A few things you should consider about international taxation is that it's complicated and only works because they have the infrastructure to sustain it.
Disclaimer, I'm not saying what they're doing is right or wrong, but simply placing it into context
1. Individuals have a hard time using international tax law similarly because of CFC rules (closely-held foreign corps). If anyone owns more than 10% of a foreign company they must include or report the income as part of their current earnings.
2. The effective tax rate is only "2.something percent" of income the income google earned outside the US.
3. To have an APA (Advanced Pricing Agreement) with the IRS is incredibly expensive and time consuming because it's like getting audited in advance and then justifying it before you ever do anything.
4. You need to pay at a minimum a big 4 accounting firm 10 million to start a project of this complexity over a number of countries.
5. The dutch companies are simply a "conduit" to allow the money to ultimately reach the Caribbean island tax havens because they have no income tax and simply charge a flat tax of 15k.
6. On cperciva's note, this tax plan could be considered "post-poning income recognition" but in reality it effectively is never repatriated or brought back into the country because google is such a multinational company. They could use the money for their international business very easily or they could use their foreign cash reserves to purchase an asset in a foreign country and still retain the ownership by the US main company.
I could go on for a while but this is just a the tip of the iceberg.
I've practice this area of taxation before as a CPA so I could give you a number of other examples.
Yes possibly, if you're able to source the income offshore and keep it away from the united states. Then you'd be able remove it easier. But, as a shareholder that owns more than 10% of the company. It effectively cancels any of the tax benefits.
There are some creative ways to remove yourself from the equation but it's pretty complicated.
Personally, I find the sub-headline misleading. The subhead reads "Google uses a complicated structure to send most of its overseas profits to tax havens, keeping its corporate rate at a super-low 2.4 percent." But I believe that number refers only to Google's overseas tax rate. This more recent article http://news.yahoo.com/googles-tax-rate-still-seems-very-low-... says that Google's overall tax rate was 22.2% in 2009.
Again, I'm just speaking for myself personally, not on behalf of my employer. My issue with the article was that I felt like it focused on Google when a broader perspective on corporate tax rates would have been more helpful.
Not to discredit Matt or his point, but I think the illustration of percentages does very little in illuminating valid points when it comes to taxation because most people don't understand the mechanisms and the theory behind tax law at this level.
I agree with Matt that the focus on Google is unfair, but the use of these one off statistics without an in depth review of the companies named above for the last 10 years is also unfair (Yes it takes a review of the past 10 years to establish a proper understanding of a company's tax position).
But, I will qualify that GE has an amazing tax team and the oil and gas industries are a beastly at lobbying.
The reason why people single Google out is because you act like you do no wrong... See the article quote: "flying a banner of doing no evil, and then they're perpetrating evil under our noses"
You are like an in the closet politician that is against gay marriage.
But that 35% corporate tax rate is the highest in the developed world, so Google's overseas tax rate is going to be lower than 35% even if they didn't pull anything fancy.
Also keep in mind that 35% corporate tax rate is also almost pure fiction too -- standard exemptions, let alone loopholes, are among the best in the world.
First, what exactly are "UK profits" supposed to be? Say Apple has a net margin of 20 % on every iPhone sold. It's designed in California by Americans (most surely several non-native Americans among them), manufactured in China by probably lots of Chinese workers and immigrants, shipped and flown across the world by god knows whom, etc. It's not like it's designed in Brixton, manufactured in Manchester and sold in London only. Which country is supposed to retain the tax on profit on each iPhone sold? The point of sale-country is one alternative. Is it the most logical? Is it equitable and fair (whatever that means)?
Second, if your local legislator is just too stupid - or, more accurately, for a lot of reasons - unwilling to close tax loopholes, why on earth should a company be willing to waste shareholder's money by settling a claim (tax) that is not legally binding due to existing loopholes? There is a lot of hypocrisy involved in politicians blaming companies for using tax law loopholes - if they were at all serious about that, they would just write better laws. Sure, it's always playing catch-up with tax lawyers looking for "tax-efficient" structures, but most loopholes are well known among legislators, and they knowingly decide not to close them.
