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Old 04-16-2011   #1
Join Date: Nov 2005
Posts: 646
Example of Corporate tax avoidance

Google Inc. used two colorfully named (but completely legal) tax avoidance schemes—the Double Irish and the Dutch Sandwich—to cut their taxes by $3.1 billion over the last three years.

The Double Irish
This shenanigan involves setting up a pair of companies in Ireland to disguise regular income as tax-deductible royalties on intellectual property.
Here's how it works: First, a parent corporation in the United States (like Google) sets up a small corporate subsidiary in Ireland—let's call it "S1." The parent then enters into a legal agreement that gives the European rights to all of its "intangible" products—like, say, an Internet search algorithm—to S1. In return, S1 agrees to help market or promote those products in some way within Europe. By virtue of this arrangement, all of the parent's European income from the products would be collected by S1.

The real trick comes next. At some point, S1 decides to relocate (at least on paper) its headquarters to Bermuda, which has no income tax. The company becomes a "dual resident," which means that, from the Irish point of view, it's subject to Bermuda tax law, but from the U.S. perspective, it's still incorporated in Ireland. To complete the scheme, the parent company then sets up a second Irish subsidiary (S2), which, importantly, chooses not to beconsidered a corporation under U.S. law; this has the effect of hiding its finances from the IRS. Why are two Irish subsidiaries better than one? Because now S1 can license the parent company's products to S2 in exchange for a stream of hefty royalty checks. This means that S2 can collect all the income, and be taxed by Ireland at a relatively low rate of 12.5 percent (compared to 35 percent in the United States). But the royalties it's paying to S1 can be deducted from its income. In the end, S2 doesn't have to pay that much in taxes, and the "royalties" that make their way to S1 are tax-free.

Wait, wouldn't it be easier just to set up a subsidiary in tax-free Bermuda? Why would anyone opt for the Double Irish over the Single Bermudan? Because of tax treaties. When you transfer money within the EU, the government doesn't take a cut in the form of a withholding tax. When money goes directly to an unregulated country like Bermuda, however, it gets taxed at the origin country's normal rate.

The Dutch Sandwich
If you really want to get fancy, you can add another layer to chicanery and turn your Double Irish into a Dutch Sandwich. This ploy makes use of an agreement between Ireland and other EU countries to further reduce their tax burdens.

To make it work, the parent company sets up a third subsidiary (S3) in the Netherlands, with no other purpose than to funnel money from S2 to S1. Instead of licensing the parent's products directly to S2, the Bermuda-based S1 grants them to its Dutch partner, who then passes them along. In other words, S1 and S2 are the bread around an S3 Dutch meat sandwich. What good is that? The Irish don't tax money being moved among European countries (S2 to S3), and the Netherlands takes only a small fee for moving the money from S3 to S1. This makes it so the "royalties" checks can arrive in Bermuda virtually untaxed.

The problem with strategies like the Double Irish/Dutch Sandwich is that the money gets stuck outside of the United States, where the parent company can't use it for domestic projects. If the company tried to "repatriate" the money to the United States, the IRS would hit it with an income tax, making the whole routine for naught. There are some fancy ways around this limitation, however—each named after the letter of the subsection of the tax code on which it depends.

See Tax Day 2011: The Double Irish and the Dutch Sandwich: A field guide to exotic tax dodges. - By J. Bryan Lowder - Slate Magazine

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Old 04-16-2011   #2
Self-Aggrandizing jackass
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The Ranch, Colorado
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Very good post.

The kool-aid drinking Tea Partiers fail to realize that the top 5% and the mega-corporations are in callusion, pissing on the Tea Partiers boots and telling them it's just rain.

The United States does not go after corporations money overseas with the same aggressiveness that it goes after individual citizens (maybe this would be a 14th amendment lawsuit to counter the implications of FEC vs. Citizens United).

Ryan and the Republicans want to lower tax rates on corporations arguing that it will create jobs:
Over the years 2001 to 2009 under Bush, our tax rates on individuals were as low as they have been in the actual 20th century, and yet the net job losses were negative.

The issue is not taxation that is costing America its jobs. It is the complex alignment of efficient transportation grids across oceans AND the simple fact that the American wage standard is significantly higher than developing nations overseas, with no meaningful benefit for paying a higher wage.

