How Google avoids paying its taxes and sticks you with the bill

Whenever there is a national conversation on ‘taxes’, Warren Buffett can be found on a soapbox shouting that he would like to pay more taxes, but our system wont allow it. He is taxpayer suppressed.

Buffett plays a game of “try and catch me”…and then he faults the system for not succeeding. It is human tragedy to behold Buffett crying with two loaves of bread. He should be unburdened. If he just didn’t have that militia of lawyers, bankers, a fawning press and, as a back up plan, people with guns. Poor, sad Warren Buffett.

Someone tax smarter than me reverse engineered the loopholes and tax thuggery utilized by foundations, hedge funds and family offices in a Barron’s article, here: Warren Buffett’s Nifty Tax Loophole

I’m going to pick on Google and layman’ishly explain how corporations use ‘inversions’, to lower, or disappear, their tax obligations.

An imperfect glossary of some of the mechanisms used

  1. Exploiting mismatches is tax arbitrage when different countries view the same entity or financial instrument differently
  2. Treaty shopping to route income so as to reduce taxes
  3. Delay repatriating earnings
  4. Earnings-stripping. A corporation loads the American part of the company with debt owed to the foreign subsidiaries. The interest payments on the debt are tax-deductible, thus reducing taxable American profits.

Google and its war against taxes

Profits at Google derive mostly from royalties on Intellectual Property, patents on software and digital ‘things’, like downloaded songs. Think of this as stateless income.

This is the intangible nature of IP rights. They can be assigned, licensed and sub-licensed.
 
Google (AKA “do no evil”) is headquartered in the United States, it wants to sells its digital products in Europe but the tax rate in Europe is high. So…
  1. Google licenses the patents and Intellectual Property for its search and advertising technology for the Europe, Middle East and Africa region to Google Ireland Holdings.
    1. Ireland has a 12.5 percent corporate income tax rate
    2. 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)
    3. This is an unlimited liability company, under Irish law it is not required to disclose income statements or balance sheets.
    4. Although it has been incorporated in Ireland, it is controlled and managed by directors based in Bermuda. Under Irish law, this characteristic renders Google Ireland Holdings a tax resident in Bermuda and therefore only subject to Bermuda legislation which does not impose taxation on corporate profits.
  2. Google Ireland Holdings in turn owns a subsidiary called Google Ireland Limited.
    1. It exploits the IP portfolio, sells advertising and collects payments, generating earnings.
    2. Nevertheless, Google Ireland Limited does not make profits, as it has to pay royalties to Google Ireland Holdings for the IP licenses.
  3. To steer clear of an Irish withholding tax, payments from Google Ireland Limited don’t go directly to Bermuda. A brief detour, a tax route, to the Netherlands avoids that liability because…
    1. Irish tax law exempts certain royalties to companies in other EU member nations. This is a ‘tax treaty’.
  4. The fees therefore first go to a Dutch unit, Google Netherlands Holdings B.V., which pays out almost every single cent to the Bermuda entity, which pays no taxes.

Notes:

  • This structure is only used by US-headquartered corps as it relies on quirks of US tax law
  • It is no longer possible to use this same ‘tax route’
  • President Trump signed a new law, taxing foreign profits if they are held outside the US

When one door closes, another one opens…

Google restructured and became a wholly owned subsidiary of a new Delaware corporation called Alphabet Inc. “Google’s ‘Alphabet Soup’ in Delaware”, explains a few mechanisms of how the new structure will allow its Google subsidiary to take advantage of the “Delaware loophole” and lower its corporate income tax.

 

p.s 

Many companies use tax havens, or impossible but true tax arbitrage schemes to underpay taxes to the country where it should be owed. What sets Amazon apart is that their whole business model is built around using tax avoidance as a way to help make their prices among the cheapest online. Read this: How Amazon avoids paying its taxes, so you’re stuck with the bill