How does Google pay 2.4%?
cameronkeng.com
cameronkeng.com
One of the more dubious strategies was having a company in the Cayman Islands that owned the cars that people drove and paid for the gas and maintenance out of corporate accounts, and paid rent and bought food for folks. So your salary could be 'poverty' level and yet you could have quite a nice lifestyle. The poor company in the Caymans was losing money quite rapidly.
As a systems guy I had to be impressed at how they worked that particular system. A CPA friend of mine once quipped that if laziness was the mother of invention, taxation was the father of innovative accounting.
I'd like to note that the US is also a noted tax haven for foreign countries. We aggressively allow our country act as a tax shield for European and Asian companies so we should be throw rocks either when we live in a glass house
I doubt the real world works like this, though.
However, it is not the case that Google only pays 2.4% of their US operating profit to the IRS, as a look at Note 15 of their 10K shows. There are lots of reasons that a corporation's effective tax rate will differ from the statutory tax rate of 40% (35% federal + ~5% state). To name a couple of common ones:
1. Prior net operating losses (net of valuation allowances)
2. Stock option exercises by employees (see 1999-2000 when over 50% of major tech companies' cash flows were from option exercise, and lots of them--entirely legally--paid zero or "negative" tax, or so it appeared; in reality, the taxes were just paid out of a different pocket). There is a bill in Congress to remove this deduction.
3. Adjustments for overseas taxes paid
4. Use of NOLs, impairment charges, changes in valuation allowances, lots of technical items.
Some of the entries in Note 15 of GOOG's latest 10K that lowered its provision for US income taxes (effective rate) in the current period include:
- Foreign rate differential (due to tax treaties with foreign countries, income taxed overseas is often not taxed again in the US)
- Federal research credit
- Tax exempt interest (interest from tax exempt bonds)
(Search for "Note 15" here: http://edgar.sec.gov/Archives/edgar/data/1288776/00011931251...)
The rest of Note 15 elaborates on their capital losses from investments, impairments of acquired goodwill, etc. Tax disclosures are some of the most complicated areas of financial statements, and they're very easy to misread. However, they can be very informative, as tax info can provide a window into the difference between accrual-based earnings and cash inflow/outflow.
Just for future reference, NOTHING in a financial statement is what it seems until you read the notes, period. That is the first thing they teach you in financial accounting.
Think of it as the equivalent of a typical developer's reaction to a blog post claiming "X outperforms Y"--usually, the first comment is "did you take into account setting Z?" The footnotes contain "setting Z."
To clarify, Google's foreign tax rate is 2.4% and their US tax rate is 21.2%. But, I believe it is important to delve further than the surface of these numbers. The 2010 fiscal year has been the most profitable year yet for Google and $17.5B is more than 7x the net income presented on their current financial statements. Also, they've refused to disclose the amount of income that is transferred to their offshore activities through their APA.
But, note that their income from foreign sources is equated to 52% of their overall revenues of approximately $30B. This would suggest that at a minimum their foreign sourced income held overseas is at least more than 50%. The APA is designed to help the company shift the tax incidence to different tax regimes, thus it would be more than likely that the true number is much higher. But, it would be impossible to determine without access to a number of documents beginning with the agreement (which lasts for 5 years before they must renegotiate for a new plan).
We could make this much more complicated, but I wanted to focus on the tax plan since most people were interested in that aspect.
One needed to make >= $4000/year in deflated 1893 dollars to even be eligible to need to pay any taxes. Not sure, but one computation I came up with (adjusted) puts that around 100K in today's dollars. Imagine making anything up to 100K tax-free.
The goal was always to tax corporations more heavily than people.
Today even the poorest Americans likely end up short more than 2.4 percent (effective annual rate) in tax payments when their employers "withold" earnings.
So when corporations go out of their way and spend a lot of money to accomplish tax avoidance, that seems kinda wrong.
In addition, more than 35% of all taxpayers pay zero tax or pay no tax and get refunds. This number is constantly changing, especially recently with the economy. I've seen it go as high as 60%.
Lastly, when the government talks about corporate tax breaks and etc. Honestly, they barely matter anymore because we've essentially marginalized the revenue generated from corporations and businesses already. So, the amount of revenue and savings potential in the greater scheme of things is almost non-consequential.
[1] http://money.cnn.com/2011/04/14/pf/taxes/who_pays_income_tax...
We're all paying into a system thats falling apart =/..