My knowledge of international corporate tax law is practically nil, but if I understand this correctly, the money sitting in Bermuda is still subject to taxation when it gets brought back into the US; so Google isn't avoiding taxes, but is rather postponing taxes by doing this.
This article discusses how in 2004 there was a tax holiday for corporations to 'repatriate' profits stashed over seas. Presently corporations are lobbying Congress for another such one time tax holiday. Under these special one time deals the money being brought in is generally taxed at a ridiculously low rate. In 2004 it was 5% meaning Google's effective tax rate once the money arrives back in Mountain View is 7.5% still very very low.
I don't believe that Google is actually just postponing taxes. Instead, they are also being selective about what money they pay it on. Basically, the money has been obtained in Ireland, sent to the Netherlands, and then Bermuda. So it hasn't touched the US, and they don't owe US taxes. They can then do two things with that money. One, they can bring it into the US, pay taxes on it, and use it to do whatever it is they plan on doing with it, or, two, which I think is more likely, they use it to finance international business, and they never pay US taxes on it. However, there hasn't been any "loss" to the US per se. If anything, it's the Irish who should be up in arms
The Irish are probably not going to be too upset that companies are taking advantage of the system that they setup in order to attract large companies and the associated financial/legal industry. It's not a case of big companies exploiting the poor Irish.
Except, from the original article, I don't get why they don't just set up in Denmark & avoid setting up in Dublin altogether. They must be doing _something_ worthwhile with those 2,000 Irish employees.
This is just a guess, but if they were set up in the Netherlands, wouldn't they have to pay Dutch taxes? My impression is that they don't have to pay Dutch taxes because the money is just passing through the Netherlands, not being earned there.
My international corporate tax law knowledge is also practically nil, but I believe there is discussion in Congress about a corporate tax holiday that would allow them to bring money back to the US at a 3.5% tax rate.
It's subject to U.S. taxation only if Google ever decides to bring it back into the U.S. via a dividend. Alternatively, they can use that cash to fund foreign growth without ever facing US taxation.
Postponing taxes for about 7 years is roughly the same as avoiding those taxes altogether, based on a comparison of the time value of money calculations (because future amounts of the same value are worth relatively less).
It is not subject to taxation since the money has already been accounted for in Bermuda (where there is no corporate tax). It is effectively the same as money laundering, but then legal and on a much bigger scale.
That's not true at all. It is subject to taxation if the cash is ever repatriated back to the U.S.
That's not money laundering (which is the use of legal business activities to exchange illegaly earned income for legally earned income).
It's legal because the money was technically earned by Google's foreign subsidiaries, which are legally distinct entities. As long as the money isn't repatriated to Google (U.S.), the money isn't subject to U.S. income taxation.
Trying to tax multi-national corporations is futile and encourages huge amounts of rent-seeking. We should just go to a low flat corporate tax rate (say 10%). To offset that we should stop taxing capital gains at a lower rate and crack down on tax avoidance by high-income individual taxpayers in the US.
A corporation can run their activities from Bermuda or wherever they want, but corporate executives and shareholders aren't going to move to a shitty low-tax jurisdiction if we up their rates.
It's "futile"? Really? Is that just shorthand for saying that you oppose trying hard enough to do it successfully?
I don't think it's futile at all. I think we lack the national will to do it, largely and obviously because of the folks who are in control of the relevant decisions.
I'd be more sympathetic to your argument (and just fyi, I am not entirely unsympathetic as it is) if I had some confidence that adopting a 10% flat tax would actually result in corporations paying that amount.
Taxing capital gains at a LOWER rate? Are you serious? Reagan/Bush/Bush trashed those rates to such an extent that it seems laughable to advocate lowering them any further. They're non-existent.
With corporations, taxation is very complicated. The law is complicated because its tries to be sensitive to the question of who should be taxed where for what, and the facts are complicated because it's hard to find out exactly what revenues are being made and what they represent. You can always throw more enforcement at the problem, but that costs money, and your yield is uncertain because companies will just spend more money on tax lawyers to shift things around.
