Friday, October 22, 2010

Search Google for "Double Irish" and "Dutch Sandwich"

Photo © Karin Engelbrecht

They are not menu items in a trendy little bistro.

It's more like a zen question: How can you do no evil and pay no tax while making billions of dollars a year?

So, go ahead -- google "double irish" and "dutch sandwich".

Oh, for chrissakes, just click here.

Google 2.4% Rate Shows How $60 Billion Lost to Tax Loopholes
Google Inc. cut its taxes by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda.

Google, the third-largest U.S. technology company by market capitalization, hasn’t been accused of breaking tax laws. “Google’s practices are very similar to those at countless other global companies operating across a wide range of industries,” said Jane Penner, a spokeswoman for the Mountain View, California-based company.

The tactics of Google and Facebook depend on “transfer pricing,” paper transactions among corporate subsidiaries that allow for allocating income to tax havens while attributing expenses to higher-tax countries. Such income shifting costs the U.S. government as much as $60 billion in annual revenue, according to Kimberly A. Clausing, an economics professor at Reed College in Portland, Oregon.

Facebook, the world’s biggest social network, is preparing a structure similar to Google’s that will send earnings from Ireland to the Cayman Islands, according to the company’s filings in Ireland and the Caymans.

Google’s income shifting -- involving strategies known to lawyers as the “Double Irish” and the “Dutch Sandwich” -- helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization, according to regulatory filings in six countries.

“It’s remarkable that Google’s effective rate is that low,” said Martin A. Sullivan, a tax economist who formerly worked for the U.S. Treasury Department. “We know this company operates throughout the world mostly in high-tax countries where the average corporate rate is well over 20 percent.”

The U.S. corporate income-tax rate is 35 percent. In the U.K., Google’s second-biggest market by revenue, it’s 28 percent.

Google, the owner of the world’s most popular search engine, uses a strategy that has gained favor among such companies as Facebook Inc. and Microsoft Corp. The method takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there, largely escaping the country’s 12.5 percent income tax.

The earnings wind up in island havens that levy no corporate income taxes at all. Companies that use the Double Irish arrangement avoid taxes at home and abroad.

Meanwhile, the U.S. government struggles to close a projected $1.4 trillion budget gap and European Union countries face a collective projected deficit of 868 billion euros.

As a strategy for limiting taxes, the Double Irish method is “very common at the moment, particularly with companies with intellectual property,” said Richard Murphy, director of U.K.- based Tax Research LLP. Murphy, who has worked on similar transactions, estimates that hundreds of multinationals use some version of the method.

“The sandwich leaves no tax behind to taste,” said Murphy of Tax Research LLP.

“You accumulate profits within Ireland, but then you get them out of the country relatively easily,” said Jim Stewart, a senior lecturer in finance at Trinity College’s school of business in Dublin. “And you do it by using Bermuda.”

Once Google’s non-U.S. profits hit Bermuda, they become difficult to track. The subsidiary managed there changed its legal form of organization in 2006 to become a so-called unlimited liability company. Under Irish rules, that means it’s not required to disclose such financial information as income statements or balance sheets.

“Sticking an unlimited company in the group structure has become more common in Ireland, largely to prevent disclosure,” Stewart said.

The high corporate tax rate in the U.S. motivates companies to move activities and related income to lower-tax countries, said Irving H. Plotkin, a senior managing director at PricewaterhouseCoopers LLP’s national tax practice in Boston. He delivered a presentation in Washington, D.C. this year titled “Transfer Pricing is Not a Four Letter Word.”

“A company’s obligation to its shareholders is to try to minimize its taxes and all costs, but to do so legally,” Plotkin said in an interview.

Technically, multinationals that shift profits overseas are deferring U.S. income taxes, not avoiding them permanently. The deferral lasts until companies decide to bring the earnings back to the U.S. In practice, they rarely repatriate significant portions, thus avoiding the taxes indefinitely, said Michelle Hanlon, an accounting professor at the Massachusetts Institute of Technology.

U.S. policy makers, meanwhile, have taken halting steps to address concerns about transfer pricing. In 2009, the Treasury Department proposed levying taxes on certain payments between U.S. companies’ foreign subsidiaries.

Treasury officials, who estimated the policy change would raise $86.5 billion in new revenue over the next decade, dropped it after Congress and Treasury were lobbied by companies, including manufacturing and media conglomerate General Electric Co., health-product maker Johnson & Johnson and coffee giant Starbucks Corp., according to federal disclosures compiled by the non-profit Center for Responsive Politics.

The rules for transfer pricing should be replaced with a system that allocates profits among countries the way most U.S. states with a corporate income tax do -- based on such aspects as sales or number of employees in each jurisdiction, said Reuven S. Avi-Yonah, director of the international tax program at the University of Michigan Law School.

“The system is broken and I think it needs to be scrapped,” said Avi-Yonah, also a special counsel at law firm Steptoe & Johnson LLP in Washington D.C. “Companies are getting away with murder.”

In February, the Obama administration proposed measures to curb shifting profits offshore, part of a package intended to raise $12 billion a year over the coming decade.

The key proposals largely haven’t advanced in Congress.

US Congressman Dave Camp from Michigan is the Ranking Republican on the House Ways and Means Committee.

He opened a hearing on "Transfer Pricing Issues" in May this year with a complete whitewash of transfer pricing, saying the policies protect American "leaders in innovation" and "these employers provide larger than average paychecks for Americans".
Transfer pricing rules have been a matter of interest for some time and today’s examination will help us all understand a little better how American companies struggle to stay competitive.

Now, it appears by the witnesses invited by the Majority that we will hear the argument that the transfer pricing rules provide an incentive for these companies to ship jobs overseas. If that is the Majority’s real concern – the tax code pushing jobs overseas – then I would suggest we focus on the real problem, which is the corporate tax rate.

shifting to an arbitrary “formula apportionment” system ignores not only the international competition U.S. employers already face, but also ignores the fact that such a move could expose worldwide American companies to double taxation. Unless foreign countries adopted a similar formula – and virtually all use our current “arms-length” standard to determine fair market value – the result could be double taxation.

[This ignores the fact that the techniques used pass through countries with very low to no tax incidents. There can be no double taxation without the second imposition of a tax. It also ignores the foreign tax credits that the US offers to US companies doing business in many or most of its significant trading partners. But ignor-ance seems to be the name of the came here. That and dissemblance, as he continues down a side track; indeed, he jumps the track and careens down a dirt road:]

Before I close, I want to make a particular point with regard to the pamphlet produced by the Joint Committee on Taxation. While I certainly appreciate their efforts, it is critical to note that the Joint Tax Committee, by its own admission, did not look at the transfer pricing practices of a representative sample of American companies. Instead, they focused on only six companies with similar tax liabilities.

Even more significantly, JCT’s pamphlet fails to meaningfully describe other countries’ international tax systems or their transfer pricing regimes, and it does not adequately discuss the global tax treatment or transfer pricing practices of foreign companies that compete directly against the six American companies that were studied.

For those reasons, JCT’s pamphlet, while very informative about the law, comes without the critical broader context that policymakers need to evaluate the effects on international competitiveness of proposed changes to our current law.

Guambat doubts that it was not only the large IT companies (and others) who take advantage of these tax havens. He's quite certain that the tax mavens who contrive, lobby and sell these convenient dodges also manage to discreetly secrete their nice fat fees in these rabbit holes, also.

Guambat can almost here the right-wing chorus warming up with renditions of "Obama Boys" as they try to pin this outrageous con on Obama, with the claim, "well, you know, Google backed Obama".



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