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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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{ 36 comments… read them below or add one }

Nicole October 24, 2010 at 9:26 am

It does make me think that a lot of ire (among lower and middle classes) about changing tax laws (on corporations and the rich) is misplaced, especially the estate tax. Wealthy corporations and wealthy people (who could and do incorporate for tax purposes) can and do afford very good tax accountants who legally reduce their taxes.

A few years back Jim Poterba, an excellent conservative economist (now head of the NBER), on GW Bush’s tax advisory board strongly recommended a way of massively simplifying the tax code that eliminated more than a metric ton of loopholes. It didn’t go over well with the administration.

Though even when tax code is simplified, the loopholes creep back in over time. It is a never-ending process.

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Kris October 24, 2010 at 5:14 pm

Nicole, you are right, it is a never-ending process. I would love to avoid some taxes myself, but I guess I am just not clever enough. If only life were simple and everyone that should pay taxes paid them…

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The Biz of Life October 24, 2010 at 1:26 pm

Loopholes are the way politicians pay off their supporters and constituents. When they outwit themselves, all you can do is laugh about it. Tax simplification and the elimination of loopholes is a nice pipedream, but as long as their are huge dollars at stake politicians will corrupt the process.
The Biz of Life recently posted..Sunday Verse- Gary Snyder

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Kris October 24, 2010 at 5:18 pm

Biz – I am sure you are right and it is a pipe dream. Politics unfortunately is all about secret deals and such that us voters have no idea about. Of course it all affects us, but what can you do?

I don’t trust anyone anymore and I am going to create my own state and make my own rules…

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Cognoramus October 24, 2010 at 6:09 pm

Like Nicole said, it’s mostly a matter of being able to afford tax consultants (and lawyers) who can show you how to pull off tricks like that. I wonder what the cost/benefit ratio is of paying lawyers to exploit loopholes vs. just paying the taxes?
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Kris October 25, 2010 at 8:43 am

Cognoramus – I have wondered the same thing! Would it be worth it to hire someone? I don’t know. We don’t have any side businesses or anything, so I don’t know how we would ‘hide’ our income. I guess I could make a shell corporation or something. I probably wouldn’t feel right doing that anyway, even if it was legal. Maybe if the tax laws change and people are taxed more, we will see a lot more people getting around the rules!

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First Gen American October 24, 2010 at 8:56 pm

It’s amazing how much taxes my family pays. Call my crazy but I do think everyone above poverty level should pay taxes. Everyone should pay they’re fair share for firemen, police, roads, etc. I definitely don’t have a problem paying. I have a problem with people and companies like google not paying.
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Kris October 25, 2010 at 8:41 am

First Gen – I agree. I don’t agree with the tax rates and such, but I do wish the loopholes could be closed up so that everyone that SHOULD pay taxes actually did. If we all had lawyers that knew how to get around the laws, there would be no tax revenue.

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Roshawn @ Watson Inc October 25, 2010 at 12:56 am

Just the sandwich :)

Typically, isn’t what is taken in the form of salary, dividends, realized capital gains etc. taxed eventually anyway? My point is profits from a corporation are subject to double taxation. I suspect even if a business has a low effective international tax, tax revenues are still coming to the government in the end (just not as much). What do you think though?

BTW, thanks for an intriguing and tempting post…time to go for a snack now!
Roshawn @ Watson Inc recently posted..Keys to Moving Beyond Past Failures

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Kris October 25, 2010 at 8:40 am

Hi Shawn! I do get what you are saying. Corporations make profits, are taxed, and then employees make a salary, and are taxed. In the end, the money is taxed twice (unless it is used for R&D or something). It is not the company that is taxed twice, but the money itself.

However, wouldn’t it be great if it was the corporations that were effectively taxed and employees did not have an income tax? I know that will never happen, but it would be wonderful. Double taxation does happen all over the place, but our deficits would be much less if corporations did pay appropriate taxes on their income.

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Roshawn @ Watson Inc October 25, 2010 at 1:28 pm

True the money is double taxed. If you own the corporation, then you are double taxed. :(

The deficits could also be decreased/eliminated if we got a handle on spending too.
Roshawn @ Watson Inc recently posted..Keys to Moving Beyond Past Failures

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Kris October 27, 2010 at 2:43 pm

But spending is so fun because everyone gets to push their own agenda. Promises are made on money that isn’t there.

The government sets a horrible example for the population, that is for sure.

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Crystal @ BFS October 27, 2010 at 2:14 pm

I read the title and am starving, so I first craved a sandwich. Then I read the post…I’m not sure how I feel. I understand why Google does what it does (honestly, I would too if I could if only because I don’t want to see 1/3 of my blogging money taken away in April). I also see your pov, that tax money we are not getting is not helping our deficit. So I am torn…and still want a sandwich…

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Kris October 27, 2010 at 2:42 pm

I would love a sandwich right now too.

I just wish loopholes could be closed so this stuff wouldn’t be possible. If I could get around paying some taxes, I am sure I would. I just don’t know how! :) (It would have to be legal though.)

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Evan October 28, 2010 at 1:29 pm

I am THAT attorney that works to make sure my firm’s clients pay as LITTLE as possible in Estate Taxes and I don’t feel one single ounce of guilt, nor do I think the fine folks at google should either.

The IRS makes the rules and NO ONE has a duty to pay more than what the rules say they should. Judge Learned Hand (yup, real name) in the 1930s said,

“Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.”
Evan recently posted..Creating a New Alternative Stream of Income–My First Non-Blog Website Part I

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Kris October 28, 2010 at 2:44 pm

Evan, I totally agree- it is completely legal. There is no way that I would pay more in taxes out of the kindness of my heart. I would rather give to the charity of my choice instead of watch the government waste it.

