Back when Commodore was a company I had the opportunity to get a look at its tax structure (I was interviewing for a VP position with the parent company). It was pretty impressive how effectively one could exploit nominal loop-holes in various jurisdiction tax codes to achieve near zero taxation.
One of the more dubious strategies was having a company in the Cayman Islands that owned the cars that people drove and paid for the gas and maintenance out of corporate accounts, and paid rent and bought food for folks. So your salary could be 'poverty' level and yet you could have quite a nice lifestyle. The poor company in the Caymans was losing money quite rapidly.
As a systems guy I had to be impressed at how they worked that particular system. A CPA friend of mine once quipped that if laziness was the mother of invention, taxation was the father of innovative accounting.
I'd like to note that the US is also a noted tax haven for foreign countries. We aggressively allow our country act as a tax shield for European and Asian companies so we should be throw rocks either when we live in a glass house
I'm not sure that makes sense. Let's say, hypothetically, the Europe and Asia have a tax rate of 99%. We offer a tax rate to foreign companies of 2%, to make it obviously worthwhile to funnel their money through the US. At the same time, we tax US companies at 98%. This makes sense because it maximizes revenue -- US companies aren't going to go abroad, and everyone else in the world will want to give us 2% of their money. Epic win.
When you combine state and federal taxes, the U.S. currently has one of the highest corporate tax rates in the world (second only to Japan, last I heard). It makes no sense to use a high-tax jurisdiction as a tax haven.
There's a great slide from my "Taxes for Hax0rs" (SHDH 44) presentation http://www.transparentaccounting.org regarding the history of the Federal Income Tax. In a nutshell, the way it was originally written was meant to tax corporate income only and only the most wealthy Americans, not common folk.
One needed to make >= $4000/year in deflated 1893 dollars to even be eligible to need to pay any taxes. Not sure, but one computation I came up with (adjusted) puts that around 100K in today's dollars. Imagine making anything up to 100K tax-free.
The goal was always to tax corporations more heavily than people.
Today even the poorest Americans likely end up short more than 2.4 percent (effective annual rate) in tax payments when their employers "withold" earnings.
So when corporations go out of their way and spend a lot of money to accomplish tax avoidance, that seems kinda wrong.
Ironically, corporate taxes these days generates less than 20% of the fiscal revenues for the government. Generally, 1040 individual taxes still make up the bulk of the taxes paid.
In addition, more than 35% of all taxpayers pay zero tax or pay no tax and get refunds. This number is constantly changing, especially recently with the economy. I've seen it go as high as 60%.
Lastly, when the government talks about corporate tax breaks and etc. Honestly, they barely matter anymore because we've essentially marginalized the revenue generated from corporations and businesses already. So, the amount of revenue and savings potential in the greater scheme of things is almost non-consequential.
Just saying they "contribute" doesn't get the whole point across. They do pay taxes, it's just not visible. Payroll taxes have to be the most ingenious method of hiding taxes from voters ever.
That's a very good point. I should've pointed that out. Another thing that everyone should keep in mind, if your company fails to remit the proper amount of payroll tax (social security and medicare), then it is your responsibility to make up the difference on your 1040. The line for this item is on the second page of the 1040 under the Self-Employment tax.
We're all paying into a system thats falling apart =/..
> Today even the poorest Americans likely end up short more
> than 2.4 percent (effective annual rate)
That really depends, due to the complexity of the tax code. In particular, depends on whether you're married, whether you have children, etc.
You can see some historical data for 4-person families at the median, half median, and twice median income levels at <http://www.taxpolicycenter.org/taxfacts/Content/PDF/family_i.... Note the negative numbers in the "average tax rate" column in recent years for the half-median level (due to the making work pay tax credit, in addition to the preexisting earned income tax credit and child tax credit). But yes, before that the average rate was higher than 2.4%. And this is federal only, not counting state and local taxes. (And the part that really makes me mad about the numbers in this chart is the marginal rate on the half-median income level, by the way.)
