back to article Google avoids tax with ‘Double Irish Dutch Sandwich’

Australia has become the latest nation to decide it wants tech companies to pay more tax, after David Bradbury, Assistant Treasurer and Minister Assisting for Deregulation, declared Google uses a “Double Irish Dutch Sandwich” to pay as little tax as possible on its Australian operations. Google paid just $AUD781,471 of taxes in …

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Anonymous Coward

I admit I know very little about this area, but how difficult is it to enact laws which make transferring tax-free profit out of one country to another illegal? Very simplistic, and obvious, so there must be a reason why not.

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It's actually very difficult. Certainly in the UK, there's something like 10,000 pages of legislation to try to stop it.

They are entitled to set up shop in any EU country they wish for any reason or for no reason. Therefore it is all down to whether the transfer pricing payments are reasonable for what they get in return, and the various tax authorities around the world will always argue for a bigger slice of the cake.

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The problem is corporation tax, which (AFAIK) is levied on profits. You can't apply VAT here as many of these transactions are inter-company so are VAT exempt.

You can't just replace corporation tax with something based on revenue as then any struggling company will be instantly killed. Letting companies offset loss against the new tax will let Google out of paying tax again as they just pay a hefty royalty to their overseas subsidiaries and hey presto, we're back where we are today

I don't know much about corporate tax law, especially as it applies to inter-jurisdictional transactions, but the solution does not appear to be obvious.

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Taxing revenue instead of profits ...

If it's good enough for individuals, then why not companies ?

Struggling households are killed by the fact that all income is taxed, before the expenses of running the household are - or can be - met. In that situation, the household then receives benefits to keep it afloat.

Essentially this IS what happens, by allowing losses to be offset against tax. The company is effectively given a 100% tax credit. But once it starts generating profits, those tax credit remain in the bank. A company should be required to repay those tax credits once it starts generating profits.

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Re: Taxing revenue instead of profits ...

Struggling households would certainly be killed by taxing businesses on revenue and not on profits.

What do you think would be the impact on your food bills?

Most super markets are very low margin businesses. I know that at one point it was common to run with a zero or even negative margin and rely on the fact that customers pay immediately while the super market pays on fairly long credit terms, so the super markets profit came from the value of the money paid to it by customers and not yet paid to suppliers. I guess that with the low interest rates currently in place this scheme no longer works. Who knows.

So if you make the super market pay corporation tax on revenue rather than profit your food bill would shoot way up because the price of the food would now need to have the tax added to it. And not just by the super market, but by everyone in the supply chain. The farmer, the distribution company, the transport companies, the manufactures, everyone. Unless a totally flat model could be developed (ie real farm shops) you could easily see your food bill double.

This really isn't a simple problem.

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"It's actually very difficult. Certainly in the UK, there's something like 10,000 pages of legislation to try to stop it."

Actually it's the 10K pages that creates it. The more complex you make something, the more likely you are to leave loopholes.

They need to start by simplifing the laws, not adding new ones

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Anonymous Coward

Not difficult

They have already been enabled for VAT (the anti-carousel fraud provisions) where customs and excise collects from you what it considers to be a reasonable amount of VAT in advance and you fight a losing battle for a rebate with it later on.

From a business perspective that arrangement sucks rocks and frankly, Google, Starbucks and Apple will doubly regret the day when they precipitate it being enacted for corporate tax as well as for VAT.

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WTF?

Re: Taxing revenue instead of profits ...

Hey dumbo... what do you think VAT is!

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Anonymous Coward

Re: Taxing revenue instead of profits ...

"Struggling households would certainly be killed by taxing businesses on revenue and not on profits."

But how low would that tax have to be? Clearly a lot lower than current corp. tax. I'm not sure that it would have a dramatic effect except on loss-making companies and I'm not convinced that the taxpayer should be supporting them anyway unless they are publicly owned and producing a service that we are happy to subsidize (like local Post Offices, for example).

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Re: Taxing revenue instead of profits ...

"you could easily see your food bill double"

You mean like it has already with predictions it will continue to do so forever?

This kind of thing is what pisses me off when talking to anyone in finance (not that Dazed and Confused

is necessarily in that business) - they always make out that this we should just shut up and put up because it could be worse. Well yes, it could be, but they can never explain why it would be. The discussion is always rooted in the 'we've always done it that way' non-argument.

