

The Tax Haven That's Saving Google Billions - bishnu
http://www.businessweek.com/magazine/content/10_44/b4201043146825.htm

======
camz
I wrote an article on this transaction that I had posted to the HN community
that breaks down a number of the points and explains how it works.

<http://cameronkeng.com/hn-how-do-i-pull-a-google/>

A few things you should consider about international taxation is that it's
complicated and only works because they have the infrastructure to sustain it.

 __Disclaimer, I'm not saying what they're doing is right or wrong, but simply
placing it into context __

1\. Individuals have a hard time using international tax law similarly because
of CFC rules (closely-held foreign corps). If anyone owns more than 10% of a
foreign company they must include or report the income as part of their
current earnings.

2\. The effective tax rate is only "2.something percent" of income the income
google earned outside the US.

3\. To have an APA (Advanced Pricing Agreement) with the IRS is incredibly
expensive and time consuming because it's like getting audited in advance and
then justifying it before you ever do anything.

4\. You need to pay at a minimum a big 4 accounting firm 10 million to start a
project of this complexity over a number of countries.

5\. The dutch companies are simply a "conduit" to allow the money to
ultimately reach the Caribbean island tax havens because they have no income
tax and simply charge a flat tax of 15k.

6\. On cperciva's note, this tax plan could be considered "post-poning income
recognition" but in reality it effectively is never repatriated or brought
back into the country because google is such a multinational company. They
could use the money for their international business very easily or they could
use their foreign cash reserves to purchase an asset in a foreign country and
still retain the ownership by the US main company.

I could go on for a while but this is just a the tip of the iceberg.

I've practice this area of taxation before as a CPA so I could give you a
number of other examples.

~~~
bd_at_rivenhill
Does this get any easier if you do the original incorporation offshore?

~~~
camz
Yes possibly, if you're able to source the income offshore and keep it away
from the united states. Then you'd be able remove it easier. But, as a
shareholder that owns more than 10% of the company. It effectively cancels any
of the tax benefits.

There are some creative ways to remove yourself from the equation but it's
pretty complicated.

Is this Brian? lol

~~~
bd_at_rivenhill
Yep that's me, always interested in this sort of thing.

------
Matt_Cutts
This is an article from 2010 that's already been submitted to HN in the past:
<http://news.ycombinator.com/item?id=1815457>

Personally, I find the sub-headline misleading. The subhead reads "Google uses
a complicated structure to send most of its overseas profits to tax havens,
keeping its corporate rate at a super-low 2.4 percent." But I believe that
number refers only to Google's overseas tax rate. This more recent article
[http://news.yahoo.com/googles-tax-rate-still-seems-very-
low-...](http://news.yahoo.com/googles-tax-rate-still-seems-very-
low-213223063.html) says that Google's overall tax rate was 22.2% in 2009.

~~~
mslate
Which is still ridiculously well below the stated 35% corporate tax rate in
the USA (source--IRS <http://www.irs.gov/pub/irs-pdf/i1120.pdf>)

~~~
Matt_Cutts
Note: I am only speaking for myself personally, not for my employer.

I did a little searching, and [http://www.reuters.com/article/2011/07/27/us-
microsoft-tax-i...](http://www.reuters.com/article/2011/07/27/us-microsoft-
tax-idUSTRE76Q6OB20110727) says that in their last fiscal years,

\- Microsoft had an overall effective worldwide tax rate of 17.5%.

\- Google's effective tax rate was 21%.

\- Apple's effective tax rate was 24%.

\- IBM's effective tax rate was 25%.

Then with a bit more digging into (independent Senator from Vermont) Bernie
Sanders' twitter feed, I saw:

\- General Electric had an effective tax rate of -45.3% from 2008 to 2010:
[https://twitter.com/#!/SenatorSanders/status/132791467994386...](https://twitter.com/#!/SenatorSanders/status/132791467994386432)

\- ExxonMobil had an effective tax rate of -38.3% in 2009:
[https://twitter.com/#!/SenatorSanders/status/132835853536989...](https://twitter.com/#!/SenatorSanders/status/132835853536989186)

\- Merck had an effective tax rate of -1% in 2009:
[https://twitter.com/#!/SenatorSanders/status/132927696131985...](https://twitter.com/#!/SenatorSanders/status/132927696131985408)

\- Boeing had an effective tax rate of -1.8% in 2008-2010:
[https://twitter.com/#!/SenatorSanders/status/132973012763938...](https://twitter.com/#!/SenatorSanders/status/132973012763938817)

\- Verizon had an effective tax rate of -5.4% in 2009 and 2010:
[https://twitter.com/#!/SenatorSanders/status/132944059814785...](https://twitter.com/#!/SenatorSanders/status/132944059814785024)

Again, I'm just speaking for myself personally, not on behalf of my employer.
My issue with the article was that I felt like it focused on Google when a
broader perspective on corporate tax rates would have been more helpful.