Of course if you're not married with children, your tax burden is definitely higher. For a single California resident in 2007 you can see a simple marginal tax rate graph at <http://www.dbaron.org/views/taxes-2007.html>; the average rate would just be the integral of the graph, which gets to be higher than 2.5% pretty early on.
The problem is that corporations are incredibly adept at finding and exploiting the kind of legal tax loopholes described in this article, and rapidly adjusting to any changes. It's a cat-and-mouse game where the tax collection agencies are always a few steps behind.
Individuals, even most very rich ones, are much less able to avoid taxes, so over time they are taxed more and more in order to collect any taxes at all.
Why hasn't someone created a company that handles this setup for small to midsize companies? Think of it as the Paychex for legal tax evasion. Their clients could all share the same legal addresses in Ireland and the Netherlands. They could keep up with the shifting tax laws and take care of opening all the appropriate banks accounts and filling out the right forms.
Of course, the loopholes should be closed, but until they are we could at least keep things fair by making the same techniques available to anyone.
Well technically it is available for small to midsize companies. There a number of websites that market these plans, but usually they're pretty sketchy haha. As an example, "www.escapeartist.com" are what's usually available openly.
Most tax professionals that are capable will provide these tax plans to their clients, but they'll do so quietly because its not something you'd want to advertise and also people generally dont like it when they find out you've gone "offshore" and etc.
Simple. They pay accountants a substantial portion of the taxes not paid.
The actual amount any country can tax it citizens and corporations is a complex relationship between its own tax laws, every other country in the world's tax laws, and the cost of the tax lawyers that figure out how to shuffle funds around to minimize their tax liability.
When politicians say "we will close this loophole and collect $xxx MM more in taxes" my BS meter pegs. There is not going to be a 1:1 relationship between a loophole's current deduction and collected taxes if that loophole is closed. There will be some increase in collected taxes (presumably), but people will minimize their taxes using different "loopholes" so the "recovered taxes" will never be as much as the politicians sell it as.
The reality is much more complicated than the article or the blog post makes it out to be. Google's foreign tax rate is 2.4% (quite low), and they shift lots of their earnings offshore where it is not subject to US tax ($17.5B cumulatively, per Note 15 of the 10K).
However, it is not the case that Google only pays 2.4% of their US operating profit to the IRS, as a look at Note 15 of their 10K shows. There are lots of reasons that a corporation's effective tax rate will differ from the statutory tax rate of 40% (35% federal + ~5% state). To name a couple of common ones:
1. Prior net operating losses (net of valuation allowances)
2. Stock option exercises by employees (see 1999-2000 when over 50% of major tech companies' cash flows were from option exercise, and lots of them--entirely legally--paid zero or "negative" tax, or so it appeared; in reality, the taxes were just paid out of a different pocket). There is a bill in Congress to remove this deduction.
3. Adjustments for overseas taxes paid
4. Use of NOLs, impairment charges, changes in valuation allowances, lots of technical items.
Some of the entries in Note 15 of GOOG's latest 10K that lowered its provision for US income taxes (effective rate) in the current period include:
- Foreign rate differential (due to tax treaties with foreign countries, income taxed overseas is often not taxed again in the US)
- Federal research credit
- Tax exempt interest (interest from tax exempt bonds)
The rest of Note 15 elaborates on their capital losses from investments, impairments of acquired goodwill, etc. Tax disclosures are some of the most complicated areas of financial statements, and they're very easy to misread. However, they can be very informative, as tax info can provide a window into the difference between accrual-based earnings and cash inflow/outflow.
Just for future reference, NOTHING in a financial statement is what it seems until you read the notes, period. That is the first thing they teach you in financial accounting.
Think of it as the equivalent of a typical developer's reaction to a blog post claiming "X outperforms Y"--usually, the first comment is "did you take into account setting Z?" The footnotes contain "setting Z."
I agree with your thoughts and I will definitely take that into consideration in the future, the post was meant to simply the concept of how they tax plan their business and how difficult it is to enact such a plan.