Surely the advantage in this situation is in having all the due tax paid into the system which eases it off as a whole. Some specific prices may rise but the system as whole will be more liquid and therefore all the various parts of it couldn't justify being all grabby and should stop wringing out the public as the only vaguely reliable source of cash. Of course, they aren't and we're all fooked when the public's pockets are finally empty. See Greece at al.

The economy is always treated as this thing in itself, as Herr Kant might say, which can only be prodded a bit but which is out of our control and needs to be largely left alone. It isn't. It is entirely man-made and can be made to do exactly whatever we wish of it, or, as long as there is sufficient requirement and motivation it can be deconstructed and put back again in working order. It would be one of the greatest undertakings of human history but why on earth would we persist with the opposite? Fear of the unknown? Knowledge conquers fear and the economists could have a marvellous time with all the necessary 'what it' discussions which everyone in their field has from time to time.

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@JSmith: Re: Taxing revenue instead of profits ...

It's more complicated than that. First, all income is taxed, in the form of VAT. In most cases, something close to 20% of the money that comes in the door goes straight out again to the government.

Second, we're only talking about corporation tax here, which is a tax on the company profits. To extract real money from the company, shareholders must take dividends, and tax is paid on the dividends at the normal rates.

Third, most companies in this business have margins of maybe 10 - 20% - ie. what's left over after legitimate expenses (wages, etc) have been deducted. The govt and the owners share out the remaining 10 or 20%. If the govt took its share before expenses, there would very quickly be nothing (or less than nothing) left for the owners, and no reason for them to remain in business. And, remember, the owners have to pay income tax on their share anyway, as soon as the money leaves the company.

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Anonymous Coward

Very difficult to stop, near impossible... VAT is the only real solution to getting tax on every sale.. (and it is the most sensible way too!)

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Anonymous Coward

Re: Taxing revenue instead of profits ...

Well actually in the UK at least you get a nice 8K tax free allowance... and I think it should be able to be shared (i.e. 2 people living in a home should be able to pool their allowance if only one is working)

But as a business owner I have been in times where I've barely covered my expenses & paid myself a living wage, if I had to cough up 20% of turnover, my margins would vanish and I would have been on the dole.. So the UK gov would be supporting me not the other way round!

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Re: @JSmith: Taxing revenue instead of profits ...

"Second, we're only talking about corporation tax here, which is a tax on the company profits. To extract real money from the company, shareholders must take dividends, and tax is paid on the dividends at the normal rates."

Unless you are Philip Green's wife, the clothing entrepreneur, who lives in tax exile in Monaco, while her husband slugs it out on minimum wage in the UK as the tea boy.

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Unhappy

Re: Taxing revenue instead of profits ...

The supermarket example is somewhat simplistic, the real scam in the whole process is the lax transfer pricing laws in Ireland and America, The payments are not for services and product, they are payments for intangible royalties and licences.

Have a read of this article to see how the big corporations work Irish subsidiaries helped Microsoft reduce US tax bill by €1.87bn in 2011

“Microsoft Ireland Research reported $4.3 billion of profits in 2011, with an effective tax rate of 7.2 per cent. This income equates to about $11 million of profit per employee.”

Or this Statement from Chairman, Permanent Subcommittee on Investigations CARL LEVIN D (MI) on Offshore Profit Shifting and the U.S. Tax Code (PDF download).

Here is a chart depicting Microsoft’s transfer pricing agreements with two of its main offshore

groups. As we can see from the chart, in 2011 these two offshore groups paid Microsoft $4

billion for certain intellectual property rights; Microsoft Singapore paid $1.2 billion, and

Microsoft Ireland $2.8 billion. But look what those offshore subsidiaries received in revenue for

those same rights: Microsoft Singapore group received $3 billion; and Microsoft Ireland, $9

billion. So Microsoft USA sold the rights for $4 billion and these offshore subsidiaries collected

$12 billion. This means Microsoft shifted $8 billion in income offshore. Yet, over 85% of

Microsoft’s research and development is conducted in the United States.

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VAT, GST

>You can't apply VAT here as many of these transactions are inter-company so are VAT exempt.

