In this video, Offshore Tax Attorney Robert V. Hanson, Esq. joins IRSMedic founder Anthony E. Parent, Esq. to discuss some basic fundamentals about International Tax Planning for US individuals. The two discuss large multinational corporations like Apple and Google and how they are able to take advantage of tax strategies, such as the "Dutch Sandwich," to avoid US taxation, but why small and medium-sized US businesses (and individuals) cannot do the same.
The "Dutch Sandwich" example of international tax planning
- An advertiser pays for an ad in Germany.
- The ad agency sends money to its subsidiary in Ireland, which holds the intellectual property (IP).
- Tax payable in Ireland is 12.5 percent, but the Irish company pays a royalty to a Dutch subsidiary, for which it gets a tax deduction in Ireland.
- The Dutch company pays the money to yet another subsidiary in Ireland, which has no withholding tax on inter-EU transactions.
- The last subsidiary, although located in Ireland, pays no tax because it is controlled from outside of Ireland in Bermuda or some other tax haven.
Ireland does not levy withholding tax on certain receipts from European Union member States. Revenues from sales of the products shipped by the second Irish company are first booked by a shell company in the Netherlands, taking advantage of generous local tax laws. The remaining profits are transferred directly to tax havens like the Cayman Islands or Bermuda. The Irish authorities never see the full revenues and therefore cannot tax them, even at the low Irish corporate tax rates.
You can think of the entire thing as an elaborate game of hot potato. The taxes keep jumping from place to place and lose much of their heft as they cross from one country to the next; by the end, you're left with something that is fundamentally different — and in this case, radically lessened — than what we had originally started with. You can see why a large multinational can take advantage of international taxing regimes; they have the size and flexibility to keep their profits moving until the taxes are a distant spot on the far-off horizon. Since they have foreign subsidiaries across many countries, they don't just deal with one tax treaty, but can take advantage of numerous treaties.
Why a small or medium-sized US business cannot use a "Dutch Sandwich" or something similar
Whereas a US business with one foreign subsidiary only has one tax treaty, if any treaty applies at all, the business nexus will always be US-based, at least according to the IRS. The use of simple shell corporations to create alter-egos in other jurisdictions is a technique the IRS has frustrated with the creation of "Controlled Foreign Corporation," as defined by the onerous Sub-Part F rules.
There are alternative strategies that small and medium-sized companies can take advantage of to reduce their US taxing obligations; these strategies allow for them to grow without being crippled by overwhelming taxation. Some of these strategies include Subpart F avoidance, foreign hedging transactions, expatriation, and Private Placement Life Insurance.