updated 11:31 am EDT, Wed May 22, 2013
Large tech companies hide funds in Cayman Islands, Switzerland
Large tech firms are coming under scrutiny over their tax avoidance measures, following the testimony of Apple executives to a US Senate Permanent Subcommittee. Google, Yahoo, Cisco, and other multinational corporations have been found to be using an assortment of tax loopholes and off-shoring in order to avoid paying governments in the US and Europe at least $100 billion.
Retired international tax attorney Michael Durst suggested to Bloomberg that the various world governments allowed multinationals to perform these tax maneuvers by funneling cash through other countries, with the result being "eroding public confidence in the fairness of tax systems in the United States and around the world."
Google uses the tax laws in Ireland and the Netherlands, termed a "Double Irish" and "Dutch Sandwich" by tax attorneys, to push cash into accounts located in Bermuda, a country without corporate income tax, in order to avoid around $2 billion in income tax each year. Yahoo uses a Netherlands-based accountant and stores funds in Mauritius and Switzerland, as well as operating an Irish subsidiary that is claimed to be a tax resident of the Cayman Islands. Cisco is alleged to have shifted half of its global profits to a unit in Switzerland, also avoiding billions in taxes.
In order to combat the "stateless income" that large companies have used to avoid taxes, a number of organizations are stepping in to work on the problem. Organization for Economic Cooperation and Development, at the request of a number of countries, is working on an "action plan" to prevent the loss of tax revenues via profit shifting, with a view to publishing it in July. The US Treasury Department listed a number of global tax loopholes that need to be closed, some of which have failed to close despite legal efforts.
The European Commission is also looking at the tax issue, and the British parliament has already questioned Amazon, Google, and Apple over tax dodging. France is also considering levying a new tax on technology products, partly to cover missing taxes, and to help fund cultural projects.
One possible solution is hinted at by former corporate tax attorney and professor of the University of Southern California Law School Edward Kleinbard. He feels that the subsidiaries external to the United States typically perform little in the way of tasks for the company, except passing money from one place to another -- with decisions for their operation typically made by the corporate office back in the US. "If they are not really competent to make independent decisions to take risks and make contracts on their own behalf, then the structure collapses of its own weight, and the income properly should be taxed to the United States," according to Kleinbard.