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Will New Tax Strategy Become More Widely Adopted
Author: Scarinci Hollenbeck, LLC
Date: October 23, 2013
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Many corporations are implementing strategies to reduce their liabilities under U.S. tax law, but as these practices come under more scrutiny from the Internal Revenue Service, some analysts are questioning whether they will remain viable in the future.
For instance, the Financial Times recently highlighted a practice implemented by Google, which allowed it to funnel roughly $11.91 billion in royalty payments to a shell corporation in Bermuda in 2012, a 25 percent increase from the amount transferred in 2011. The strategy – commonly called the Dutch Sandwich – involves a company selling or licensing its foreign rights to intellectual property developed in the United States to a subsidiary in a country with lower tax rates, Bloomberg explained. In doing so, foreign profits are then attributed to that offshore subsidiary rather than the U.S., greatly reducing the company’s tax liabilities.
In the case of Google, the company lowers its overseas tax rate to roughly 5 percent, less than half the rate in already low-tax Ireland. However, the move has also sparked controversy over the practice, namely because Google earns most of its foreign income in Ireland and does not pay substantial taxes in other countries. In addition to this set-up, the company moves most of its profits from Ireland to Bermuda, choosing to route the funds through the Netherlands to avoid withholding taxes, the Times added.
It is unclear how many U.S. companies have adopted this strategy, but a number of large corporations, including Facebook, Microsoft, and Starbucks have all come under fire for their controversial tax strategies. However, many analysts argue that while they may be complex, they are currently legal under U.S. tax law. This assertion may come under dispute by the IRS, however, which has said it will take a more detailed look into corporate tax strategies.
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