How American Corporations Saved Tax Worth 1 Trillion Dollars

Introduction

Taxes can be a significant burden for everyone, especially for small business owners. When a small company finally turns a profit after years of losses, the reality of tax payments can be daunting. This is particularly true when that money could be crucial for future operations.

While ordinary people diligently pay their taxes, major corporations like Google, Microsoft, and Apple have developed ingenious strategies to minimize their tax liabilities. In fact, these companies saved billions in taxes in a single year, raising questions about the fairness of the tax system.

Understanding Corporate Taxation

Corporate tax rates vary by country, and in the United States, the corporate tax rate is set at 21%. This means that a company like Google, with a profit of $2 billion, would typically owe $420 million in taxes, leaving them with $1.58 billion. However, savvy corporations have found ways to significantly reduce this tax burden.

### The Role of International Tax Strategies

To illustrate how corporations can save on taxes, let’s look at a simplified example involving Google. By establishing a subsidiary in Ireland, Google can benefit from a much lower corporate tax rate of 12.5% instead of the U.S. rate.

This strategy works because the U.S. taxes companies based on their place of incorporation. However, Irish tax laws state that if another jurisdiction controls a corporation, that jurisdiction taxes the profits. This creates an opportunity for tax minimization.

The Double Irish Dutch Sandwich Explained

One of the most notorious tax strategies employed by multinational corporations is the “Double Irish Dutch Sandwich.” This clever maneuver allows companies to avoid significant tax payments through a series of subsidiaries and tax loopholes.

Here’s how it works:

### Step 1: Setting Up the Structure

Initially, Google would create an Irish subsidiary called “Irish Google.” This subsidiary operates at a lower tax rate of 12.5%. However, to avoid U.S. taxes, Google sets up another entity in Bermuda, known as “Bermuda Google,” which has a zero percent tax rate.

### Step 2: Navigating Tax Laws

Because “Bermuda Google” is considered a resident for Irish tax purposes, Google effectively pays no taxes. However, U.S. laws regarding Controlled Foreign Corporations (CFC) complicate this strategy. If a U.S. company’s subsidiary is controlled by a foreign entity, the U.S. could impose taxes.

### Step 3: Creating Additional Subsidiaries

To circumvent the CFC rules, Google creates another Irish subsidiary called “Omega Ireland Ventures,” which is controlled in Ireland. This allows them to avoid U.S. tax while still benefiting from the lower Irish tax rate.

Next, “Omega Ireland Ventures” establishes another subsidiary called “Omega Properties,” which is controlled from Bermuda. This structure allows Google to transfer intellectual property to “Omega Properties,” creating expenses that offset profits.

How Royalties Play a Role

In this setup, “Omega Ireland Ventures” can claim expenses for royalties paid to “Omega Properties.” By manipulating the transfer of intellectual property, they can effectively reduce taxable income to zero.

However, Irish law imposes a withholding tax on these royalty payments. To avoid this, Google creates a subsidiary in the Netherlands—”Omega Dutch Ventures,” which benefits from favorable tax treatment within the European Union.

### The Final Steps of the Strategy

With this new structure, “Omega Ireland Ventures” pays royalties to “Omega Dutch Ventures” without incurring withholding tax. Subsequently, “Omega Dutch Ventures” pays royalties back to “Omega Properties,” also avoiding withholding tax.

This clever arrangement allows Google to keep profits in Bermuda, where they incur no taxes. This strategy has been widely adopted by other large corporations, allowing them to save billions in taxes.

The Impact of the Double Irish Dutch Sandwich

From 2004 to 2018, U.S. multinationals reportedly built up untaxed offshore reserves totaling approximately one trillion dollars. This staggering figure highlights the scale of tax avoidance strategies utilized by these corporations.

However, the Irish government has recently moved to abolish the Double Irish Dutch Sandwich strategy, closing loopholes that allowed such extensive tax avoidance.

Conclusion: The Future of Taxation for Corporations

The tax landscape is continually evolving, and governments are becoming more vigilant in closing loopholes that allow for such aggressive tax avoidance. While large corporations have historically found ways to minimize their tax burdens, the future may see more stringent regulations and enforcement.

As businesses adapt to these changes, understanding tax strategies will remain crucial for corporate leaders. It’s essential to stay informed about evolving tax laws and compliance requirements to navigate the complexities of international taxation effectively.