In AUS, VAT (GST) is a tax on income. You get a rebate for GST expenses. If Google books 200G$ income, they have a tax liability ot 20G$. Since there haven't been any claims that they are avoiding GST, I assume that they are paying a flat 10% off the top of all transactions. Normal AUS companies pay much less, since they can claim back all expenses, which in normal businesses are a massive fraction of revenue.

On the other hand, if they have structured each payment to be paid to an offshore company, they are avoiding GST. To handle this, the goverment applies an 'uplift' GST component to imported goods worth more than 1000AUD

If Google is avoiding GST, and 'uplift' is not being applied to services, this should be corrected.

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Re: Not difficult

Agreed.

What will happen is that double-taxation relief will apply only when proof of payment of taxes in other jurisdictions has been supplied to the Revenue / Finanzamt / Belastingdienst (or whatever your local word for tax authority is), and proper validation has been done. With today's technology, that kind of recursive auditing shouldn't actually be a big deal. Until the audit is complete, a flat (say, 30%) tax is levied on all money sent out of the country, whatever it happens to be booked against - and the onus is then on the corporation to claim it back, by proving that the tax was paid to another tax authority (and providing a full money trail.) Of course, tax havens will be of absolutely no use at that point - if the money cannot be traced (which is the whole point of using a tax haven), then the payment of tax cannot be proved - and the tax simply isn't refunded.

The onus will simply shift from the tax authority to the corporation. Of course, multinationals won't like it, and they will squeal like stuck pigs - but they will be forced to open their books and declare profits openly and transparently. In the background, tax havens like the Bahamas, Cayman Islands and Jersey will quietly shut up shop and return to being the boring old backwaters they used to be.

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Anonymous Coward

"They need to start by simplifing the laws, not adding new ones"

You must be new to the UK. The whole point of unnecessarily complicated legislation is that it's a massive and (not so) covert job creation scheme.

That it also benefits their friends in the city is just coincidental. /sarcasm off.

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Re: Taxing revenue instead of profits ...

A company reclaims all the VAT it pays on the things it buys, i.e. the VAT it ends up paying is on the difference between what it sells and the purchases it makes in order to create the products it sells.

That's not a tax on revenue, it's a first swipe at the profits.

Who's the dumbo ?

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Instead of constant rhetoric and hand-wringing, perhaps Governments worldwide should have a long, hard think about exactly why they feel entitled to plunder from corporate and individual citizens.

Whatever the question, their answer always seems to involve increased and frequently byzantine taxation.

Enough!

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Anonymous Coward

There goes this bloke asking a perfectly legitimate question "what do I get in return for ever-increasing levels of taxation?" and he gets downvoted.

Taxation in itself? We can talk about it. The obscure, confusing, not really accountable way it is currently implemented? No, thanks!

Talk about a captive audience.

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FAIL

It's not Google's fault. The governments that created the system to allow companies to exploit it.

It's like declaring a tax on everybody called George and whinging when all the Georges change their name.

The Governments makes the rules but are too stupid and slow to beat companies at the game.

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"Instead of constant rhetoric and hand-wringing, perhaps Governments worldwide should have a long, hard think about exactly why they feel entitled to plunder from corporate and individual citizens."

Are you for real? How do you think the roads and the street lights and the fire brigade and countless other things are paid for? Companies and people are only able to make money because other people feel confident enough to spend it, so it's only right that they should put back in to help pay for the things that keep that society running.

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Holmes

"what do I get in return for ever-increasing levels of taxation?"

Top brackets of taxation used to be in the range of 70-80 percent, so personal taxation for middle class is actually quite low by historical standards. The problem is that the richer people and corporations started to find ways to avoid paying tax* so more and more tax had to be taken from middle and lower classes in the form of payroll tax, sales tax etc (When income tax was originally set up, it was ONLY for the rich, the poor didn't have anything to give anyway).

So your "ever-increasing levels of taxation" are due to entities like Google finding ways to not pay tax. As to "what do you get", definitely there is a lot of waste and uselessness going on in government, but what you DO get is an infrastructure that can support modern life and businesses - roads and bridges, power, communications, a system of laws, property rights and justice without which companies could not operate **.

