While the competition in the tech industry certainly can get ugly, there are times when US based tech giants “follow” each other in lock step. Bloomberg features a story explaining how Google pays an effective income tax rate of 2.4% on it’s overseas earnings, which means the US Treasury got a billion a year less than might have been expected from Google for the past 3 years. While the strategy behind this is well executed, the article points out that it’s really based on the prosaic corporate tax-planning tool known as transfer pricing. The specific tactics that Google used to accomplish this feat of legal tax avoidance are so common they have nicknames – the “double Irish” integrated with a “Dutch sandwich”. As explained in the Web CPA Debits & Credits blog, an Irish subsidiary is the company that gets credited for search and advertising revenue from Europe, the Middle East and Africa. A second Irish sub has a structure thank links it to corporate tax haven Bermuda. In addition there’s a company in the Netherlands also involved to make the transfer pricing “accurate”, hence the Dutch sandwich name.
The IRS has looked at this and given it a blessing. Apparently Microsoft does the same thing, and Facebook openly acknowledges it’s preparing to follow suit. Some estimates put the general use of these types of strategies as reducing tax payments in the US by about $60 billion a year. The logic behind why this is legal is related to the idea that the earnings aren’t taxed when they are credited to the foreign subsidiary, but when the dollars are brought back to the US, they will be fully assessed for tax liability. You don’t have to be a CPA to recognize that a multi-national company is going to find a way to deploy those dollars anywhere but the US for the foreseeable future. We are in a global economy, and companies trying to maximize shareholder value are essentially required to find and use strategies like this. I just wish there was an equivalent break we could provide our small business clients who are trying to make ends meet in a tough economy.