In recent years, governments have become increasingly aware of the fact that many major companies—especially technology companies including Apple, Google, Yahoo, Dell, and many others—are using shadowy, albeit legal, techniques to shift income in ways that reduce a company’s tax burden. The scam known as the “Dutch sandwich,” in which companies move money through the Netherlands, has become one of the most preferred ways to reduce a company’s financial liability.
On Wednesday, a Dutch parliamentary committee meets to consider the fairness of its own tax system and also review its role as part of the legal financial chain that allows companies to reduce the amount of tax they pay.
In December 2012, Google moved $10 billion from Ireland through the Netherlands to Bermuda—which avoided many taxes in Ireland, the Netherlands, and its real home country, the United States.
“We shouldn’t be a tax haven,” Ed Groot tell him Bloombergreporter, Jesse Druckerthat has been reported on this issue for years and has become the so true expert on wealth. Groot is a member of parliament from the Dutch Labor Party, the ruling party in the Netherlands.
“If they go somewhere else we are not upset at all because they spoil Holland’s name,” added Groot. Otherwise it could stand for retaliatory measures and we don’t want that.”
Experts agree that part of the reason tax law — often a dry and vague term — is coming to the fore in recent months has to do with global austerity measures, especially in Europe.
“Everywhere you look, governments are cutting funding for teachers, police, firefighters — things that the general public wants more of,” Robert Goulder, Editor-in-Chief of Tax Analysts’ International, told Ars. “That’s tough for a lot of people to accept when corporate profits aren’t taxed in a meaningful way.”
Moving billions each year
As these technologies are gaining more public attention, company executives have faced new scrutiny from Ireland, France, the United Kingdom—which is set to hold its second hearing on the matter at the end of January—and in now, the Netherlands.
Like Bloomberg reported on Tuesday, technology companies including Google and Dell requested the Netherlands’ tax law to their benefit-saving the possibility of billions of dollars for companies that follow this process.
The news agency wrote that “Various companies stole €10.2 trillion ($13.586 trillion) in 2010 through 14,300 Dutch ‘special financial units’, according to the Dutch Central Bank,” the news agency wrote. “Such categories are always on paper only, as the law allows.”
This is it how it works: as Bloomberg also reported in 2010, a company sells or licenses its foreign rights to intellectual property developed in the United States to a subsidiary in a country with low tax rates. That means that in most cases, companies will license their own IP to one of their own foreign subsidiaries (usually based in Ireland), whose profits are retained in the Netherlands. Currently, those profits end up in Bermuda, Britain’s North Atlantic Ocean, and a popular tax haven.
Empty Dutch companies
Bloomberg also reported Tuesday that Yahoo cut its taxes by $42.8 million in 2011 using such financial shenanigans.
“Records show that the Yahoo group reported Dutch income taxes in 2009 of €1.28 ($1.7 million) – out of €101.5 million ($135 million) in royalties made by the subsidiary in the year too,” the news agency reported. “That’s a small price to pay. In return, Yahoo can transfer profits to almost any destination without paying withholding tax.”
Dell also uses the Netherlands—and its tax treaty with the United States—to avoid paying taxes either at home or abroad. Its Dutch subsidiary, Dell Global BV, paid only 0.10 percent on profits of $2 billion in 2011.
“That means the unit takes credit for nearly three-quarters of Dell’s global revenue,” Bloomberg full. That company had no actual employees in the Netherlands as of 2009, filings show. The Dutch company conducts its business through a branch in Singapore, where it designs and sells laptops and other devices for the US, European, and Asian markets. “
In response to the question about Bloomberg and others, companies often say they’re just following the law—which is true.
Waiting for Brussels
Despite the new pressure from various governments, it seems very unlikely that the national governments—or the United Nations, which suggested it. Common Consolidated Income Tax Basis (PDF) continues to languish in Brussels—it will make any meaningful tax reform any time soon.
“That would end intra-EU transfer pricing by rejecting the arm’s length standard and adopting a quota,” Goulder, of Tax Analysts, told Ars via email.
“Finally this is the answer, but it is difficult to do without. It only takes one EU country to veto the CCCTB. At the end of the day, it will take a major financial crisis to correct the factors that characterize the status quo. While Europe will continue to shift the tax burden to VAT and the US will continue to run large deficits, as long as the bond market gives us.”
Other tax law experts agree, noting that if there was a better way to reduce tax liability other than through Double Irish and Dutch Sandwich, accountants would have found it by now.
“Smart people will still work on (tax avoidance), but it will probably require more work,” Samuel Brunsona law professor and head of law at Loyola University Chicago, told Ars.
“If something is more effective out there now, people will do it. My guess is that (corporate tax departments) are looking closely at what the other options would be. They are not very scary yet, but it can have a real impact on the way they do business and the way they are structured. I don’t know if it will create real business change, but it might make them pay more taxes in some countries—being an American, I’ll vote for us.”