How Multinationals save Corporate Taxes: Process Analysis

Tax Avoidance Structure – We all read the articles published in the leading magazines about Google, Microsoft and other MNCs saving millions in taxes every year. Conflict is not about them saving millions but that after earning loads of revenue how do they save taxes with such stringent taxation laws around the world. There is nothing illegal in the processes adopted by them but a mix bag of simple and complex techniques adopted by highly paid taxation geniuses at work in these companies.

This article analyses and explains some of the ways multinational organizations such as Google, Apple, Microsoft, Amazon, etc. avoid tax liabilities through international transactions, tax havens & Tax avoidance agreements. It will also discuss the essentials of tax havens, ways to transfer profits and features of a tax friendly jurisdiction.

What is tax structuring and how does it help large corporations?

Tax structuring is a way through which loopholes are found in the law and then suitably applied and reaped benefits by such multinational giants. According to a report published by Reuters, the Netherland based arm of Google Inc. i.e. Google Netherlands Holdings BV published its accounts which showed that the company transferred almost all its revenue, mostly royalties from its Irish subsidiary (Royalty is the payment for the right to use the intellectual property of another company). The royalties through the Dutch subsidiary are transferring to another Irish registered but operational from Bermuda affiliate called Google Ireland Holdings.

This complex nexus of subsidiaries and royalties result in saving billions of non-US revenue from getting tax. This decade-old system ‘Double Irish, Dutch Sandwich’ strategy allows the parent company Alphabet Inc. to effectively charged at just 6% on its non-US revenues. Whereas its US revenues were charge at 35%.

How does the Double Irish Sandwich Structure work?

Double Irish Sandwich structure follows by global businesses, which initially started out from the US. Apple Inc., Starbucks, Ikea, Amazon UK, Gap & Microsoft have saved millions of dollars from tax by using either Double Irish Arrangement or Dutch Sandwich.

Example with Diagram of a Double Irish Arrangement

Fig. I

Let’s assume there is a company name MNC Inc. which has

two subsidiaries incorporated in Ireland namely IR 1 and IR 2. IR 1 has changed its establishment to Bermuda but the place of incorporation is still Ireland i.e. IR 1 is operating out of Bermuda now whereas IR 2 is operating from Ireland.

MNC Inc. sells its IP rights of Europe to IR2 in lieu of royalty for using the rights and promoting the brand of MNC Inc. in Europe. At the end of each year IR 2 transfers

the revenue collected from IP rights used in Europe in the form of royalty to IR 1 in Bermuda.

Tax Implications of the Double Irish Arrangement

Tax Avoidance Structure – The income of IR 2 is taxable at 12.5% in Ireland, unlike 35% in the US, which makes Ireland a suitable country for corporation’s registered offices.

While transferring the royalty from IR 2 to IR 1 there is no tax levied from European Union

as there is no withholding tax for flux of money within EU.

This royalty is transfer to IR 1 in Bermuda because Bermuda has no income tax. So the income, assuming to be Rs. 100, is charge Rs.12.5 in IR 2 but the rest of it i.e. Rs. 87.5 travels safely to IR 1 where it can be safely parked.

What does the Dutch Sandwich Structure look like?

Fig. II

Dutch Sandwich structure followed by global businesses, which initially start out from the US.

Assuming the names of holding, subsidiary and locations same, as under Double Irish Arrangement, there is

an additional subsidiary in Netherlands in this case called DT 3.

IR 2 transfers the revenues in the form of royalty from Ireland to DT 3. Netherland collects the royalty from IR 2 and transfers it to IR 1 in Bermuda.

Tax Implications of the Dutch Sandwich

Tax Avoidance Structure – IR 2 pays tax at 12.5% in Ireland on the revenue earned and transfers it to DT 3 in Netherlands which charges a nominal amount

as fees to collect the royalty from IR 2 and transfers it to IR 1 in Bermuda. Bermuda, being a tax haven owing to the liberal regulations on income tax, allows the money to be parked here.