Introduction
It could be hardly doubted that the modern taxation system is a significantly complicated subject. Many aspects of this system, such as vast differences in tax rates and tax treatment of corporate income in different countries, are continuously investigated and elaborated on (Arel-Bundock, 2017). Another important part of the question is numerous strategies of tax avoidance (which is also referred to as tax aggressiveness), which are employed by multinational corporations (McClure, Lanis, & Govendir, 2016). This paper aims to dwell upon several issues, including previously mentioned problems along with the use of the Double Irish and the Dutch Sandwich by Google, Google’s negotiation with the Internal Revenue Service, and Microsoft’s use of Irish subsidiary to cut the company’s U. S. taxes. Based on the investigation of the given questions, a conclusion will be made.
Differences in Tax Rates and Tax Treatment among the Countries
First of all, it is essential to discuss the question of why the taxation rates and treatment of corporate income vary so dramatically among different countries. In general, “taxation of business income is always a contentious public policy issue” since numerous parties are involved (Griffin & Pustay, 2015, p. 530).
The Use of Tax Havens by Multinational Corporations
It is possible to mention that the ability of multinational companies and corporations (MNCs) to lower their tax burdens is vastly based on the strategic use of transfer prices (Griffin & Pustay, 2015). Also, this ability is significantly facilitated by the existence of a tax haven, which is the term referred to a country that imposes little or no taxation of corporate income (Griffin & Pustay, 2015). Such states, instead, impose a small fee for a multinational corporation (concerning the income rate of an average MNC) to establish a fully owned subsidiary in a tax haven. Further, an MNC manipulates different types of payments, including “transfer prices, dividends, interest, royalties, and capital gains,” between its separate subsidiaries to lower the corporate income taxation (Griffin & Pustay, 2015, p. 526). As result, the tax rates of multinational companies which are using the tax haven scheme are significantly lower than those of the companies, operating in high-tax countries. It could be additionally mentioned that the globalization process has an immense impact on the development of corporate tax competition in numerous states and the growing rate of tax avoidance by MNCs (Farnsworth & Fooks, 2015).
Political Reasons for Tax Rates Differences
As it was mentioned in the previous section, there are vast differences in tax rates and tax treatment among different countries. Another reason for such variety that should be mentioned is different domestic policies, implemented by the governments. It is argued that, in the majority of cases, politicians are preoccupied with the creation of new workplaces and tax revenue, and they tend to change their countries’ tax codes if such actions stimulate the local economy (Griffin & Pustay, 2015). Therefore, corporate income taxes vastly depend on the political course of the state and its overall economic condition. For example, the federal corporate income tax rate is 35 percent in the United States, 16.5 percent in Canada, and only 12.5 percent in Ireland (Griffin & Pustay, 2015, p. 530). Additionally, tax havens, which were previously mentioned, do not impose any tax at all in the majority of cases. The aggregate of the enlisted reasons serves as a foundation for numerous opportunities and strategies which are used by multinational corporations to significantly lower their tax rates. The following section will discuss the implementation of the tax avoidance strategy by Google.
The Use of Double Irish and the Dutch Sandwich by Google
Since the general information about the reasons and opportunities for tax avoidance is given, it is essential to discuss the implementation of the strategy used by Google corporation to lower its corporate income taxes. This approach is vastly based on the use of the Irish taxation code, which is significantly different from the United States Code. For example, “the effective rate on royalty income imposed by Ireland can be as low as zero” (Griffin & Pustay, 2015, p. 530). Additionally, Ireland offers significantly vast tax credits for research and development along with the exceptions for the intellectual property revenue (Griffin & Pustay, 2015). These factors contribute to the emerging of Google’s tax avoidance strategy, implemented primarily under the Irish code.
Further, it is possible to explain how Google’s scheme of lowering its corporate income tax works. First of all, it is essential to mention the immense importance of the company’s advance price agreement with the U. S. Internal Revenue Service. This agreement established the terms under which Google can “transfer its intellectual properties to its foreign subsidiaries” (Griffin & Pustay, 2015, p. 531). According to the agreement, Google licensed its intellectual property to its wholly-owned subsidiary, Google Ireland Holding, which is managed in Bermuda (making it a nonresident corporation, which is not governed by an Irish taxation law). It possesses an Irish resident enterprise, Google Ireland Limited (Griffin & Pustay, 2015). These two subsequently dependent companies are referred to as Double Irish. Further, Google Ireland Limited transfers its profits to another Google subsidiary, Google Netherlands Holdings (which is referred to as Dutch Sandwich), in the form of royalties (Griffin & Pustay, 2015). Google Netherlands Holdings then transfers almost all of the fees to Google Ireland Holdings, whose profits are not taxed due to its residence in the tax haven. Therefore, an immense part of Google’s corporate income remains free from the tax code of the United States.
Microsoft’s Use of Its Irish Subsidiaries
Furthermore, it is possible to discuss how Microsoft corporation uses its subsidiaries in Ireland to lower its U. S. taxes along with the influence of such use on the Irish economy. The scheme which is employed by the corporation is relatively similar to Google’s strategy of the Double Irish and the Dutch Sandwich (McClure et al., 2016). Microsoft established its subsidiary in Ireland, Round Island One Ltd., which localizes Microsoft products for European, African, and Middle-Eastern markets (Griffin & Pustay, 2015). Then Round Island One Ltd. licenses the localized products to its subsidiary, Flat Island Company, which is also located in Ireland. Earnings of the latter subsidiary are taxed at a 12.5 percent corporate income tax rate, which is a relatively low rate compared to the U. S. taxes (Griffin & Pustay, 2015). Round Island One Ltd. revenues are characterized as active income by the U. S. government, which allows Microsoft “to take advantage of the IRC’s deferral rule and to avoid U. S. taxation of that income” (Griffin & Pustay, 2015, p. 531). Concerning the influence of these actions on the Irish economy, it should be noted that Ireland welcomes the establishment of foreign subsidiaries such as factories and service facilities since it stimulates local economic growth.
Conclusion
In conclusion, it is possible to state that there are numerous schemes of tax avoidance, including the use of tax havens and foreign countries’ different taxation laws. This paper analyzed the use of such strategies by Google (the Double Irish and the Dutch Sandwich scheme) and Microsoft’s subsidiaries. It is possible to state that the implementation of these tax avoidance methods significantly harms the U. S. economy.
References
Arel-Bundock, V. (2017). The unintended consequences of bilateralism: Treaty shopping and international tax policy. International Organization, 71(2), 349-371.
Farnsworth, K., & Fooks, G. (2015). Corporate taxation, corporate power, and corporate harm. The Howard Journal of Crime and Justice, 54(1), 25-41.
Griffin, R. W., & Pustay, M. W. (2015). International business: A managerial perspective (8th ed.). Pearson.
McClure, R., Lanis, R., & Govendir, B. (2016). Analysis of tax avoidance strategies of top foreign multinationals operating in Australia: An expose. Retrieved from cdn.getup.org.au/1507-Aggressive-Tax-Avoidance-By-Top-Foreign-Multinations.pdf