Even if you scrupulously obey the multiple jurisdictional laws to legally minimize the amount of tax you pay, politicians can’t resist the opportunity to pillory you for not paying your “fair share”:
The Minister’s explanation of Google’s tax affairs is as follows:
“While the day-to-day dealings of Australian firms advertising on Google might be with Google Australia, under the fine print of contracts Australian firms sign with Google, they are actually buying their advertising from an Irish subsidiary of Google.
It is then argued that the source of this income — and therefore the taxing rights under our tax treaty — would be with Ireland rather than Australia. Despite Ireland’s relatively low company tax rate of 12.5 per cent, we have just started to build the sandwich.
The next step is to route a royalty payment from the Irish operating subsidiary of Google to a Dutch subsidiary of Google, which is then paid back to a second Irish holding company subsidiary of Google that is controlled in Bermuda, which has no corporate tax.
The first Irish subsidiary receives a tax deduction for the royalty payment to the Dutch subsidiary, substantially reducing the income subject to the 12.5 per cent Irish company tax rate.
Under Dutch law, and because EU member countries do not charge withholding taxes on transfers within the EU, the transfers to and from the Netherlands are essentially tax free.
And under Irish tax law, the second Irish resident subsidiary is not taxed on the royalty payment because it is controlled by managers elsewhere.
The profits from the sale of advertising to an Australian firm then sit in a tax-free jurisdiction — possibly indefinitely.”
Tax lawyers — especially those who work on multinational levels — don’t create these situations out of whole cloth: it’s the politicians and revenue ministries that set up and maintain the tax rules. Corporations are legally required to pay taxes (as are individuals), but corporations are also legally required to conduct themselves in ways that maximize the profits for their shareholders. Finding ways to legally pay tax at a lower rate is a requirement. That companies like Apple and Google are big enough to take advantage of the “loopholes” deliberately created by the tax authorities is not a reason to bash Apple or Google. They can only take advantage of “loopholes” because this or that government tried to rig the system in a particular way. Changing or threatening to change the rules retrospectively is a really good way to indicate to foreign business that you really don’t want them operating in your territory.
Update: Snigger.
@cstross “Double Irish Dutch Sandwich” sounds like something you shouldn’t risk looking up on Urban Dictionary.
— Chris Herborth (@taffer) November 23, 2012
