Prepare your composition to cover the following topics or questions with in the Body section of the paper described for this assignment. Answer all the questions and follow the outline.
1. Why do tax rates and tax treatment of corporate income vary so dramatically among countries?
2. Explain the use of the Double Irish and the Dutch Sandwich by Google.
3. How important is the advance pricing agreement that Google negotiated with the Internal Revenue Service to the success of its tax-minimization strategy?
4. Explain how Microsoft uses its Irish subsidiary to cut its U.S. taxes.
5. How does it get around U.S. regulations regarding passive income?
6. What is the impact of Microsoft’s Irish subsidiary on the Irish economy?
Below is a recommended outline.
Cover page
Introduction
A thesis statement
Purpose of paper
Overview of paper
Body (Cite sources using in-text citations.)
Main issue 1.
Main issue 2.
Main issue 3.
(there may be additional sections of your paper)
Conclusion – Summary of main points
Lessons Learned and Recommendations
References – List the references you cited in the text of your paper according to APA format.
Here is the article you need for the essay!
Taxation of business income is always a contentious public policy issue. Firms, tax lawyers, and accountants continually engage in cat-and-mouse clashes with their national tax authorities. The former group strives to minimize the tax burden imposed on their businesses, asserting that they have a fiduciary duty to their shareholders to do so. The latter group responds that they are charged with the task of ensuring that all the taxes owed to the government are appropriately and legally collected. Although the battle of wits, lawsuits, and lobbying is intense between domestic firms and domestic tax authorities, it pales in comparison to the company-government wars fought over international taxation. Most politicians care little about the nuances of the benefits of comparative advantage, the productivity gains generated by specialization of labor, or the deleterious impact of trade barriers. Their concerns are focused on job creation and tax revenue, and they are willing to adjust their national tax codes if doing so stimulates the local economy. The result is wide variations in corporate income taxes among countries. For instance, in the United States, the federal corporate income tax rate is 35 percent, while in Canada it is 16.5 percent, but only 12.5 percent in Ireland. In many tax havens, no taxes are imposed on corporate earnings.
Another complicating factor is differences in how various types of income are taxed. When taxing dividends, some countries, such as Australia and Mexico, provide dividend tax credits to the shareholder for income taxes paid by the corporation; others, such as the United States and Sweden, do not. Estonia and the Slovak Republic choose not to tax dividend income at all. Ireland offers generous tax credits for research and development expenditures and exemptions for income generated by intellectual property. The effective rate on royalty income imposed by Ireland can be as low as zero, for example. These variations in tax codes generate opportunities for firms to locate or relocate their economic activities to lower their overall taxation costs. Firms can also creatively fashion the transfer prices they charge for intercorporate transactions. Much of the attention of the world’s tax collectors has been focused on so-called tax havens (see “Emerging Opportunities” on page 526). But Ireland has become the new focal point for imaginative structuring of corporate transactions to reduce tax bills. Of the Organization for Economic Co-operation and Development (OECD) nations, Ireland has been the most aggressive user of its corporate tax code to promote economic development.
The Industrial Development Agency Ireland, a governmental agency responsible for promoting inward FDI, believes nearly 1,000 MNCs have located their European headquarters in Ireland, drawn in large part by the country’s low taxes and pro-business policies. Google is one company that has benefitted from Ireland’s pro-business tax code. It has taken advantage of two strategies created by international tax lawyers, dubbed the “Double Irish” and the “Dutch Sandwich,” which allowed it to reduce its taxes by $3.1 billion over three years. In 2006, Google entered into an advance pricing agreement with the U.S. Internal Revenue Service, establishing the terms under which it could transfer its intellectual property to its foreign subsidiaries. After signing the agreement with the U.S. tax authorities, Google licensed its intellectual property to Google Ireland Holdings, a wholly owned subsidiary. Although established in Ireland, Google Ireland Holdings is man- aged in Bermuda, making it a nonresident corporation that is not subject to Irish taxation under Irish law. Google Ireland Holdings, however, is the owner of an Irish resident corporation, Dublin-based Google Ireland Limited—hence, the term Double Irish. Google Ireland Limited’s 2,000 employees sell advertising and provide support services to customers in Europe, the Middle East, and Africa, and account for about 88 percent of Google’s non-U.S. revenues.
Even though its California engineers and scientists developed most of Google’s technology, this arrangement allows Google to avoid immediate U.S. taxation of its non-U.S. profits. That takes care of the U.S. Internal Revenue Service. To avoid Ireland’s Revenue Commissioners, Google Ireland Limited then transmits what would appear to be its profits from selling this advertising to another Google subsidiary, Google Netherlands Holdings (the Dutch sandwich), in the form of royalty payments, thereby slashing Google Ireland Limited’s Irish tax bill. (Payments are made to Google Netherlands Holdings because of favorable provisions in the Irish tax code dealing with royalty payments to companies based in other European Union countries.) Google Netherlands Holdings, which has no employees, then remits 99.8 percent of the royalty payments it receives to Google Ireland Holdings, eliminating most of its tax liability to the Netherlands. And, of course, Bermuda has no corporate income tax, so the “profits” earned by Google Ireland Holdings remain untaxed so long as these profits are not repatriated to the parent corporation back in the United States. Other technology-intensive companies have established Irish subsidiaries for similar purposes. A Microsoft subsidiary in Ireland, Round Island One Ltd., “localizes” Microsoft products developed by U.S. employees for the European, African, and Middle Eastern markets.
The customized products are then licensed by a Round Island One subsidiary in Ireland, Flat Island Company, to customers in those markets. Earnings from these sales are taxed at Ireland’s relatively low 12.5 percent corporate income tax rate. From the U.S. perspective, because the U.S.-developed products undergo transformation in Ireland, Round Island One’s earnings are characterized as active income, allowing Microsoft to take advantage of the IRS’s deferral rule and avoid U.S. taxation of that income. Apple and Oracle have also created Irish subsidiaries that allow them to lower their income tax payments using techniques similar to Google and Microsoft. In Apple’s case, Apple Sales International, one of Apple’s Irish subsidiaries, is the formal purchaser of many of the company’s products made in China. ASI in turn marks up the goods, resells them to other Apple subsidiaries, and books the profits. In 2012, ASI recorded $22 billion in pre-tax profits but paid only $10 mil- lion in income taxes.