There are two solutions to the trends:
1) is what's happening now - overseas labor costs + transportation costs to move product to developed economies for sale (where the expensive currencies remain) is still cheaper than US labor costs. Jobs will move where the investor class makes the most profit, and there is no doubt that it's more profitable to use cheap labor for production, and sell to the US dollar for as long as that currency is the market leader for buying power.

2) The other solution is for the United States to do what most developing countries, and as you note in the above post, what many industrialized countries do: You tax the hell out of attempts to move your nation's currency outside of your nation.

Want to know why China is growing faster than possibly any other nation out there (I think Brazil might be in the lead this year)? They don't let you take money out of their economy without them taxing you punitively for doing it (if they let you at all). Japan? No foreign ownership of Japanese businesses - you have to be a partner (most developing countries do this as well).

What Americans are just not economically savvy to understand is that there is no end in sight to the loss of US jobs overseas. And as infrastructures have improved especially along the land masses that share borders with the great oceans, it's ever more reliable and ever more inexpensive to out-source even high-tech jobs like software programming, financial servicing, accounting, to go overseas too.

My theory is that there is an 'investor class' in the US comprised mainly of large mega-corporations and the top 5% individual earners who have bankrolled politicians of both major parties to keep money transfers cost-free and investment income taxed at an abhorrently low rate.

In the age of virtually limitless computer processing speed, it is very easy to use a vast fortune (the kind available to a mega-corporation or a top 5% individual) to make another vast fortune on top of it simply by trading in profits of a fraction of a cent continuously, millions of times each and every day.

Our corporations and our top 5% are leveraging their starting wealth and are investing increasingly in companies (US and/or foreign) that are specifically targeting the technological revolutions of foreign countries because those companies provide greater returns than their US counterparts.

The evidence you give from the tax code shows why this is profitable, and, if one can draw a conclusion through inference, what the future holds for the US if it does not drastically redesign its tax code and reconsider the economies of scale enabled by our taxes on transfer of US funds to overseas locations.

Now with a tax code that is thousands of pages long, around which hundreds of billions of dollars are exchanged for "Tax Services," how likely do you think it is that Democrats and Republicans are going to be to put all those donations out to pasture by revising the tax code into a libertine and simple code that anyone with a high-school education can easily manage in an afternoon?

In short, the US is doomed. Start looking for overseas places to move (or maybe Canada, but I prefer warmer climes).

"self-aggrandizing jackass" - it says it right on the label
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Old 04-24-2011   #3
Denver, Colorado
Paddling Since: 1995
Join Date: Apr 2007
Posts: 2,239
Well that is quite the shell game. I think popular support for undoing some of these free trade policies is growing.Some measure of protectionism is appropriate ,especially when you're hemorrhaging jobs.Tariffs ,limitations [ and /or taxes]on the movement of capital across borders,and prohibitions on foreign imports produced in sub standard labor or environmental conditions,are wholly reasonable.Ideological barricades are preventing needed changes.We have instead,a situation where we are being blackmailed by threats of capital flight, if policies are not further structured to favor big business and the wealthy.

A key point Basil made in the other thread was in regards to business putting greater demands on the infrastructure and succeeding under it's protections.Why should they be able to simply off shore the money or find a better return in some other market and siphon off needed capital from the domestic market.We need to take measures to prevent that, if election results don't favor the' economic royalists' [ as FDR put it].There is a precedent for the oligarchs to flee if they are voted out or otherwise overthrown.In Latin America it is tradition to flee with the national treasury to Miami ,then fund the right wing papers Yarmony quotes .Look up the increase in per capita income / ppp in, and number of these tax havens in recent years; Bermuda,Jersey,Caymen Isl.,etc.

There is a great quote in one of Palast's books from the Wall Street Journal all surprised that an idea outside the free market paradigm ,could work if given a chance.The idea was that of imposing limits on the movement of capital across borders,imposed by Chavez' government, a violation of a cornerstone free market principle.The essence of the shocked WSJ quote [ not verbatim]' it trapped liquidity within the economy and lead to significant economic activity',yeah 17.9 % growth followed by 9.4% the following year[ 2004 /2005 ?],the higher figure partially inflated by recovering from the economic stagnation caused by the lock out. 4% is considered optimistic for us in the near future.
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