* sure, in many cases legally avoiding tax, but bottom line they're 'lobbying' legislators to make tax laws that favour them. Although lobbyists can't directly pay legislators anything, they're indirectly sourcong campaign contributions etc so basically lobbying is legalised bribery)

** European countries spend approx 6% of GDP on infrastructure renewal and maintenance. That bastion of tea-party-ists over the pond spends 3%, mostly because the people and companies there keep voting for tax-lowerers. Guess which one of those has aging decrepit infrastructure that still depends on investments made between the 50s and 80s, and will need to spend trillions just to maintain what they currently have?

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@Joe 3

"Are you for real? How do you think the roads and the street lights and the fire brigade and countless other things are paid for?"

Most public spending is hugely inefficient, and a fair chunk is on non-essential stuff. Roads, fire services and street lights represent a fraction of the total, with the largest single item usually being a welfare system that is a complete mess.

Looking at most Western economies, you'll find that they almost all spend a huge amount more than they bring in through tax. It has worked in the past because they flicked the debt onto future generations, and with rising populations and rising incomes it didn't seem to hurt at the time. Now that incomes have topped out for perhaps the next two decades (ie we aren't going back to REAL 4% pay rises any time soon), and the baby boomers are approaching retirement, so it is becoming less and less practical to keep increasing the national debt. Sooner or later, somebody has to pay, or the country has to default (and that's only a means of making a slightly different group of people pay). Look at Greece to see the ghost of Christmas future.

Or try it yourself. Spend 20% more than you earn, each and every month. Then see how long you can do that for, and see what the eventual outcome is. I'll guess it won't be fun in the end.

There is a way round this, and that's to keep spending the same ludicrous sums on crap (which is what most "public services" are), but to increase gross tax income by 20% to cover current spending, plus a further increase to pay down the existing debt, say another 20% if you want to get the existing national debt eliminated in a generation. At say a basic tax rate of 25% (that's about average when factoring in allowances and employee payroll taxes), that means you'd need to up that to around 38% or thereabouts as an average.

Sound good to you?

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Re: @Joe 3

Somewhat of a red herring there sir, since if proper tax dues were not being so consistently avoided (and evaded) then the overspend to which you refer simply wouldn't exist. (That does of course ignore the principle that one's outgoings tend to rise in line with income, and I wouldn't for one second attempt to argue that public spending isn't an insatiable black hole, but my point stands.)

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Re: @Joe 3

"Most public spending is hugely inefficient, and a fair chunk is on non-essential stuff. ....with the largest single item usually being a welfare system that is a complete mess."

Really? Suck this and see:

http://duncanseconomicblog.wordpress.com/2010/10/27/welfare-spending-some-facts/

"Looking at most Western economies, you'll find that they almost all spend a huge amount more than they bring in through tax. It has worked in the past because they flicked the debt onto future generations,"

Current national debt is not paid by future generations. If it had been, then the aftermath of the Second World War would have been a crash. On the contrary, that war was followed by constant growth once the Bretton Woods system, with managed intervention and stimulus from governments, was brought into being. (By the way, it's a bit beside the point, but the eventual crash was assured once the ideologues had driven out evidence-based fiscal management in the mid-1970s.)

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Anonymous Coward

"why they feel entitled to plunder from corporate and individual citizens."

Exactly.

Who do those arguing for more tax think is going to pay it?

Clue: think about who pays the tax on your petrol.

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Byzantine ?

The Byzantine nature of tax legislation is a large part of this problem, competition between nation states is much of the rest of it.

While the complexity of tax legislation boggles the mind, and probably provides more revenue for lawyers than patent litigation, as long as one state taxes businesses at a lower rate than another, then companies - who are out to maximise after-tax profits - have a perfectly understandable incentive to move their earnings to a state with a lower tax rate. And the subtleties of transfer pricing provide the perfect mechanism.

Contrary to what was claimed at a British Parliamentary Committee the other week, it is not a moral problem, it is a legal problem, and Governments write the laws and negotiate international agreements. The solution lies in their hands.

One of the basic principle of tax legislation was settled in the Victorian era when My Lord Justice determined 'That no man ( or company ) is required to arrange his affairs for the benefit of the Inland Revenue'. Perhaps all that can be said is that these international companies are complying with My Lord's judgement.

