How To Take Advantage of Tax Havens

Ever wonder how Apple and Google end up paying so little on their taxes?

You have the whole internet at your disposal – millions of cat videos, GIFs, Tumblr, Tinder, Netflix (and chill?), and you decided to click on the article about taxes? I guess you’re my older audience (I bet you actually vote, too). In case you’re younger than 70, have no fear. This isn’t your grandpa’s tax article.

How To Take Advantage of Tax Havens

I’m going to teach you about tax havens, and how to go about avoiding paying corporate taxes. Legally.

Most people believe that taxes are evil. We all hate paying them, talking about them, and we cringe at the sight of our paycheck when we see how much money the government takes. This is not an article about the morality of avoiding taxation.

In a capitalist society, profits are king.

It makes sense to try to pay as few taxes as possible when the end goal is wealth: that’s the American Dream, after all. Therefore it’s quintessentially American to give the United States as little money as legally possible.

Apple’s Tim Cook stood in front of Congress in 2013 to reject allegations of tax avoidance and basically reiterated over and over again that Apple did nothing illegal (watch him speak here).

One important note: tax evasion is illegal. Tax avoidance is legal. If you think this is just semantics – it’s not. One will land you in prison, while the other is used by multinational corporations on a daily basis.

An example:

Jimmy built a company, Jimmy Corp, which sells Jim-rat action figures. These Jim-rats are sold in America and in England. After one year, Jimmy makes $1,000,000. As a corporation, Jimmy Corp is liable to have to pay the federal corporate income tax of 35%.

“35%!” Jimmy says, aghast. “That is $350,000 straight to the government. Mr. Accountant, surely there’s something you can do!”

Mr. Accountant chuckles, and strokes his fluffy white Persian cat, “Why yes, Jimmy. There is.”

Mr. Accountant has some tricks up his sleeve and Jimmy feels better. Mr. Accountant talks about “offshore” accounts, maybe an LLC in Bermuda, and something about Ireland. Jimmy feels at home knowing he only has to pay 22%, saving him $130,000.

Now, you’re thinking: shit, I need to find myself an accountant with a fluffy white cat. Well, accountants are expensive, and you have to actually be making money already to have one. So, you decide to do some research yourself.

You call Switzerland and ask them:

“Yeah… can I open one of your bank accounts? I don’t want to pay taxes.”

Switzerland says, “You vatch too many movies. Stupid American.” You mentally declare war on Switzerland and call them communists.

How did Mr. Accountant do it?

A lot of these tactics may seem like shady business tactics, but much of this is due to the ‘Check The Box’ loophole.

Turns out, the IRS is trusting of U.S. corporations. This means that American corporations can decide for themselves how to classify their subsidiaries. Since a company typically only pays tax to the country it’s located in, this allows Google Ireland to pay Irish Tax. The trick: how do we get the money we made overseas?

You start by checking out the IRS website, which shows the positives and negatives of incorporating under different rules. Big companies (like Berkshire Hathaway, Ford, Coca-Cola) tend to go with Delaware, which serves as a sort of domestic tax haven, according to this New York Times article.

The Double Irish

First, take two shots of Jameson… no, just kidding.

Let’s break this down. So, I own Jimmy Corp. I sell Jim-rats around the world. Jimmy Corp is located in Santa Barbara, California. Because I sell Jim-rats outside the US, I create two subsidiaries under Irish jurisdiction, one in Dublin and one in the Cayman Islands.

I use the favorable corporate tax laws of Ireland (12.5% as opposed to the U.S. rate of 35%) and the Cayman Islands (0%) to pay fewer taxes. Ireland offers a relatively unchanging tax law and national stability, while the Cayman Islands offer the best tax rate possible.

I can even keep the profits overseas and wait for a “Repatriation Tax Holiday,” which occurs whenever one such bill is passed in Congress (the last such holiday occurred in 2004 – at 5.25%).

The government will sometimes pass a bill like this in order to incentivize U.S. multinational corporations to bring their profits home. This helps stimulate the American economy by encouraging corporations to bring in liquid assets.

Companies accused of this: Apple, Google, Microsoft

The Double Irish With A Dutch Sandwich

Aside from being a sexual position, the “Dutch Sandwich” adds for more complexity and allows another tax to be avoided.

Sell your International Property Rights to a Dutch holding company. A holding company does not produce goods or services – it simply holds stock or equity.

If you want to do this, you have to form a corporation, which you can do via LegalZoom, BizFilings, or the IRS. If you sell the Intellectual Property Rights to the Cayman Islands, royalties from selling your Intellectual Property can go to the Dutch holding company, which avoids an Irish “Withholding Tax.”

Transfer Pricing

This is a common tactic. This price (the transfer price) is defined as the amount at which a subsidiary buys their parent company’s product in order to sell it. For example, I sell a Jim-rat in the U.S. and in Ireland. They both cost around $100.

But I sell the Jim-rat to my Irish company for $199. So it looks like I made $199 in Ireland, and only $1 in the USA.

Famously, GlaxoSmithKline paid $3.4 billion to the IRS in 2006 over abusive transfer pricing, according to Forbes.

Often these prices – as internal exchanges – aren’t publicized. In principle, this price should be the same price that an independent dealer would buy the product.

But since no one looks at these transactions, you can mask income and make it seem like income is coming from a place it really isn’t (like a country with better tax laws than our own).

Shell Company

Huge multinational corporations have a lot of money. So they set up offices and subsidiaries in countries like The Netherlands (favorable corporate tax laws – 25%).

These companies have few assets and no operations, but are used as floating bank accounts.

Used by: Everyone

In tech, where products or services are virtual by nature, loopholes in the tax code can create profitable situations.

Oh, and you better use section 199 to your advantage, especially if you make your product domestically (software counts). Check out the IRS checklist to see if you qualify, as it can give you up to a 9% deduction on certain taxes.

We might all agree that the tax code needs to be reformed, but until it does, who wouldn’t take advantage?

Can you blame a corporation for wanting to increase its profits? Even if tactics like the Double Irish become less common, companies that have figured out how to avoid paying 35% in corporate tax will do so.

That’s how capitalism works. If you don’t play the game, you’ll fall behind.

American lawmakers constantly have to debate the merits of increasing taxes for corporations because they end up paying so little, or decreasing them to keep corporations here.

However, every time they raise taxes, we see domestic companies turn to international waters due to more favorable tax climates.

Ultimately, tax laws need to be reformed, but when your competitors (whether that’s Coca-Cola or Apple) are using tax laws to their advantage, you better do the same… or you won’t be able to compete.

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