I wrote an article on this transaction that I had posted to the HN community that breaks down a number of the points and explains how it works.<p><a href="http://cameronkeng.com/hn-how-do-i-pull-a-google/" rel="nofollow">http://cameronkeng.com/hn-how-do-i-pull-a-google/</a><p>A few things you should consider about international taxation is that it's complicated and only works because they have the infrastructure to sustain it.<p><i></i> Disclaimer, I'm not saying what they're doing is right or wrong, but simply placing it into context<i></i><p>1. Individuals have a hard time using international tax law similarly because of CFC rules (closely-held foreign corps). If anyone owns more than 10% of a foreign company they must include or report the income as part of their current earnings.<p>2. The effective tax rate is only "2.something percent" of income the income google earned outside the US.<p>3. To have an APA (Advanced Pricing Agreement) with the IRS is incredibly expensive and time consuming because it's like getting audited in advance and then justifying it before you ever do anything.<p>4. You need to pay at a minimum a big 4 accounting firm 10 million to start a project of this complexity over a number of countries.<p>5. The dutch companies are simply a "conduit" to allow the money to ultimately reach the Caribbean island tax havens because they have no income tax and simply charge a flat tax of 15k.<p>6. On cperciva's note, this tax plan could be considered "post-poning income recognition" but in reality it effectively is never repatriated or brought back into the country because google is such a multinational company. They could use the money for their international business very easily or they could use their foreign cash reserves to purchase an asset in a foreign country and still retain the ownership by the US main company.<p>I could go on for a while but this is just a the tip of the iceberg.<p>I've practice this area of taxation before as a CPA so I could give you a number of other examples.
This is an article from 2010 that's already been submitted to HN in the past: <a href="http://news.ycombinator.com/item?id=1815457" rel="nofollow">http://news.ycombinator.com/item?id=1815457</a><p>Personally, I find the sub-headline misleading. The subhead reads "Google uses a complicated structure to send most of its overseas profits to tax havens, keeping its corporate rate at a super-low 2.4 percent." But I believe that number refers only to Google's overseas tax rate. This more recent article <a href="http://news.yahoo.com/googles-tax-rate-still-seems-very-low-213223063.html" rel="nofollow">http://news.yahoo.com/googles-tax-rate-still-seems-very-low-...</a> says that Google's overall tax rate was 22.2% in 2009.
My knowledge of international corporate tax law is practically nil, but if I understand this correctly, the money sitting in Bermuda is still subject to taxation when it gets brought back into the US; so Google isn't <i>avoiding</i> taxes, but is rather <i>postponing</i> taxes by doing this.
These tax-avoidance schemes have great names - the "Double Irish" Arrangement and the "Dutch Sandwich": <a href="http://en.wikipedia.org/wiki/Double_Irish_Arrangement" rel="nofollow">http://en.wikipedia.org/wiki/Double_Irish_Arrangement</a>
This is going to sound like a 99% rant, however this article perfectly demonstrates a scenario where tax-avoidance benefits few at the expense of the greater populace.<p>To quote the article: "a company's obligation to its shareholders is to try to minimise its taxes and all costs, but to do so legally"<p>Let's talk about who those share holders are: In tech companies the largest percentage of shares usually belong to the founders or the investors. Meaning that the tax minimisation is directly profiting few, and in some cases a single individual.<p>Regular persons do not have the financial clout to either purchase shares, even in low volumes which would see so little of the avoided-tax-returned-as-profits. Similarly small companies don't have sufficient funding to set up elaborate tax minimisation schemes, effectively forcing them to bear the brunt and be less competitive.<p>Governments deprived from tax income then turn to the population to bolster their coffers, and often to remain popular the tax rate is kept lower than required - which means cutting back on programs which benefit the greater good. We've seen some pretty ridiculous examples of how underfunded the education sector is becoming. (Somewhat hypocritical when the education sector is responsible for creating the skilled individuals that fuel these companies.)<p>Stopping international loopholes is incredibly difficult, however there is still plenty that can be done to entice companies to not start them in the first place. Incentive rates could be introduced which allow companies (especially smaller ones) to take advantage of a lower rate in exchange for certain business restrictions that limit these sorts of activities.
Trying to tax multi-national corporations is futile and encourages huge amounts of rent-seeking. We should just go to a low flat corporate tax rate (say 10%). To offset that we should stop taxing capital gains at a lower rate and crack down on tax avoidance by high-income individual taxpayers in the US.<p>A corporation can run their activities from Bermuda or wherever they want, but corporate executives and shareholders aren't going to move to a shitty low-tax jurisdiction if we up their rates.
This is exactly why high taxes hurt startups. How can a startup/small business compete profit wise against Google or another large company when they are paying a much lower effective rate. Since their tax burden is so much lower they can charge a much lower price, effectively pricing any startup/competition out of the market.<p>We just need a super low corporate tax with zero loopholes that make it less expensive to just comply vs hiring hundreds of lawyers and accountants to move around money.
How hard would it be to set up a system for startups, or at least mid-sized corporation to get the same tax breaks in mass? For example, could a company handle setting up all the holding companies & bank accounts around the world and make the process more affordable by doing it for hundreds of companies at once? You could share the same mailing addresses for each of the companies and the cost of keeping up w/ all the tax laws would be amortized across a much larger group of corporations.
For a paper that discusses the Google example in some detail see Ed Kleinbard's "Stateless income's challenge to tax policy".<p><a href="http://www.sbs.ox.ac.uk/centres/tax/symposia/Documents/Kleinbard%20final%20v3.pdf" rel="nofollow">http://www.sbs.ox.ac.uk/centres/tax/symposia/Documents/Klein...</a>
Wait a second. These are earnings that Google international made. So, yes, perhaps they have weaseled out of paying taxes in the UK or various European countries but IMO they shouldn't owe the US a dime of that money. It wasn't made in the US.<p>I find it really frustrating that people talk about discuss these things as "look at all the revenue the US lost because of this!". Sure, and look how much the mafia lost on it too! Both of these armed groups could have made more money if they just extorted foreign agents and took their money (calling it "protection money" or "tax" or whatever seems appropriate).
An earlier Hacker News discussion on this article can be found here: <a href="http://news.ycombinator.com/item?id=1815457" rel="nofollow">http://news.ycombinator.com/item?id=1815457</a>
I'd like to know how much of the $60 billion tax shortfall the US government doesn't receive ends up in being spent by Google (at their discretion) on public works, education etc.<p>I don't know enough to suggest this is (or isn't) the case, but perhaps this model would allow companies who genuinely want to look after their community to basically choose how money, that would otherwise be tax money, gets spent.<p>I think lots of people would rather see money spent on public health and education than lots of other areas tax money gets diverted to.<p>Of course, I'm not so naive as to think that this will take off anytime soon...