Taxing individuals is a lot simpler. You live in the US, you pay US taxes on all your income.
Also, I said we should stop taxing capital gains at a lower rate. There is no reason for it, and it just distorts the market, shifting activity from spending to saving.
> Taxing individuals is a lot simpler. You live in the US, you pay US taxes on all your income.
Not quite as simple as that, actually. As a US citizen, you have to pay US taxes on your income even if you live and work in another country. Which sounds a lot like the problem that Google and other companies successfully avoid: a jurisdiction claiming tax on income taking place entirely outside of their jurisdiction. Individuals just have fewer options to help them avoid this problem; I suppose you could call that "simpler".
(Also, I'll carefully note that you said "simpler", not "simple". The latter rather obviously does not apply to the US tax code.)
The point is that a corporation can relocate activities on paper to the Bahamas to avoid taxation. A US citizen can live and work in another country and try to avoid tax that way, but few people are actually going to do that. All of the places someone might actually want to live have higher tax rates than the US.
Your failure with the facts reveals that you are just an angry partisan.
President Clinton cut capital gains rates further in 1997 than G.W. Bush did. Also, President Carter cut capital gains, while Bush senior made no change in capital gains rates but famously raised other taxes in 1990.
Current longterm/shortterm rates range from 15/25 or 15/35, which is hardly "non-existent", especially when you consider that these rates are a double-taxation on resources that were already taxed as income.
Capital gains taxes are not "double taxation." If you buy an asset for $1,000, you've paid for it with $1,000 after-tax dollars and acquire $1,000 in basis on the asset. If you then sell it for $2,000, you're taxed on the $1,000 accretion in value as a capital gain, but you are not taxed again on the $1,000 which forms your basis in the asset.
In the case of a business, that business had to grow to justify the increase in value, and that growth typically occurred via some taxable event, such as income. Then, that growth makes the business more valuable. If you sell your interest in the business, you pay taxes again on the increased value.
So, yes, double taxation. Very similar to the double taxation experienced when taking in taxed business income and using it to pay taxed salaries. It's a repeated net drain on the economy, which occurs almost every time money changes hands.
So first of all, the concept of "double taxation" is something you have to be careful with. In general, a given dollar will be taxed more than once because it is spent more than once. However, that same dollar also counts towards the net income of the country more than once. Double taxation is when the same income is taxed more than once, which is a bit different.
Capital gains in general does not involve double taxation. Some examples:
If you buy property for $100,000, and sell it for $150,000, you'll pay capital gains taxes on the $50,000. Here, $200,000 of income is involved and $200,000 is taxed.
Say you invest $100k in a store, and build it up to $100k/year in revenue. You sell it for $1m. The business has no assets to speak of (you lease the space, etc). You're taxed on the $900k. Here $1.9m of income is involved and $1.9m of income is taxed.
Where you do run into double taxation is with corporations. $1m of corporate income is taxed once when it is earned and again when it is distributed as a dividend. But that's because the corporate income tax is double taxation, not because capital gains is double taxation.
Also, there is no double taxation when paying salaries. Say you have $1m in revenue and $400k in expenses (salaries and rent). You're taxed on the $600k of net income, not the $1m in total revenue.
So the basic point is that in any economy, a given dollar supports a multiple of one dollar in income. The US GDP is roughly $13 trillion dollars, which is roughly equivalent to the total national income (http://en.wikipedia.org/wiki/Gross_domestic_product#Income_a...), but there are a lot fewer than $13 trillion dollars in circulation.
Now, when you buy something with a post-tax dollar, that money will get taxed again, but that is not double taxation. That dollar is counting towards income again when you spend it.
So say in the first example, the buyer made $200k in salary and capital gains, on which he paid 25% in taxes and was left with $150k. He then bought the property from the seller with that $150k, and the seller paid tax on the $50k of capital gains. Say this all happened in the same tax year. So the buyer reported $200k of income, and the seller reported $50k of income. That contributes $250k to the GDP. And taxes were paid on that $250k. No income was taxed twice.