I don’t blame Google because as I said, they have to make shareholders and Wall Street happy. Plus, the loopholes are there, so might as well use them. (Maybe they are just smarter than most companies, or at least their tax attorneys are!)

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Chris April 12, 2011 at 11:15 am

Evan,

Can you please let me know if you can arrange such a sandwich. I am more than happy to keep a corrupt Government and IRS out of my pockets.

Christopher

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Kris April 12, 2011 at 2:10 pm

I want one of those sandwiches too!!

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Len Penzo October 29, 2010 at 8:28 pm

This is precisely why we need another major overhaul of the tax system, Kris! And you know me, I am not a fan of big government, but Google’s games are really legalized tax evasion to the tenth degree.

Best,

Len
Len Penzo dot Com
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Kris October 29, 2010 at 10:04 pm

Len- you are right, our tax system is a mess. I will end up paying forever because I am not clever enough to know how to hide all my assets!

Flat tax anyone???

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Financial Samurai November 1, 2010 at 8:29 pm

I want to invest in companies who can get away with paying as LITTLE tax as possible legally! If Google can do it, awesome for them. It’s just another positive datapoint for the company. Management is CRUCIAL in investing imo. If you have brilliant, trustworthy management, you can trust them to do the right thing.

Cheers, Sam
Financial Samurai recently posted..How Much You Need To Retire And Never Have To Worry Again

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Bathroom Lighting November 17, 2010 at 11:53 am

i might be needing personal loans next month coz i need a home renovation and some garden renovation too ,`,

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Investor Junkie November 22, 2010 at 2:18 pm

I don’t like it, but I cannot blame them. People do things for their best interest. Even the “do no evil” Google. Google is in business to make a profit for their shareholders.
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Kris November 22, 2010 at 4:23 pm

I am in the same boat as you investor Junkie…

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Garden Lighting November 25, 2010 at 1:20 am

everyone would love to be debt free and have some financial freedom then become rich ‘*’

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Joe the Plumber December 28, 2010 at 8:37 am

I think Google paid plenty in taxes. Given their revenue 2-2.4% is plenty for what we need. I agree that the tax code is incredibly complex to generate specific loopholes for those who know how to use them. I also feel that people, corporations, etc use those loopholes to avoid funding the irresponsible spending of our government. Why don’t we reduce the services offered by the gov’t if the tax base doesn’t have the budget to cover such expenses. I’m talking about gov’t sponsored programs to determine the amount of methane produced by cow flatulence, corporate welfare (TARP)(http://www.cato.org/pub_display.php?pub_id=8230), spending $2.6 million training chinese prostitutes to drink responsibly(http://www.cnsnews.com/public/content/article.aspx?RsrcID=47976), and the list goes on (http://www.whitehouse
.gov/omb/expectmore/part.xls.) Let’s just cancel the ineffective programs and see how short or even or profitable our current tax revenue then becomes.

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Kris December 28, 2010 at 1:23 pm

Canceling ineffective programs? ha ha ha. Then someone might not donate to a campaign fund or something! :)

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Brule December 28, 2010 at 9:59 am

Given that taxes are ALWAYS passed to the consumer, anyway, businesses don’t need the annoyance of being taxed. The money they spend with huge tax avoidance departments for dodging taxes would better be spent (in theory) by building the business. The taxes by the citizenry (the theoretical rulers of the country who SHOULD pay for THEIR government) should be offset by lower operating costs of the companies, better competition and lower prices. Might even encourage other companies to locate here and create jobs.
Tax the hell out of anyone playing shell games with the inevitable loopholes and watch the stinkin’ congress.

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Brule December 28, 2010 at 10:06 am

Oh, and watch the stinkin’ shareholders and stock manipulators.

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Kris December 28, 2010 at 1:25 pm

I think that no matter what, there will be loopholes that crafty lawyers can find. The Google plan is elaborate for sure, but is totally pays off for them.

I have had it with taxes in general…

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Cloudbuster December 28, 2010 at 10:01 am

I applaud Google. I applaud every red cent that anyone manages to keep out of government hands these days. The U.S. and European governments are bloated, irresponsible parasites that don’t deserve one single additional dime of corporate or individual earnings given how shamefully they continue to waste what they already take. I don’t call what Google is doing making everyone else “suffer,” I call it “keeping their own money” — something more of us should be able to do more of.

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Kris December 28, 2010 at 1:26 pm

But if the government doesn’t get more money, how will they bail me out of my house and give me cash for my clunker?

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Amrinder Arora December 31, 2010 at 2:04 am

I don’t know if you noted but Dilbert from December 28th was on this theme (Dutch Sandwich). Here is the link: http://standardwisdom.com/guydownthestreet/category/economics/

A corporation (even one that says it intends to do no evil) is at the end of the day, a karma-neutral and a for-profit entity. If what it is doing is legal, then it should generally be OK.
Amrinder Arora recently posted..Dutch Sandwich

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Kris December 31, 2010 at 8:42 am

Amrinder- It was so funny because I wrote this post months ago. One day, I noticed a huge spike in traffic and could not figure out why. Then someone sent me the Dilbert cartoon, and it all made sense. I love that people read the comic and then Googled ‘Dutch Sandwich Tax’.

I agree that since it is legal, people can’t really get too upset about it. However, if everyone in the world and every corporation employed similar tactics, then the government should would be short on money. Maybe it would cause some major tax overhaul, which would make me happy.

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Alfred September 7, 2011 at 3:37 pm

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