How does Google, Microsoft, Facebook and friends pay an effective tax rate of 2.4%? More importantly, can I do the same?
- How does Google accomplish this?
- Google is an international company that has operations throughout the world; their ultimate tax goal is to send its income to the Caymans because almost all tax havens in the Caribbean don’t have a corporate level tax.
- Google has its income funneled to an Irish company. Ireland itself has a hefty tax rate, but the income is transferred to a subsidiary in the Netherlands or another EU (“European Union”) state with favorable tax laws. Every nation charges exorbitant tax rates on income transferred to tax havens, especially those without corporate level tax rate like the Caymans. But, the EU prevents most countries within the union from taxing income between member states such high rates. Thus, Google uses Netherlands as a stop-gap between Ireland and the Caymans to avoid the Irish tax system. As result, the income has effectively circumvented the tax system.
- International tax planning is very expensive and very complicated because you must take into account multiple tax regimes and remain mindful of changing tax laws in multiple countries.
- Income will be taxed if it is repatriated or brought back into the United States. Thus, the income must be used or paid outside of the United State’s jurisdiction.
- You must obtain an APA (“Advanced Pricing Agreement) with the IRS’s advanced pricing agreement program. You’ll effectively be paying the IRS to commence a detailed audit of your entire business to determine how the foreign company is going to charge the domestic US Company for its services. It is a complicated and difficult negotiation between you and the IRS on what is the fair market value of expenses you’ll be creating for the US Company.
- You need to hire an awesome tax professional (Enrolled Agent, Certified Public Accountant or Attorney) to help you traverse this legal minefield.
- It could take anywhere from 1.5 years to 3 years generally. It is a tedious and long process.
- 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. The APA doesn’t guarantee that you’ll avoid and audit, it is assurance that you have a reasonable position for your tax professional to stand on when they’re being lynched.
Google and friends have the bankroll, infrastructure and the economy of scale to take advantage of international tax planning. But, it is possible to accomplish similar goals at modest levels for businesses of different sizes. The caveat is that you’ll always require a good tax professional in order for you to avoid egg-on-your-faee.