Problem:
How does Google, Microsoft, Facebook and friends pay an effective tax rate of 2.4%? More importantly, can I do the same?
Analysis:
- 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.
- What are the drawbacks?
- 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.
- How do I get an APA or transfer pricing agreement and start saving?
- You need to hire an awesome tax professional (Enrolled Agent, Certified Public Accountant or Attorney) to help you traverse this legal minefield.
- How long does this process take?
- It could take anywhere from 1.5 years to 3 years generally. It is a tedious and long process.
- If I have an APA does that mean I won’t get audited?
- 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.
Conclusion:
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.
i wanna make 300k a year and worry about that too.
That’s a nice problem to have haha. Scaling is always better than scraping =x.
The Caymans seems to be a popular location. I’d like to know why over the other low tax jurisdictions such as the Turks and Caicos or the British Virgin Islands?
That’s a really good question. It’s a mixture of tax law, convenience, infrastructure, politics and the herd following the pack. I’m on my mobile right now so it’s hard to type out a thorough explanation. But,would mind if I steal your question for tomorrow’s hn case study? It’s an awesome question! Thanks!
Cam.
While I’m happy for your success (and for Google’s), this behavior is clearly immoral. You benefit from the services and protection that the government provides. You should pay for them.
Immoral? This isn’t really a moral issue. Morally, I’m not required to pay taxes. Legally, however, I am. And the above process is clearly written with legal perspective.
LOL what?
Using the infrastructure of the state to generate huge profits, and then avoiding paying your portion of the development and maintenance cost of that infrastructure is not a moral issue?
You’re a leech.
there is a clear difference between Morals and Ethics.
Don’t forget about all those jobs that google created, and all the tax those google employees are paying. And all of the other business that are able to make money based on what google do.
I’m not saying I agree that a company that makes $9bn per quarter and only pays 2.5% tax is fair, but you have to look at the whole picture i.e. is the state better off with google or without?
(I don’t know the answer btw)
Here’s the answer: Every employee, customer, and shareholder of google has a consensual relationship with google. If they don’t like google’s policies they can stop being an employee, customer or shareholder.
Every subject of government has a non-consentual relationship. You can’t choose to not be subject to government whims, and in America, you can’t even renounce citizenship without getting permission first– and they have stated that if you make a lot of money, they won’t give you permission.
Google deals with people without using violence, and doesn’t force people to use its services.
Government treats people as slaves, and uses violence against them if they refuse to use the “services” it “provides.”
The initiation of force is immoral. As much as I don’t like google, I can choose not to be their customer. You have no choice when it comes to government, everything it does, it does with violence.
And that makes government itself a perfect place for parasites to congregate in order to steal from the masses… which is exactly what happens.
I’m not sure I totally get your point, so I’ll pick up on a couple of lines you put there.
” You have no choice when it comes to government, everything it does, it does with violence.”
That is what voting is for. Sure, it’s not as quick as selling your shares in google, or stopping using their services, but if you don’t like the system you have a chance to vote.
“And that makes government itself a perfect place for parasites to congregate in order to steal from the masses… which is exactly what happens.”
Are you implying that google is stealing from the masses by paying 2.5% tax? If so, my question is actually about the net value of google. So if you take that 2.5% + taxes on staff wages + tools that help other business grow, is the state better off than if google did not exist?
The “infrastructure of the state” does not enable profits. The state is a parasite, nothing more.
It is really sad that people have been so “educted” in government schools as to believe that you wanting to steal from others is moral, and when others say they want to keep what they’ve earned, they’re “leeches”.
Shame on you.
You’re presuming that taxes are a legitimate deal– that the “benefits” from the government are worth as much as the taxes one is paying.
This is bullshit of course. If government services were worth a damn, they wouldn’t have to use violence to collect them. The government doesnt’ provide any protection, and in fact, is the primary threat to people’s wellbeing.
If you’re a businessman in America, you’re far more likely to be shaken down by government illegally than you are to be mugged in the street. And if you *are* mugged in the street, the government won’t do any thing about it.
I endorse everything Jessica Darko says AND recommend Atlas Shrugged to the rest of ya so you can understand where she/he is coming from.
This is the nature of ALL regulation. It enshrines the politicly connected class and makes it harder for the smaller businesses to compete on the same terms.
Whenever someone says “there ought to be a law” or “government should regulate X” they’re saying “government should prevent regular people from competing in industry X” and “you cant’ participate in industry X unless you have millions in lobbyists.”
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