Thursday, 29 November 2012

Double Irish Dutch Sandwich, How Multinational Corporations Avoid Tax

You wont find “Double Irish Dutch Sandwich” on a menu. Instead, you'll find them on the menu of legal financial shenanigans available to multinational corporations, taking advantage of these complicated tax loopholes to minimize their tax burden.

Apple, Google, Amazon, Adobe, and Microsoft are well know culprits of this kind of activity. Google’s tax rate was 2.4 percent, the lowest of all American technological companies, as measured by market capitalisation, leading the pack to minimise their tax burden. However, this kind of behaviour is not illegal but immoral.

In 2011, Google had $4 billion worth of sales in the United Kingdom, while it only paid $5.4 million (0.1%) in UK corporate tax. Last month, French tax authorities charged Google France with avoiding taxes via Ireland and owing $1.3 billion in fines. The Irish minister of finance, argued that the problem fundamentally lies with the American tax code. “US tax on profits of foreign subsidiaries with such arrangements is deferred indefinitely until the profits are repatriated by dividends or otherwise to the US parent company," he said. "That is a US arrangement, not an Irish one.” These cases may be early warning signs that these complicated international tax avoidance schemes may be coming to an end, as government authorities try to mitigate this.

How Does Double Irish Dutch Sandwich Work?

A company sells or licenses its foreign rights to intellectual property developed in the United States to a subsidiary in a country with lower tax rates. The foreign profits that come are attributed to the offshore subsidiary rather than the parent company. Any payments contribute to taxable income, the parent company has an incentive to set them as low as possible. Cutting the foreign subsidiary’s expenses effectively shifts profits overseas.

Double Irish

The biggest culprit Google license its technology to a fun little company called Google Ireland Holdings, headquartered in Bermuda. It appears to not have any employees, and it does not exist beyond paperwork. Bermuda, has zero corporate income tax, so as a Bermuda company, Google Ireland Holdings pays none. This holding company is owned by yet another Bermuda-based subsidiary, Google Bermuda Unlimited, managed by a law firm specialising in such offshore transactions. The “unlimited” corporation means it is not required to disclose income statements, balance sheets, and other financial information.
Google Ireland Holdings, in turn, owns Google Ireland Limited, which employs 2,000 people in Dublin. Google Ireland Limited reported a pretax income of less than 1% of sales in 2008 and paid $5.4 billion in royalties to Google Ireland Holdings.

Double Dutch

Getting tax-free money from Ireland to Bermuda requires a stopover in the Netherlands, to Google Netherlands Holdings B.V, listing no employees and pays out about 99.8% of what it collects to the Bermuda entity.
From a US tax point of view, neither Google Ireland Holdings nor Google Netherlands Holdings B.V exist. The United States sees only an Irish company with a Bermuda branch, where most of its net income comes to rest. The end result is a near-zero rate of tax on income derived from customers in Europe, the Middle East, and Africa that is attributable to the high-value intangibles that encompass the bulk of Google’s economic factors of production, and a very low rate of tax on returns attributable to the services of Google’s Irish-based sales force.

Missing The Cheese & Tomato

The “Double Irish Dutch Sandwich” tax structure has become increasingly popular with many US companies holding IP.  The structure (in which the two Irish companies are referred to as the “bread” and the Netherlands company as the “cheese”) is designed to help many US multinationals reduce their global taxation liabilities through the use of the favourable taxation regimes in both Ireland and the Netherlands. The pending legislation in Brussels would do a lot to reduce this current scheme.

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