To clarify, Google's foreign tax rate is 2.4% and their US tax rate is 21.2%. But, I believe it is important to delve further than the surface of these numbers. The 2010 fiscal year has been the most profitable year yet for Google and $17.5B is more than 7x the net income presented on their current financial statements. Also, they've refused to disclose the amount of income that is transferred to their offshore activities through their APA.
But, note that their income from foreign sources is equated to 52% of their overall revenues of approximately $30B. This would suggest that at a minimum their foreign sourced income held overseas is at least more than 50%. The APA is designed to help the company shift the tax incidence to different tax regimes, thus it would be more than likely that the true number is much higher. But, it would be impossible to determine without access to a number of documents beginning with the agreement (which lasts for 5 years before they must renegotiate for a new plan).
We could make this much more complicated, but I wanted to focus on the tax plan since most people were interested in that aspect.
Fixing this sort of loophole should be far higher on Congress's list of priorities than it is now. There is no reason why a massively profitable corporation like Google should pay so little in taxes when poor Americans are nickel-and-dimed with sales, payroll and income taxes.
The standard arguments against corporate taxation are that it's double taxation (the shareholders are already taxes on capital gains and dividends) and that higher corporate taxes lead corporations to choose to base their operations in other countries (e.g. Ireland).
The problem goes far beyond Google Ireland and Google Netherlands. What about Tata, Reliance, Baidu and Guinness? None of them pay their fair share to the US government.
Something must be done about these evil corporations which exist outside the US, don't bring money into the US, do no business in the US, and pay no taxes in the US!
Should US corporations pay the Indian and Chinese governments taxes if they employ people educated by the Indian and Chinese governments? Should all computing companies worldwide pay the British government for their investments in foundations of computing?
How much of SV are immigrant engineers in general although? Is it really the USA or just the fact it became a hollywood and it's gravity keeps it going?
If your not attached to the USA you can just move you and your business to a territorial based corporate income tax country (singapore, etc). Income not repatriated into the country and not generated from the country is tax free. If your an american citizen you'll still have to pay personal federal income tax to the USA, even if you don't live in the USA, and to your country of residence but you can work with that much better with the ~$100k not living in the USA tax deduction that the US gives you.
That's a good point. If you're lover of travel or foreign countries, then there are a number of different countries or economic zones that are similar tax havens. Singapore, Hong Kong and etc are tax havens that don't take foreign sourced income. You only pay tax on income earned from the country.
Also, singapore and hong kong have much lower tax rates. You'd be able to take a tax credit on foreign taxes paid in the US 1040 individual tax (this calculation is a little awkward though) or you could choose to exclude 90k+ of income entirely from you 1040 but you'd lose the foreign tax credit.
You need make the calculation to see which is the better tax savings. Obviously, if you're earning less than 90k then you should use that. But, to get the 90k exclusion you must remain without the US territories for the majority of the year.
I also want to note that the USA is the only country in the world to base income taxation on citizenship/green card and residency, vs residency only for the rest of the world. Be a citizen of anywhere else and you can be really tax free/low tax.
How do they enforce that one, or even get a hold of your income to know how much they're missing out? Or is it just a general "set foot on this country again and it's prison time for you"?
the ~$100k not living in the USA tax deduction that the US gives you
Could you provide more details? I tried Googling for it, and I could only find:
You can also claim an additional exclusion from your U.S. taxes in excess of the $91,500, if the rent, utilities, etc. you pay on your residence abroad and other living expenses exceed a standard amount (which is currently approx $13,300 per year) established by the IRS. This exclusion only comes into play when your earnings are in excess of the $91,500 foreign income exclusion.
Here's another idea: drop the corporate tax rate to 0% and raise income, high-end property (let's say houses that cost 2x the median in a particular area), and high-end consumption taxes (a "yacht tax".)
Another handy related idea would be to have a maximum income multiplier. Something like "the highest paid employee cannot make more than 20x the lowest paid in total compensation", so if you want to make one million a year, the lowest paid employee must be making 50k.
Here's another idea: drop the corporate tax rate to 0% and raise income, high-end property (let's say houses that cost 2x the median in a particular area), and high-end consumption taxes (a "yacht tax".)