Chris Cosgrove

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Anonymous Coward

Re: Byzantine ?

competition between nation states is much of the rest of it.

Do you recall Gordon Brown's huffing and puffing about tax havens several years ago?

The real truth is that for anyone born outside the UK and rich enough, the UK itself is a tax haven.

Yes, it is competition between nation states.

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Alert

Chalk this up to disruptions of the internet

If a foreign company sells stuff in a country, the country used not to care. This was such a small part of the economy that it mattered little. Now that large parts of an economy is transborder commerce, it becomes feasible for companies to shop around and earn money where income is taxed less.

Fixing is going to be "fun". I would just tax the transactions, but to take a variation of an old example, if an Australian resident on a British website clicks an ad for a German company brokered by an American company, where is the transaction happening?

I wonder in particular what this $AUD1bn means (note that this is of course revenue, not income). Is this money that were paid by Australian companies to Google because somebody clicked on their ads? Or is it money Google earned because Australians clicked on the ad? And how much of it goes in fact directly to the probably Australian website which was publishing the ad?

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Re: Chalk this up to disruptions of the internet

" to take a variation of an old example, if an Australian resident on a British website clicks an ad for a German company brokered by an American company, where is the transaction happening? "

The German company contracts accountable advertising exposure from the American company and makes the appropriate expense claim. The British website contracts accountable content from the American company and makes the appropriate income declaration. The Australian parts with their credit$ for the advertised goods / service. The German company despatches the goods and makes the appropriate income declaration. The Australian has obtained a right in Australia, rightly subject to applicable Australian law, no ?

Props to Mr Bradbury for articulating a difficult issue.

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Devil

Cuddly, loveable, Google

All those free services don't seem quite so free now, eh?

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THANKYOU

Finally somebody explains how google are doing this in terms I understand.

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Pirate

Greed is good....

Commercial and Investment banks have been doing this type of offshore accounting for a hell of a lot longer than Google and the rest, (look at where a majority of the worlds banking industry situate their trading arms in Asia Pac, Singapore or HK the lowest tax rates in Asia!) the simple answer is that there is no simple answer to any of this.

Yes it is unfair and guess what the middle & lower classes will always get screwed by tax whilst any company (or individual for that matter!) that can afford the high price accountants will always find loopholes in tax law, big up the government for trying to close them down but in reality its a game of cat & mouse and believe me the government are definitely the mice...(so are the MC & LC..)

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Pint

Re: Greed is good....

It's no surprise that the organisations that largely are responsible for setting up the "The System" went about it in a way that they were able to then take advantage of. They have been allowed to do so for so long because the system itself largely depends on their participation, and in turn the economies of the world depend on them.

The Googles, Apples and others that have come along and now are taking the same liberties have no such excuses.

If we can't fix this system, perhaps it's time for an entirely new one ?

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Pint

Lets try to stop this

It would be stupid to demand "clever" companies to stop being clever. So it has to be about legislation, multinational, as those companies are multinational too. What a problem indeed. Who is fast, who is slow.

I think we know the answer to that. What pisses me off is when taxation is turned against you by those multinationals who tend to ask - do you want to pay more tax. No, No and NO.

But I don't build the roads or anything (and for you Americans, they don't finance the Army the Navy, NASA or anything). Except I do and they won't.

Had a beer, need some more, but essentially they are screwing both me and you.

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Devil

Re: Lets try to stop this

"it has to be about legislation"

I agree. Unfortunately the way it works is:

- Laws are made by legislators

- Legislators are elected by people who mostly do not know the candidates personally, and whose information on the candidates are limited to media exposure + ads

- A bit of statistical analysis shows that to get elected, legislators need to spend mega$$$ on their campaigns, and having cash to spend is one of the strongest indicators of who will win an election.

- The companies and individuals who can afford to will pay for the expenses to get a candidate elected. Once elected, even if the legislator then goes ahead and does his own thing, next time round no cash = no re-election

- Legislators in general want to be re-elected

Is it possible to change things so that money is no longer a determining factor in an election? When the porcine community takes up aviation

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Tax efficiency is required to stay in business

If Microsoft were not efficient about avoiding taxes then they would be less price competitive with Apple. If governments magically become competent at wording tax law and get the big search engines to pay more tax, then the price of advertising rises, the advertisers make a little less profit, pay a little less tax and pass some of the pain on to their costumers. The business customers make a little less profit, pay a little less tax and pass some of the pain on. Finally real people pay a bit more for their goods.

