The International Monetary Fund called its Fiscal Monitor back in last October Taxing Timesas it analysed ways that nations reducing budget deficits might raise revenue to help do so. In passing I note that on the Fund’s reckoning Australia is well down the list of those needing to take drastic action with its projections of debt to GDP by 2030. There we are on the far right but I’m not sure of the assumptions used to put us there in pride of place. Perhaps the current Senate shenanigans might change things but there is hardly evidence there that Australia is facing some imminent disaster.
Be that as it may, what intrigued me when I belatedly discovered the paper was the description in a section on increasing company tax receipts of how some of those large multi nationals avoid paying much at all.
“So many companies exploit complex [taz] avoidance schemes, and so many countries offer devices that make them possible, that examples are invidious. Nonetheless, the “Double Irish Dutch Sandwich,” an avoidance scheme popularly associated with Google, gives a useful flavor of the practical complexities. Here’s how it works (Figure 5.1):
•• Multinational Firm X, headquartered in the United States, has an opportunity to make profit in (say) the United Kingdom from a product that it can for the most part deliver remotely. But the tax rate in the United Kingdom is fairly high. So . . . •• It sells the product directly from Ireland through Firm B, with a United Kingdom firm Y providing services to customers and being reimbursed on a cost basis by B. This leaves little taxable profit in the United Kingdom. Now the multinational’s problem is to get taxable profit out of Ireland and into a still-lower-tax jurisdiction. •• For this, the first step is to transfer the patent from which the value of the service is derived to Firm H in (say) Bermuda, where the tax rate is zero. This transfer of intellectual property is made at an early stage in development, when its value is very low (so that no taxable gain arises in the United States). •• Two problems must be overcome in getting the money from B to H. First, the United States might use its CFC [controlled foreign corporation] rules to bring H immediately into tax. [Note: The "controlled foreign corporation" rules seek to reduce the ability of companies to move profits to another country via a pure paperwork transaction to what is really the same company.] To avoid this, another company, A, is created in Ireland, managed by H, and headquarters “checks the box” on A and B for U.S. tax purposes. This means that, if properly arranged, the United States will treat A and B as a single Irish company, not subject to CFC rules, while Ireland will treat A as resident in Bermuda, so that it will pay no corporation tax. The next problem is to get the money from B to H, while avoiding paying cross-border withholding taxes. This is fixed by setting up a conduit company S in the Netherlands: payments from B to S and from S to A benefit from the absence of withholding on nonportfolio payments between EU companies, and those from A to H benefit from the absence of withholding under domestic Dutch law. This clever arrangement combines several of the tricks of the trade: direct sales, contract production, treaty shopping, hybrid mismatch, and transfer pricing rules.