Irish Coffee, Sandwiches and Just Desserts

For Americans in general, it’s watching the Super Bowl, the World Series, March Madness, the BCS Championship, and the NBA or Stanley Cup finals. For the Silly Con Valley, it’s avoiding taxes by moving its core values – its underlying intellectual property (patents, copyrights, etc. or IP) – to low tax jurisdictions around the world, then charging its domestic and high tax country subsidiaries a high price for that IP, effectively turning income into a cost. The costs are deducted from the income in the high tax jurisdictions, and the revenues are recognized in the low tax countries.

This is called the Double Irish: “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 result? Foreign profits that come from that tech—like the rights to Google’s search and advertising technology, effectively the keys to the kingdom—are now attributed to that offshore subsidiary rather than the Mountain View, California headquarters. The subsidiaries have to pay ‘arm’s length’ prices for those rights, just like an outside company would.” ARSTechnica.com, January 20^th.

I’ve blogged how Apple parks its IP in Ireland, where it pays a tiny tax but hires lots of locals for administrative tasks, but when it was recently pressured by shareholders to pay out roughly $150M in dividends to compensate for its slowing growth rates, Apple balked at first, complaining that if they repatriated such a huge sum, the U.S. corporate rates would eat 35% of the total. Then they figured it out. They would borrow the money needed for dividend payments (borrowed money is not taxable income), but the final coup was that since they were borrowing the money in the U.S., the interest they were paying on this tax-avoidance debt was deductible against U.S. taxes. Perfectly legal and perfectly infuriating.

But when you dig into these mega-complex structures, millions and millions of dollars spent and lots of high-priced specialists engaged to figure it all out, the infuriation simple grows. “So who does Google license its tech to? A fun little company called Google Ireland Holdings, headquartered in Bermuda. Bermuda, of course, has zero corporate income tax. So as a Bermuda company, Google Ireland Holdings pays none.

“Google Ireland Holdings, in turn, owns Google Ireland Limited, which employs 2,000 people in downtown Dublin. Google Ireland Limited reported a pretax income of less than one percent of sales in 2008 and paid $5.4 billion in royalties to Google Ireland Holdings. (French investigative news site OWNI.fr published Google Ireland Limited’s 2011 annual report and its Irish Registration Office documents in 2012.)

“This holding company based in Bermuda is owned by yet another Bermuda-based subsidiary, Google Bermuda Unlimited. It is managed by Conyers, Dill, and Pearman, a law firm specializing in such offshore transactions. That ‘unlimited’ corporation means it is not required to disclose income statements, balance sheets, and other financial information.

“But getting money tax-free from Ireland to Bermuda requires a stopover in the Netherlands (the ‘Dutch Sandwich’ part) at Google Netherlands Holdings B.V. This entity, according to Bloomberg, ‘pays out about 99.8 percent of what it collects to the Bermuda entity, company filings show. The Amsterdam-based subsidiary lists no employees.’ ” ARSTechnica.com. Whew! What does it mean? The average American pays taxes at a rate that vastly exceed the U.S. tax rate paid by these companies, and it includes companies like General Electric and a good number of the behemoths headquartered in the Silicon Valley or its Seattle-area brethren. It legal, but…

The Organization for Economic Co-operation and Development (OECD)—a group of the world’s top economies – is beginning a series of meetings to figure out a multinational solution to stop these abusive – but legal – practices. The United States, it seems, is not the only country to lose a tax base from economic activity conducted within its borders. “Starting February 3, the Task Force on the Digital Economy is set to convene at the OECD’s office in Paris to discuss the global corporate response to these potential plans to rein in questionable tax practices. [In mid-January], the OECD published various corporate responses to its initial proposal—needless to say, companies don’t want to stop what they’re doing.

“‘This kind of tax planning, I believe, will end—the tax rate on the tech firms is going to go up, and they are squealing like stuck pigs,’ Edward Kleinbard, a professor of tax law at the University of Southern California, told Ars… ‘It is inevitable in a world where every jurisdiction is short of revenue, where every jurisdiction is worried about the fairness of competition of wholly domestic [firms] and multinational companies that seem to reach into the country in commercial terms but without tax purposes. When everyone is worried about that kind of competition, it strikes me as very unlikely that US tech firms will be able to preserve their extraordinarily low effective tax rates. Sooner or later, we’re going to get to a tax reporting system that has some stronger nexus where business is actually conducted.’” ARSTechnica.com.

Do you really blame them if they can get away with this legally? It our Congress that created this stage, and it is our Congress that can return fairness to the equation. Will the powerful lobbyists, backed by a Republican Party resolve to continue these loopholes here in the United States succeed, or with these companies finally – most with fleets of corporate jets and multimillionaire/billionaire senior executives – pay their fair share of taxes? What do you think?

I’m Peter Dekom, and just listening to how much they do to avoid taxes is chilling.