If corporations don't pay taxes, then won't everybody who can afford to just do all their business (income and all) through shell corporations? Sort of the way that currently wealthy people skirt the estate tax by having a company own their land, so their next of kin can just inherit the CEO position of the company?
This already happens to varying degrees, because if you make enough money the corporate tax structure doesn't hit you as hard as the personal income tax structure. There are plenty of other tricks available as well, such as deferring income, etc.
If you also eliminate income taxes and shift completely to consumption-based taxes, it gets a lot harder for wealthy people to avoid taxes; in fact, the only way to avoid consumption taxes is to live the lifestyle of a less-wealthy person. Even illegal sources of income get taxed when you switch to a consumption-based tax system: you can't tax the income of a gangster with no declared income, but you can tax all of the shiny stuff he buys. Regardless of the source of income, the same truth applies: if you want to enjoy your wealth, you will end up paying taxes on it.
Of course, some wealthy people will choose to live more frugal lifestyles in order to avoid taxes (many wealthy people already do so, for a variety of reasons). The reduced consumption might hurt the economy some, but they have to put their money somewhere, and that somewhere is generally some sort of investment, which helps the economy.
The biggest problem with consumption-based taxes is that they tend to be highly regressive because there is generally an inverse relationship between income and the percent of income spent on consumption. However, there are ways to correct for this. You can target specific categories of goods which only the wealthy can afford (the aforementioned "yacht tax,"), but this tends to be very destructive to those industries and can cause big distortions throughout the rest of the economy. You can exempt certain categories of goods, such as groceries and other basic necessities, but this also creates huge distortions, and also creates a situation where industries buy politicians in order to get their products exempted. Another approach is to offer rebates equal to the consumption taxes paid by a typical low-income family, so that such families will pay zero net tax, but that's complex and expensive to administer.
I worry that the maximum income multiplier would have distortive effects. For example, if all my employees make high salaries, I would have a strong incentive to hire a company that provides janitorial services, rather than hire a janitor in house. (Which is presumably more efficient, as most firms do that in the current structure.)
The "yacht tax" is proven to be a terrible idea; last time that was tried it basically killed the US boat industry. But otherwise I absolutely agree that we should eliminate corporate income tax and replace it with higher taxes on the individual owners of and creditors to those corporations. The government wouldn't be collecting any more revenue. This would encourage economic growth by avoiding the need for corporations to waste resources on tax planning.
We had a federal "yacht tax" (literally) from 1991 to 1993. It didn't work very well. See http://www.thecitizen.com/blogs/lance-mcmillian/07-12-2011/t... for the gory details, but the summary is that people bought many fewer yachts, a bunch of yacht-making companies went bankrupt, 25,000 employees of said companies were laid off, and revenue from the tax was far below projections (because the purchase volume fell). Now it's possible that one issue here was credibility of the tax: maybe people figured it would be repealed soon and just tried to wait it out. But it's hard to tell, and even if that's the issue any proposal to introduce taxes like this needs to take that factor into account.
I've actually been asked about IKEA in the past as well. The crux of the issue is that IKEA is the largest single employer and GDP powerhouse of Sweden. So, the country has been more than understanding of their "tax plan."
The founder of ikea essentially owns everything through a charity and avoid all taxes for effective purposes.
Yup, I have a number of Swedish friends. When I mention "That guy [Kamprad] is a crook" they all say "But he [IKEA] has done so much for the economy and providing jobs for Sweden."
GE is a special case. Their tax department has been compared to the big four accounting firms as the unspoken big 5.
They pay their tax staff very well and truly are some of the best in the field within every tax specialty.
But it's unfair to single out John. I'm sure given the opportunity you'd attempt to maximize your profit. It's quoted from judge Learned Hand of New York, one of the most respected legal minds that it is your legal right and American duty to tax plan.
The code is set this way obviously due to politics but also because the American people value jobs over taxes. We would rather have high employment that additional Corp tax revenue.
GE is also a special case because they are using a loss carryforward. GE Capital lost billions in 2008 and 2009 which means GE's profit averaged over the past few years is close to zero.