~~~
camz
Not to discredit Matt or his point, but I think the illustration of
percentages does very little in illuminating valid points when it comes to
taxation because most people don't understand the mechanisms and the theory
behind tax law at this level.

I agree with Matt that the focus on Google is unfair, but the use of these one
off statistics without an in depth review of the companies named above for the
last 10 years is also unfair (Yes it takes a review of the past 10 years to
establish a proper understanding of a company's tax position).

But, I will qualify that GE has an amazing tax team and the oil and gas
industries are a beastly at lobbying.

------
cperciva
My knowledge of international corporate tax law is practically nil, but if I
understand this correctly, the money sitting in Bermuda is still subject to
taxation when it gets brought back into the US; so Google isn't _avoiding_
taxes, but is rather _postponing_ taxes by doing this.

~~~
angli
I don't believe that Google is actually _just_ postponing taxes. Instead, they
are also being selective about what money they pay it on. Basically, the money
has been obtained in Ireland, sent to the Netherlands, and then Bermuda. So it
hasn't touched the US, and they don't owe US taxes. They can then do two
things with that money. One, they can bring it into the US, pay taxes on it,
and use it to do whatever it is they plan on doing with it, or, two, which I
think is more likely, they use it to finance international business, and they
_never_ pay US taxes on it. However, there hasn't been any "loss" to the US
per se. If anything, it's the Irish who should be up in arms

~~~
a3camero
The Irish are probably not going to be too upset that companies are taking
advantage of the system that they setup in order to attract large companies
and the associated financial/legal industry. It's not a case of big companies
exploiting the poor Irish.

~~~
OliverM
Except, from the original article, I don't get why they don't just set up in
Denmark & avoid setting up in Dublin altogether. They must be doing
_something_ worthwhile with those 2,000 Irish employees.

Disclaimer: I'm Irish.

~~~
Zakharov
This is just a guess, but if they were set up in the Netherlands, wouldn't
they have to pay Dutch taxes? My impression is that they don't have to pay
Dutch taxes because the money is just passing through the Netherlands, not
being earned there.

------
brown9-2
These tax-avoidance schemes have great names - the "Double Irish" Arrangement
and the "Dutch Sandwich":
<http://en.wikipedia.org/wiki/Double_Irish_Arrangement>

------
idspispopd
This is going to sound like a 99% rant, however this article perfectly
demonstrates a scenario where tax-avoidance benefits few at the expense of the
greater populace.

To quote the article: "a company's obligation to its shareholders is to try to
minimise its taxes and all costs, but to do so legally"

Let's talk about who those share holders are: In tech companies the largest
percentage of shares usually belong to the founders or the investors. Meaning
that the tax minimisation is directly profiting few, and in some cases a
single individual.

Regular persons do not have the financial clout to either purchase shares,
even in low volumes which would see so little of the avoided-tax-returned-as-
profits. Similarly small companies don't have sufficient funding to set up
elaborate tax minimisation schemes, effectively forcing them to bear the brunt
and be less competitive.

Governments deprived from tax income then turn to the population to bolster
their coffers, and often to remain popular the tax rate is kept lower than
required - which means cutting back on programs which benefit the greater
good. We've seen some pretty ridiculous examples of how underfunded the
education sector is becoming. (Somewhat hypocritical when the education sector
is responsible for creating the skilled individuals that fuel these
companies.)

Stopping international loopholes is incredibly difficult, however there is
still plenty that can be done to entice companies to not start them in the
first place. Incentive rates could be introduced which allow companies
(especially smaller ones) to take advantage of a lower rate in exchange for
certain business restrictions that limit these sorts of activities.

------
rayiner
Trying to tax multi-national corporations is futile and encourages huge
amounts of rent-seeking. We should just go to a low flat corporate tax rate
(say 10%). To offset that we should stop taxing capital gains at a lower rate
and crack down on tax avoidance by high-income individual taxpayers in the US.

A corporation can run their activities from Bermuda or wherever they want, but
corporate executives and shareholders aren't going to move to a shitty low-tax
jurisdiction if we up their rates.

~~~
Bud
It's "futile"? Really? Is that just shorthand for saying that you oppose
trying hard enough to do it successfully?

I don't think it's futile at all. I think we lack the national will to do it,
largely and obviously because of the folks who are in control of the relevant
decisions.

I'd be more sympathetic to your argument (and just fyi, I am not entirely
unsympathetic as it is) if I had some confidence that adopting a 10% flat tax
would actually result in corporations paying that amount.

Taxing capital gains at a LOWER rate? Are you serious? Reagan/Bush/Bush
trashed those rates to such an extent that it seems laughable to advocate
lowering them any further. They're non-existent.