If you think Google paying more tax will reduce your tax bill will make you better off then you are living in a fantasy world. A government with increased revenue just finds more daft ways to waste it. I am sure politicians are well aware of this. All this talk about multinationals paying very little tax is just tactic to distract us from the latest expensive failed government initiatives.

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fantasy worlds

So then, if we simply abolish corporate income tax, then all products would sell for $0 and everyone would have a job and all government deficits would be eliminated? Who's living in a fantasy world? Idiot.

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Anonymous Coward

Re: Tax efficiency is required to stay in business

The point is this allows big multi-nationals to avoid tax while a company who is only based in one company is at a huge disadvantage.

I think the smaller companies need more help than these big dominating companies.

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WTF?

Re: Tax efficiency is required to stay in business

"If you think Google paying more tax will reduce your tax bill will make you better off then you are living in a fantasy world"

For most of the post-war period up to the 70s, the richest 1% in the US made about 10% of the income. A CEO was paid AT MOST 10X what the lowest paid worker in the company made. Currently the richest 1% make about 24% of the income, and a CEO can easily make 1000X what his lowest-paid worker makes.

So yes, if all large companies and rich individuals* paid their fair share, the median quality of life would be higher. I'm not advocating a socialist punitive tax rate here. Just that a billionaire pays at least the same real rate as a middle income earner and a mega-corporation pays at least the same real rate as the corner store or 10-employee local company.

* Mitt Romney paying 13% overall tax? Buffet paying lower %age than his secretary?

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Re:(Original post) Tax efficiency is required to stay in business

That just doesn't make sense. It's the argument of the "trickle down economy" where the more money the people at the top make, the more they'll spend.

Except that nearly never happens. The more money a corporation makes, the more money gets paid out to its executives and shareholders, and the minions and suppliers still get squeezed "to increase shareholder value". In fact, the more clout a company has, the harder they squeeze their dependants to increase their own profits.

Apple as an example: Sitting on a HUGE PILE of cash reserves. Why? "In case of change of market conditions or potential acquisition targets." So, a company making that much money, with the market share it has, could:

1. Pay more tax. (No Double Sandwich)

2. Pay better wages. (And I don't mean to management...)

3. Pay fairer prices to its suppliers. (So Foxconn workers don't commit suicide so often.)

What do we see instead? Right after Jobs dies, shareholders pressure for the cash to be paid out as dividend, doled out to the "haves", so that the "have-nots" get squeezed even more.

I have yet to see someone turn down a money-making opportunity because "It doesn't make enough profit." If there's money to be made, someone will do the job. If everyone plays by the same rules, the level playing field will keep everyone straight.

But it's not. And it won't.

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Multinationals?

It seems to me that the problem stems from the fact that these companies aren't forced to pick a country and stick with it. Whose side are they on? Nobody's.

This is like a football player who plays for two (or three) teams.

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Mushroom

Free market tax

Governments as usual don't really understand half of what they say and do.

The power of the free market has been a standard part of rhetoric for years now, isn't this tax efficiency simply a global free market in tax?

Sounds like "do as i say, except don't do that".

Good Luck to google and the rest of them, if i had their tax accountants i would be praising them for their creative work.

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Pirate

Do no evil *....

Pay less tax.

* remember that?

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Anonymous Coward

Re: Do no evil *....

Exactly.

Paying less tax is NOT evil.

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Re: Do no evil *....

When I go to the accountant, it's so I can pay less tax. Google just has better accountants than me.

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Anonymous Coward

two types of avoidance - or is it three

1) having the income from selling a service in one country paid to a company in a lower rated nation

2) making inflated "royalty payments" from one company to another company with the same ultimate owner to siphon off income in a non-taxable form

3) having a business based in a country but doesn't pay any tax in that country because the management is in another

now while no 1 seems a relatively straight forward and not so iffy practice - consider an agent arranging for a business to buy products from another country, the other two seem rather more questionable. No 2 . is a form of artificially fixing the price of something and No 3 is what makes a tax haven - probably the worst practice of the lot.

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