of regulations.