~~~
rayiner
With corporations, taxation is very complicated. The law is complicated
because its tries to be sensitive to the question of who should be taxed where
for what, and the facts are complicated because it's hard to find out exactly
what revenues are being made and what they represent. You can always throw
more enforcement at the problem, but that costs money, and your yield is
uncertain because companies will just spend more money on tax lawyers to shift
things around.

Taxing individuals is a lot simpler. You live in the US, you pay US taxes on
all your income.

Also, I said we should stop taxing capital gains at a lower rate. There is no
reason for it, and it just distorts the market, shifting activity from
spending to saving.

~~~
JoshTriplett
> Taxing individuals is a lot simpler. You live in the US, you pay US taxes on
> all your income.

Not quite as simple as that, actually. As a US citizen, you have to pay US
taxes on your income even if you live and work in another country. Which
sounds a lot like the problem that Google and other companies successfully
avoid: a jurisdiction claiming tax on income taking place entirely outside of
their jurisdiction. Individuals just have fewer options to help them avoid
this problem; I suppose you could call that "simpler".

(Also, I'll carefully note that you said "simpler", not "simple". The latter
rather obviously does not apply to the US tax code.)

~~~
rayiner
The point is that a corporation can relocate activities on paper to the
Bahamas to avoid taxation. A US citizen can live and work in another country
and try to avoid tax that way, but few people are actually going to do that.
All of the places someone might actually want to live have higher tax rates
than the US.

------
curt
This is exactly why high taxes hurt startups. How can a startup/small business
compete profit wise against Google or another large company when they are
paying a much lower effective rate. Since their tax burden is so much lower
they can charge a much lower price, effectively pricing any
startup/competition out of the market.

We just need a super low corporate tax with zero loopholes that make it less
expensive to just comply vs hiring hundreds of lawyers and accountants to move
around money.

~~~
shin_lao
Although you would reduce the amount of fraud with a lower tax rate, you would
also decrease your income. The goal is to have the highest income possible,
even if that implies fraud or optimizations.

Big companies will always have an advantage regarding taxes: they can
provision more easily, pay people to optimize, lobby, etc.

I'm not saying you have an optimal tax rate in the USA, but the naive approach
regarding this problem will probably not work.

More information: <http://en.wikipedia.org/wiki/Optimal_tax>

------
joshfraser
How hard would it be to set up a system for startups, or at least mid-sized
corporation to get the same tax breaks in mass? For example, could a company
handle setting up all the holding companies & bank accounts around the world
and make the process more affordable by doing it for hundreds of companies at
once? You could share the same mailing addresses for each of the companies and
the cost of keeping up w/ all the tax laws would be amortized across a much
larger group of corporations.

------
ppereira
For a paper that discusses the Google example in some detail see Ed
Kleinbard's "Stateless income's challenge to tax policy".

[http://www.sbs.ox.ac.uk/centres/tax/symposia/Documents/Klein...](http://www.sbs.ox.ac.uk/centres/tax/symposia/Documents/Kleinbard%20final%20v3.pdf)

------
danssig
Wait a second. These are earnings that Google international made. So, yes,
perhaps they have weaseled out of paying taxes in the UK or various European
countries but IMO they shouldn't owe the US a dime of that money. It wasn't
made in the US.

I find it really frustrating that people talk about discuss these things as
"look at all the revenue the US lost because of this!". Sure, and look how
much the mafia lost on it too! Both of these armed groups could have made more
money if they just extorted foreign agents and took their money (calling it
"protection money" or "tax" or whatever seems appropriate).

------
Skillset
An earlier Hacker News discussion on this article can be found here:
<http://news.ycombinator.com/item?id=1815457>

------
nazgulnarsil
good, google creates more value than the average government program.

------
cq
The Tax Haven That's Stealing From Your Government

------
stephenhamilton
I'd like to know how much of the $60 billion tax shortfall the US government
doesn't receive ends up in being spent by Google (at their discretion) on
public works, education etc.

I don't know enough to suggest this is (or isn't) the case, but perhaps this
model would allow companies who genuinely want to look after their community
to basically choose how money, that would otherwise be tax money, gets spent.

I think lots of people would rather see money spent on public health and
education than lots of other areas tax money gets diverted to.

Of course, I'm not so naive as to think that this will take off anytime
soon...

~~~
rprasad
That's called a charitable deduction, and it's already part of the tax code.

Google isn't using the charitable deduction; it's simply using a loophole to
avoid U.S taxation on income earned from non-US sources. Whether this is bad
depends on your view on taxation.

~~~
danssig
>it's simply using a loophole to avoid U.S taxation on income earned from non-
US sources

Income earned from non-US sources on US soil or outside of it? The thing that
infuriates me about my home country is that they think I owe taxes on money
I've earned while living in a totally different country. What stops, say,
Russia from deciding I owe _them_ taxes too?