This allows them to pay yearly taxes as if they made little profit.
This is actually a good thing - it avoids disproportionately taxing companies with volatile incomes.
"Generally, Google and companies of similar size are audited every year. Thus, the IRS actually has a permanent office within the Googleplex compound because they audit them year-round"
I think this statement is incorrect. The auditors hired (PwC, Deloitte, E&Y, whoever) are at the Googleplex all year round, but not the IRS
I misspoke, I stated auditors but I wasn't specific about his. Pwc, deliotte and friends are financial auditors meant to provide assurance. But the IRS auditors are there for tax audits.
It is IRS policy to generally audit fortune 500 companies annually. Usually they hold an area for the IRS because it makes sense for them to be kept away from daily operations. A former coworker works in the LMSB dept that handles these cases.
When the IRS starts printing special forms for you because the lines don't fit your revenues, you know you've made it lol.
I would actually do it the other way around: since there are fewer corporations in the US than there are people, it is harder for a corporation to evade taxes than for a person. So it makes sense to raise the corporate rate, and either reduce individual rates or raise the exemption.
Another suggestion I’ve seen would be to not tax corporations directly, but to pass the obligation down to the shareholders: if you own 100 shares of Apple, and Apple made $15 of taxable profit per share, your taxable income goes up by $1,500. (Presumably Apple would pay you a dividend to make up for your tax bite, but note that this kind of scheme would make stock ownership more attractive for people with modest incomes.)
Great question. My understanding was that the (primary) purpose of corprate income tax is not to directly collect revenue, but rather to encourage reinvestment by firms in the economy. Increasing CGT would discourage investment. Can others please enlighten us?
Well the corporate tax is meant to collect revenue but it's secondary goal is promote certain activities. Mainly, they want to promote job creation and increased productivity, which is in theory done through reinvestment.
When you reinvest into equipment, the logic goes that the productivity increases and new higher paid jobs are created even though the lower end labor is eliminated or reduced.
Increasing capital gains tax would in effect make everyone accelerate the sale of their company before the taxes are effective, so it was a mass liquidation of capital.
But, I don't believe it would discourage investment because people would simply tax plan around the capital gains tax. A while back, during Reagan and friends presidency, the personal income tax as well as capital gains tax was more than 35%. People actually invested more into corporations because the corporate tax rates were lower (ironically).
I think as a side effect it encourages companies to use credit as a financial buffer (single digit interest rate vs. double digit tax rate) vs. savings since corporate taxes are effectively a tax on corporate savings longer than a few months to a year.
Our congressional representatives are corrupt, doling out tax breaks to wealthy corporations, while ordinary people are left to pay high tax rates on ordinary income. I think Google should be ashamed to be part of this corrupt system.
It's BS to say that they owe it to their shareholders to try to defraud the federal government of as much tax revenue as possible. They should instead be fighting for corporate tax reform and closing loopholes to make a level playing field and not rewarding "scumbag" corporations.
It's not fraud, there is no lying involved in this. Your an international company that gets money from everywhere, your based everywhere, and you have employees everywhere. Who deserves the bulk of the tax revenue?
Should Toyota pay the majority of it's taxes to the US because they sell a large amount of cars there, or only the income taxes of their employees in the US and the profits they receive from car sales in the USA? Should Japan get the majority of Toyota's tax revenue because they are headquartered there? Even though the majority of Toyota's income from Japan is minor vs the rest of the world combined? What incentive would they have other than personal reasons to stay then vs just use it as a net-loss R&D center and minor manufacturing plant to avoid tariffs?
These things are significantly more gray than you think.
The highest marginal federal tax rate for corporations is 35%. I think that's too high. But Google, a US Corporation, who derives most of it's earnings from it's US operations, is paying but a small fraction of that.
I think in the case of Google, they should at least be paying higher tax rates on all advertising earnings from US users; it seems to me they are maying barely 1 tenth of that amount currently.
Just as "selective enforcement" of laws leads to corruption, so too does gaming the tax system. Large corporations pay legislators to create these tax loopholes for them.