Now compare this to a corporation. Say it makes $1m in profits after expenses. It is taxed 30% on these profits, leaving $800k. It then distributes this $700k via a dividend to its shareholders, who are taxed another 15%, leaving $595k. This example does not involve $1m + $700k of income. Only $1m of income is added to GDP. But that same income is taxed twice: once as corporate taxes and again as capital gains.
But let's look at how incentives change when these "double taxes" were removed:
1. No capital gain tax: Encourages speculation because speculation is "tax-free". Prices across commodities, properties, stocks and bonds will all rise, and may result in even more speculation.
2. No dividend tax: Encourages investment into companies who pay out high dividends because dividends are no longer taxed as much. Buying goods for the sake of capital gain would become less advantageous than buying goods because it pays out passive income that is tax free.
3. No corporate tax: Companies no longer store their money overseas as repatriating money from overseas no longer costs any taxes. Encourages investment by companies rather than hiring more workers, paying more wages, or paying out taxes, because further profit from investment is not taxed, but the other three activities are. Encourage creation of more companies (at least on paper).
4. No employee tax: Companies will be able to get more employee per dollar, and encourages companies to hire more employees because they can pay $100000 and the employee will now get $100000 instead of $60000. There will also be the effect of wage inflation; Every company wants to hire more employees.
Of all the double taxation that exists I advocate getting rid of (2) first.
1) Capital gains is not double taxation. You're only taxed on the gain, not the total value of the sale.
2) Dividends are only double tax because of (3).
3) This is actually double taxation. The same income is taxed twice, once when it is earned as profit by the corporation, then again when it is distributed as dividends.
4) Salaries are not included in taxable income, so you're not taxed twice.
I would go even further: zero out corporate income tax, and raise taxes on the individual owners and lenders to make the change revenue neutral. This would do much to increase long-term economic growth by allowing managers to focus on creating value rather than playing tax arbitrage games. We would also be able to shift a lot of tax accountants to more productive work, and downsize the IRS.
"To offset that we should stop taxing capital gains at a lower rate"
I think this is not a bad idea, in fact, corporate taxes could be significantly lowered and capital gains/dividends could make up for it I believe. If not the money would usually go to reinvestment or some other sort of purpose. I think that taxing capital gains as if it was regular income would also be a fairer way to tax since a significant portion of high net worth individuals make most of their money from capital gain and pay less % taxes than upper middle class individuals.
This is going to sound like a 99% rant, however this article perfectly demonstrates a scenario where tax-avoidance benefits few at the expense of the greater populace.
To quote the article: "a company's obligation to its shareholders is to try to minimise its taxes and all costs, but to do so legally"
Let's talk about who those share holders are: In tech companies the largest percentage of shares usually belong to the founders or the investors. Meaning that the tax minimisation is directly profiting few, and in some cases a single individual.
Regular persons do not have the financial clout to either purchase shares, even in low volumes which would see so little of the avoided-tax-returned-as-profits. Similarly small companies don't have sufficient funding to set up elaborate tax minimisation schemes, effectively forcing them to bear the brunt and be less competitive.
Governments deprived from tax income then turn to the population to bolster their coffers, and often to remain popular the tax rate is kept lower than required - which means cutting back on programs which benefit the greater good. We've seen some pretty ridiculous examples of how underfunded the education sector is becoming. (Somewhat hypocritical when the education sector is responsible for creating the skilled individuals that fuel these companies.)
Stopping international loopholes is incredibly difficult, however there is still plenty that can be done to entice companies to not start them in the first place. Incentive rates could be introduced which allow companies (especially smaller ones) to take advantage of a lower rate in exchange for certain business restrictions that limit these sorts of activities.
How hard would it be to set up a system for startups, or at least mid-sized corporation to get the same tax breaks in mass? For example, could a company handle setting up all the holding companies & bank accounts around the world and make the process more affordable by doing it for hundreds of companies at once? You could share the same mailing addresses for each of the companies and the cost of keeping up w/ all the tax laws would be amortized across a much larger group of corporations.
