Sunday, April 29, 2012

Double Irish with a Dutch Sandwich – Yummy Way For Corporations to Reduce Federal Taxes

The “Double Irish with a Dutch Sandwich” has been getting a lot more press lately just because of that darned deficit and that Apple uses this technique to help reduce their Federal taxes.  A hundred million here.  A hundred million there.  Soon, it adds up to billions.  Cupertino, California based Apple also routes some  revenue through Nevada, which ultimately saves state income tax they would have pay in California on investment income.  

The link below leads to a graphic showing  how this works using a pair of Ireland subsidiaries. In Apple's case, the subsidiaries are   named Apple Operations International and Apple Sales International. You then route profits  through the Netherlands.  Store the profits in the Cayman Islands/Caribbean or other  friendly tax havens and voila!  It is legal.  

A number  of US firms do this.  Look at a company's  annual report or their web site.  If they have offices/sites in these countries (Luxembourg as well), there’s a good chance that....  It’s great for software firms. It's worth clicking on the link below just to see the graphic explaining everything.

By managing its investments through a subsidiary in Reno, Nevada,  Apple avoids California’s 8.84% tax rate.  In Nevada, there is neither state corporate income tax nor capital gains tax. Apple did prepare a response for the NY Times, defending their practices and talking about their job creation in the US. 

All of the above is legal.  Apple and other companies are just aggressively making best use of applicable tax laws to help minimize the taxes they pay.  In fact, if you are a proponent of discounted cash flow models to help determine a firm’s valuation, minimizing taxes  helps increase  cash flow, which leads to a higher stock price or a higher valuation for an IPO (Initial Public Offering). .  

“The information on 10-Ks is fiction for most companies,” said Kimberly Clausing, an economist at Reed College who specializes in multinational taxation.  “But for tech companies it goes from fiction to farcical.”
According to the article, “In  2004, Ireland, a nation of less than 5 million, was home to more than one-third of Apple’s worldwide revenues, according to company filings."   Apple has not released estimates that are more recent.   Lots of iPods on a per capita basis!

One downside for companies using the above is that when money is sent overseas, it cannot be returned to the United States without incurring a new tax bill.  That’s why firms have been urging Congress to have a “repatriation holiday” that would permit US companies to bring some of their profits offshore back without owing large taxes.

Below is a link to the complete NY Times article.  It’s a great read.  You don’t need to be an accountant to understand it.  The link below will probably even work on an iPad!  Read while drinking an Irish coffee and having a Dutch pastry.   

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