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Tax Avoidance, Double Irish and Dutch Sandwiches!

October 24, 2010 · 50 comments

in Personal Finance

Do you ever read articles that state many people get away with not paying taxes (or a minimal amount), and wonder how they do it? Well, the secret is to be creative, and to really, really know the tax laws!

I was reading an article on Yahoo Finance (written by Bloomberg Businessweek), which states that Google enjoys a 2.4 percent tax rate on its overseas operations.  Can you believe that?  A hugely successful and profitable company pays just 2.4 percent in taxes, and it is perfectly legal!  What is even more amazing is that the average tax rate in the overseas countries that Google operates is over 20 percent.

The process in which Google follows to reap the rewards of tax avoidance is very complex.  One method is called the ‘Double Irish’.  It involves profits being sent to Ireland, which actually has quite a high tax rate.  But wait, Ireland doesn’t tax certain payments made to other European Union states, so the money then has to be routed a shell Google office in the Netherlands.  Once the money is in the Netherlands, it is home free, because the Dutch have fantastic tax laws.  So, the money is then diverted to an Irish owned subsidiary nestled in Bermuda.  (Now you understand the name Double Irish.)  The best part?  Google only paid .2 percent of taxes along the way.  What a deal!!!  For Google that is…  If you want to sound like a tax guru at your next party, you can also refer to this method of tax avoidance as the ‘Dutch Sandwich’, or the “Dutch Sandwich Tax”.

Unfortunately, it is everyone else that suffers.  In reality, some of these overseas profits are supposed to come to the US since Google Ireland leases the search/advertising technology from Google in California.  But, Google has a plan for that too!  Google just sets the licensing price for Google Ireland at a very low rate.   The net result is the profits stay in Ireland so the money can then go through the Dutch Sandwich!  Again, perfectly legal since the IRS approved Google’s transfer pricing process.  Does it really matter that the US is essentially getting ripped off by Google?  It is no wonder we have such a huge budget deficit since we allow our country to be denied tax income, and Google isn’t the only company practicing such tactics.

Whereas these methods of getting around taxes are perfectly legal, it may not be the most honest and ethical.  However, our system allows it and rewards it.  Google shows more profits by avoiding taxes.  That means higher EPS, and eventually a higher stock price.  Avoiding taxes benefits Google shareholders.  Therefore, in order to best serve the ‘owners’ of the company, Google needs to generate profit where it can.  Our own government allows (and creates) loopholes, so it is not shocking that companies and individuals would take advantage.   (I am sure new tax avoidance tactics may be employed by individuals if the Bush tax cuts expire.)  In a way, it is no different than  owning a small (or large) company in Nebraska and incorporating in Delaware, which happens all the time.   Why incorporate in Delaware you ask?  Because historically, the courts tend to protect the assets of the business owner more so in Delaware than in other states.  So, why not take advantage and incorporate in a state that will protect you best?  The rules allow it, and it may benefit your business.  Kind of like how tax avoidance benefits Google.

So, what do you think of Google’s Dutch Sandwich Tax structure?  Does it make you angry, or just make you crave a sandwich?

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