This is exactly why high taxes hurt startups. How can a startup/small business compete profit wise against Google or another large company when they are paying a much lower effective rate. Since their tax burden is so much lower they can charge a much lower price, effectively pricing any startup/competition out of the market.
We just need a super low corporate tax with zero loopholes that make it less expensive to just comply vs hiring hundreds of lawyers and accountants to move around money.
Although you would reduce the amount of fraud with a lower tax rate, you would also decrease your income. The goal is to have the highest income possible, even if that implies fraud or optimizations.
Big companies will always have an advantage regarding taxes: they can provision more easily, pay people to optimize, lobby, etc.
I'm not saying you have an optimal tax rate in the USA, but the naive approach regarding this problem will probably not work.
You can move to a country with a lower corporate tax rate. Like Canada. Yes Canada. And you can get special tech industry tax deductions. The US has one of the higher corporate tax rates out there.
Wait a second. These are earnings that Google international made. So, yes, perhaps they have weaseled out of paying taxes in the UK or various European countries but IMO they shouldn't owe the US a dime of that money. It wasn't made in the US.
I find it really frustrating that people talk about discuss these things as "look at all the revenue the US lost because of this!". Sure, and look how much the mafia lost on it too! Both of these armed groups could have made more money if they just extorted foreign agents and took their money (calling it "protection money" or "tax" or whatever seems appropriate).
I'd like to know how much of the $60 billion tax shortfall the US government doesn't receive ends up in being spent by Google (at their discretion) on public works, education etc.
I don't know enough to suggest this is (or isn't) the case, but perhaps this model would allow companies who genuinely want to look after their community to basically choose how money, that would otherwise be tax money, gets spent.
I think lots of people would rather see money spent on public health and education than lots of other areas tax money gets diverted to.
Of course, I'm not so naive as to think that this will take off anytime soon...
That's called a charitable deduction, and it's already part of the tax code.
Google isn't using the charitable deduction; it's simply using a loophole to avoid U.S taxation on income earned from non-US sources. Whether this is bad depends on your view on taxation.
>it's simply using a loophole to avoid U.S taxation on income earned from non-US sources
Income earned from non-US sources on US soil or outside of it? The thing that infuriates me about my home country is that they think I owe taxes on money I've earned while living in a totally different country. What stops, say, Russia from deciding I owe them taxes too?
Regardless of your view on taxation, it seems pretty reasonable to only have to pay taxes in one jurisdiction (the one in which the income occurred). Differing views on taxation could argue over whether one or zero jurisdictions should get to impose taxes, but it seems pretty reasonable that no more than one ought to.
http://cameronkeng.com/hn-how-do-i-pull-a-google/
A few things you should consider about international taxation is that it's complicated and only works because they have the infrastructure to sustain it.
Disclaimer, I'm not saying what they're doing is right or wrong, but simply placing it into context
1. Individuals have a hard time using international tax law similarly because of CFC rules (closely-held foreign corps). If anyone owns more than 10% of a foreign company they must include or report the income as part of their current earnings.
2. The effective tax rate is only "2.something percent" of income the income google earned outside the US.
3. To have an APA (Advanced Pricing Agreement) with the IRS is incredibly expensive and time consuming because it's like getting audited in advance and then justifying it before you ever do anything.
4. You need to pay at a minimum a big 4 accounting firm 10 million to start a project of this complexity over a number of countries.
5. The dutch companies are simply a "conduit" to allow the money to ultimately reach the Caribbean island tax havens because they have no income tax and simply charge a flat tax of 15k.
6. On cperciva's note, this tax plan could be considered "post-poning income recognition" but in reality it effectively is never repatriated or brought back into the country because google is such a multinational company. They could use the money for their international business very easily or they could use their foreign cash reserves to purchase an asset in a foreign country and still retain the ownership by the US main company.
I could go on for a while but this is just a the tip of the iceberg.
I've practice this area of taxation before as a CPA so I could give you a number of other examples.