Dutch Sandwich is a tasty tax evasion for U.S. multinationals

Tuesday, December 28th, 2010 By

a woman holding a large sandwich

The Dutch Sandwich is a complex tax-evasion scheme that multinational corporations use to move billions in profits to Caribbean tax havens. Image: CC star 5112/Flickr

The Dutch Sandwich is on the financial menu at many large, U.S.-based multinational corporations. As a tax evasion strategy, the Dutch Sandwich isn’t exactly news. But the complex financial slight of hand has become notorious in recent articles about how Google uses the Dutch Sandwich to funnel overseas profits to Caribbean tax havens.

How to make a Dutch Sandwich

The Dutch Sandwich is a complicated business tax structure scheme Google has used to avoid paying $3.1 billion in taxes since 2007. To make a Dutch Sandwich, a U.S. parent company transfers overseas profits to an incorporated holding company in Ireland. The Irish holding company just happens to be a tax resident in Bermuda. Sending the money directly to Bermuda from there would incur a hefty tax. Therefore it takes a detour through a Netherlands shell company, because the Netherlands has no tax on royalties. Ireland doesn’t tax the Dutch payment, because it is made to a company in the European Union. The Dutch shell company then transfers the money to Bermuda, where there is no corporate income tax.

Google eats the IRS for lunch

Google’s Dutch Sandwich helps shave its tax rate down to about 2.4 percent. The U.S. corporate tax rate is 35 percent. The corporate tax rate in the U.K, Google’s second-largest market, is 28 percent. To protect its overseas profits from those tax rates, Google licenses its advertising and search technology to Google Ireland. The licensing fee is ridiculously low because the revenues are taxed at the 35 percent U.S. corporate rate. This dollop of mayo on the Dutch Sandwich is called “transfer pricing.” The IRS considers transfer pricing legal, if a company has enough lawyers.

The Dutch Sandwich is here to stay

The Dutch Sandwich will probably stay on the menu even as the government tries to reduce a $1.4 trillion deficit. In February the Obama administration proposed taxing payments between the foreign subsidiaries of U.S. companies, such as Google’s shell game with Ireland and Bermuda. Lobbyists swarmed Capitol Hill and the idea was relegated to the back burner. Huge multinationals have said they will bring their tax sheltered billions back to the U.S. if tax on overseas profits was reduced to about 5 percent. Even then, the Dutch Sandwich would be a better deal for Google.

Sources

Business Week

MSNBC

Intellectual Property Tax

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This post has 8 comments

  1. Mike says:

    Perhaps the real solution would be a lower tax rate in the first place making the cost of setting up and maintaining these loopholes prohibitive. Say a flat 10%. You can not blame the companies because they have a fiduciary duty to their shareholders to maximize profits. If a company pays 35 % tax on profits and then dividends the balance to shareholders who in turn pay 35% income tax on the dividends and add on any State income tax at both levels the goverment is getting up to 90 % of the profits. That is simply wrong and leads to this type of activity.

  2. Klaus says:

    The US does not establish the tax rates of foreign countries. Google's "effective" income tax rate is not the rate at which the US is taxing Google on it US source income. Utilizing foreign corporations and income tax treaties in order to reduce corporate tax on foreign source income is necessary in order to compete with foreign competitors. The US already has the second highest corporate tax rate in the world. Don't you think that is high enough already?

  3. Michiel Lampers says:

    multinationals are global property so they should pay tax globally. Problem is: the is not global tax authority. These guys are stealing from the average man because of a system that allows profits made by multinational to leak away in Cayman bank account while they should be used to: USA: create jobs, NL: cover budget deficits, EU: pay for Greek escape or Dev/Hum. aid.

  4. hwertz says:

    Well, first off, it sounds like this money was not earned in the US anyway. So the US really can't do anything to make companies pay tax on this income within the US (and given UK's 28% tax is less than US's 35%, they probably wouldn't.). *BUT*, since the heart of this scheme involves licensing technology (at a near-zero cost) to a Google Ireland, could a law be written up so, these types of licenses must be offered up on a RAND (Reasonable and Non-discriminatory) basis? That'd put a stop to it, if Google had to license out their tech to ANYONE who wanted to pay whatever artificially low fee Google Ireland pays, they probably would decide it's not worth it, as would many other companies.

  5. business tariff says:

    ou incorrectly call this tax evasion (which is, of course, illegal) It is actually tax avoidance (which, of course, is legal). I would expect a bit more precision in your use of language

  6. Patrick says:

    What Google is doing stinks from a fairness standpoint, but it is perfectly legal.

    This article is not about a corporation doing something wrong, but the spinelessness of the
    U.S. to stand-up to huge corporations.

    Congress should stop whining about the deficit, and get a backbone and pass legislation
    which will close this loophole. If Google then "takes its business elsewhere", Congress needs
    the guts to inpose a huge tariff on internet providing occuring offshore.

    Bottom line, Google is very powerful, but the U.S. is one hundred times more. This is not about
    who would win that fight, but about lobbyists and Congress members who are getting
    election and other support from groups like Google, the Chamber of Commerce, etc.

    When will we realize that powerful, big business is like anything else. Power corrupts and
    absolute power corrupts absolutely. If we let these companies walk all over us, they will
    and it will be our fault as much as theirs.

    Patrick

  7. Mike says:

    You incorrectly call this tax evasion (which is, of course, illegal) It is actually tax avoidance (which, of course, is legal). I would expect a bit more precision in your use of language

    • Robert Sinnott says:

      In addition to Mike being correct that this technique is legal avoidance and not illegal evasion, the description of how the Dutch Sandwich, also known as the Double Irish, works is not accurate in several respects:

      (1) The effective tax rate on this structure is 12.5%, which is the Irish corporate tax rate on trading income. Google's 2.4% tax bill is an effective rate that is net after very substantial tax credits for its continual investment in capital equipment and infrastructure, and the accompanying non-cash charges for accelerated depreciation.

      (2) Google does not "transfer overseas profits." It licenses its technology from Google Inc. (USA) to Google Ireland Ltd., which is the entity that actually sells Google's services and earns the revenue.

      (3) Google Ireland transfers its cash to Google Netherlands Holdings (GNH), a shell company with no employees or operations. This is necessary to avoid an Irish penalty tax on transfer of profits to tax haven countries.

      (4) GNH transfers the cash to Bermuda, which has zero income tax.
      (4)

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