One of the big problems with our overcomplicated tax system is that it creates these sorts of moral ambiguities. Is person X or corporation Y paying their fair share of taxes? Only the accountants and (maybe) the IRS have any idea. So people with a negative view of business can get all riled up and angry, and people with a positive view of business can get all riled up and angry.
The presence of ambiguities in the system breeds mistrust among the citizenry. This cannot be healthy for society.
Don't many companies pay nothing? IE if my company earns $100k and I pay out $100k in salaries and overhead, there is nothing left to tax as all my expenses were deductible?
Google may pay 2.4% but presumably the money is getting taxed at a higher rate when it gets to individuals.
In the first paragraph, yes the tax due would be zero, in general (certain industries and/or countries could harbor exceptions). The final amount paid is independent of the tax rate on profits, though: if revenues are offset completely by expenses, it doesn't matter if the effective rate is 2.4%, 40% or 90%, it still comes to 0. But you want the former if your company is highly profitable.
For your second point, I don't know the specifics in this case. But even if it's just deferring taxes that have to be paid eventually, that can be a huge win, since it lets you collect interest or store funds for an emergency. There are probably other financial benefits too though; maybe someone who knows can comment.
Well in this circumstance that's not true because thy aren't paying any tax on more than 95 percent ifthe income because it sits outside the united states jurisdiction in a foreign Corp in the caymans. Until they decide to repatriate the income or bring it back into US territories then it is legal untaxable.
Isn't that a tax rate of 2.4% on foreign income? Or does "effective tax rate" mean taxes across all income? If they've only saved "$3.1 billion since 2007" (to October 2010), it seems like they haven't saved that much (er, relatively...).
Not generally true; companies already attempt to charge the highest rates that the market can bear, so if they could easily just raise prices, they would've already raised them before the tax to gain more profits.
In the general case, an increase in costs will come out of some combination of: 1) increased prices passed onto consumers; 2) decreased wages at the firm; and 3) decreased profits at the firm. There's no economic law that says they'll all come out of #1, unless it's such a perfectly-competitive commodity business that everyone is charging barely above cost for their services to begin with (not the usual case in Silicon Valley).
Consider the flip side: If all cost reduction were automatically passed on directly into price cuts, there would be no incentive for companies to trim costs. But that isn't the case, of course; one reason firms aim to reduce their costs is that reducing costs while keeping prices fixed is one way to increase profits. Similarly, increased costs without the ability to raise prices can reduce profits. In both cases it depends on the surrounding market.
and we were laughing at the mobster furious as his 4% percent in "The Firm"! Ultimately, he happens to be right as paying 4% instead of 2.4% seems to be a pretty valid reason to be furious...
I answered this question a while back for an HN member back on the day the article first hit the web. I have a bunch of questions from members that I've answered over the last year that I'm unloading onto my website. I figured its makes more sense economically if I shared my advice openly instead of giving it to individuals specifically.
The problem with googling this is that it only tells you the basic premise and fails to tell you the problems and the reality of actually applying these tax models.
As someone who's worked on these tax models in the past, I can tell you that its never as picture perfect as they make it sound. These companies are always getting audited even though these plans were drafted, approved and done by the "big 4 accounting firms."
It was a running joke that the big 4 plans it and the law firms would defend it. It was like we were self-generating projects for us to work on by creating a new "plan" every other year. The IRS always comes back and audits these clients.
I'm vaguely aware of Citi's tax plan, but I'd have to look into it. If I can learn the details, I'll start a series of case studies that break down the tax strategies of different fortune 500 companies.
One of the more dubious strategies was having a company in the Cayman Islands that owned the cars that people drove and paid for the gas and maintenance out of corporate accounts, and paid rent and bought food for folks. So your salary could be 'poverty' level and yet you could have quite a nice lifestyle. The poor company in the Caymans was losing money quite rapidly.
As a systems guy I had to be impressed at how they worked that particular system. A CPA friend of mine once quipped that if laziness was the mother of invention, taxation was the father of innovative accounting.