Overseas tax loopholes closing - Apple, Google, Amazon, etc. getting nervous

01/21/2014 - 00:00

Last year, the Organisation for Economic Co-operation and Development (OECD)—a group of the world’s top economies—decided it was time to crack down on international tax shenanigans through meaningful reform.

These legal loopholes allow major tech corporations to move money around on paper through a series of shell corporations in Ireland, Bermuda, and the Netherlands. The companies save big, and "best" of all, it’s currently legal! This widespread strategy of moving money around involves two specific tactics better known as the “Dutch Sandwich” and the “Double Irish.”

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. Last week, 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.”

Double Irish—sadly not a delicious pub sandwich

Lots of companies engage in these strategies—Apple, Google, Amazon, Adobe, and Microsoft to name a few. How beneficial are they? Google’s overseas tax rate was 2.4 percent in 2009, the lowest of all American tech companies when measured by market capitalization. This shifting move saves the company billions of dollars annually.

As Ars reported in October 2013, Google is now moving even more money through a shell corporation in Bermuda—reaching a total of €8.8 billion ($11.91 billion) in 2012, 25 percent more than it did in 2011. (Ars obtained a copy of a Google financial filing from the Netherlands, dated September 27, 2013, from an anonymous source.)

Bloomberg first described the process of the Double Irish in 2010. As we have reported, here’s how the Double Irish works: 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.

Bloomberg concluded, “Because the 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.”

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.”