The tax-revenue loss due to offshored profits in 2013 was for the US alone over 100 billion dollars.
But how is it possible that especially corporations can avoid taxations on a global scale?
In the process itself are a lot of countries involved and their different tax laws being used.
But to explain this, we need a real example of a corporation which offshores their profits,
and that example will be Google. Why Google? Because their method is one of the easiest to explain.
There are a lot more different ways to offshore profits that corporations like
Apple, Microsoft, IBM, Google and hundredsmore are using, which are different in some parts, but focus on the same structure.
While Google has many departments, the most important and most profitable is their search engine.
By tax law the search engine technology is owned by the one who bore the risks and expenses for the development,
but that does not mean that the owner needs to do all the programming.
The owner can simply hire another company to do so.
Google earns money mostly through advertisement. Now the people who buy a license to advertise, are buying it from the owner of the technology.
In a simple world it would be like this:
Google US, owns the technology, has programmers working for it and sells licenses for advertisement.
The Taxes in the US would be 35%. But actually Google pays only about 21% taxes and below 3% in foreign countries.
Google only by itself was able to save taxes worth billions over the past years.
So how is Google able to do it?
First of all, Google USA establishes a company on the Bermuda’s
which is formally established under Irish law, and for Irish law only the headquarter needs to be on the Bermuda’s,
Now Google Bermuda/Ireland establishes a new company in the Netherlands which establishes another new company in Ireland.
Now by US-Law a company can decide if its foreign daughter-companies are by tax-law own companies,
and have to tax their income by the tax laws of the country they are located in, OR
if the daughter-company’s taxes are managed within the main-company, making them a “disregarded entity”.
It sounds like the daughter-companies’ profit would now get taxed in the US,
but when the income of the disregarded entity never reaches the company, it can’t get taxed.
And the country in which the disregarded entity is located in, does not care about US tax-law and taxes the company by their laws.
Google NL and Google Ireland are now becoming disregarded entities.
Google Bermuda/Ireland Ltd. now gets a lot of money and hires Google US for programming,
the technology is now owned by Google Bermuda/Ireland Ltd.
Google Bermuda/Ireland Ltd. now gives a license to Google NL which gives another license to Google Ireland.
For this structure to work, only Google Ireland has contact with the customers who pay for their advertisement.
Now the customer pays to Google Ireland, Google Ireland needs to pay to Google NL for using the license
and Google NL needs to pay to Google Bermuda/Ireland for using the license as well.
While Google Ireland and Google NL both need a taxable profit of 2, Google Bermuda/Ireland gets 96 and does not need to tax it.
In total less than 1% were taxed.
If these transactions would have been made in the US, Google would have to pay 35% taxes,
but because of this system Google pays less than 1%.
While the US and the EU have specific laws concerning tax havens most of them do not work with this structure.
The US does have Anti-abuse rules which are making sure that corporations have to pay taxes when profiting from license payments,
and especially from tax havens like the Bermuda’s. But Google Ireland and Google NL are by US-Law disregarded entities and therefore will be ignored.
If someone now buys a license, by US-law they are buying from Google Bermuda/Ireland.
Furthermore for tax purposes, the US considers the country responsible in which the headquarter is located (UK),
while the EU considers the country in which the company was founded responsible (USA).
The EU does tax license payments in the Bermuda’s with a withholding tax, with the exception of the Netherlands.
For the double Irish part, the company responsible for selling licenses to costumers needs to be located in the country of the subsidiary company, which is Ireland.
By Irish law, the company located in the Bermuda’s does not need to pay taxes if the one in Ireland does.
In short: The profits for Google Bermuda/Ireland have to come from the Netherlands because
the Netherlands do not tax license payments to the Bermuda’s with a withholding tax.
At the same time the license payments need to come from the same country Google Bermuda/Ireland is located, which is Ireland.
Customers pay without a withholding tax to the Google Ireland
which is paying again without a withholding tax to Google NL
and because of the special tax rights in the Netherlands, they are paying again without a withholding tax to Google Bermuda/Ireland.
The only negative part is, that the money can never directly get to Google US without getting taxed,
but instead Google Bermuda/Ireland can invest into the company.
If Google in the future ever have to tax the profits, they still made billions through interest rates and investments.
While some laws, including the “disregarded entities” could be changed right away,
all countries need to find the leaks in their tax law which allow such structures to exist in the first place.
But changing those will be even harder.
To change the tax treaties between different countries, both parties need to agree. And most countries won’t agree to disadvantages.
After being put under pressure by an Investigation of the European Union, Irelands Finance Minister Michael Noonan announced in 2015,
that the double Irish system will vanish in 2020, but there are already replacements.