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

Thursday, July 24th, 2014 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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