That really depends, due to the complexity of the tax code. In particular, depends on whether you're married, whether you have children, etc.
You can see some historical data for 4-person families at the median, half median, and twice median income levels at <http://www.taxpolicycenter.org/taxfacts/Content/PDF/family_i.... Note the negative numbers in the "average tax rate" column in recent years for the half-median level (due to the making work pay tax credit, in addition to the preexisting earned income tax credit and child tax credit). But yes, before that the average rate was higher than 2.4%. And this is federal only, not counting state and local taxes. (And the part that really makes me mad about the numbers in this chart is the marginal rate on the half-median income level, by the way.)
Of course if you're not married with children, your tax burden is definitely higher. For a single California resident in 2007 you can see a simple marginal tax rate graph at <http://www.dbaron.org/views/taxes-2007.html>; the average rate would just be the integral of the graph, which gets to be higher than 2.5% pretty early on.
Individuals, even most very rich ones, are much less able to avoid taxes, so over time they are taxed more and more in order to collect any taxes at all.
Of course, the loopholes should be closed, but until they are we could at least keep things fair by making the same techniques available to anyone.
Most tax professionals that are capable will provide these tax plans to their clients, but they'll do so quietly because its not something you'd want to advertise and also people generally dont like it when they find out you've gone "offshore" and etc.
The actual amount any country can tax it citizens and corporations is a complex relationship between its own tax laws, every other country in the world's tax laws, and the cost of the tax lawyers that figure out how to shuffle funds around to minimize their tax liability.
When politicians say "we will close this loophole and collect $xxx MM more in taxes" my BS meter pegs. There is not going to be a 1:1 relationship between a loophole's current deduction and collected taxes if that loophole is closed. There will be some increase in collected taxes (presumably), but people will minimize their taxes using different "loopholes" so the "recovered taxes" will never be as much as the politicians sell it as.
Something must be done about these evil corporations which exist outside the US, don't bring money into the US, do no business in the US, and pay no taxes in the US!
Also, singapore and hong kong have much lower tax rates. You'd be able to take a tax credit on foreign taxes paid in the US 1040 individual tax (this calculation is a little awkward though) or you could choose to exclude 90k+ of income entirely from you 1040 but you'd lose the foreign tax credit.
You need make the calculation to see which is the better tax savings. Obviously, if you're earning less than 90k then you should use that. But, to get the 90k exclusion you must remain without the US territories for the majority of the year.
Could you provide more details? I tried Googling for it, and I could only find:
You can also claim an additional exclusion from your U.S. taxes in excess of the $91,500, if the rent, utilities, etc. you pay on your residence abroad and other living expenses exceed a standard amount (which is currently approx $13,300 per year) established by the IRS. This exclusion only comes into play when your earnings are in excess of the $91,500 foreign income exclusion.
Is this it?
Another handy related idea would be to have a maximum income multiplier. Something like "the highest paid employee cannot make more than 20x the lowest paid in total compensation", so if you want to make one million a year, the lowest paid employee must be making 50k.
If corporations don't pay taxes, then won't everybody who can afford to just do all their business (income and all) through shell corporations? Sort of the way that currently wealthy people skirt the estate tax by having a company own their land, so their next of kin can just inherit the CEO position of the company?
If you also eliminate income taxes and shift completely to consumption-based taxes, it gets a lot harder for wealthy people to avoid taxes; in fact, the only way to avoid consumption taxes is to live the lifestyle of a less-wealthy person. Even illegal sources of income get taxed when you switch to a consumption-based tax system: you can't tax the income of a gangster with no declared income, but you can tax all of the shiny stuff he buys. Regardless of the source of income, the same truth applies: if you want to enjoy your wealth, you will end up paying taxes on it.
Of course, some wealthy people will choose to live more frugal lifestyles in order to avoid taxes (many wealthy people already do so, for a variety of reasons). The reduced consumption might hurt the economy some, but they have to put their money somewhere, and that somewhere is generally some sort of investment, which helps the economy.
The biggest problem with consumption-based taxes is that they tend to be highly regressive because there is generally an inverse relationship between income and the percent of income spent on consumption. However, there are ways to correct for this. You can target specific categories of goods which only the wealthy can afford (the aforementioned "yacht tax,"), but this tends to be very destructive to those industries and can cause big distortions throughout the rest of the economy. You can exempt certain categories of goods, such as groceries and other basic necessities, but this also creates huge distortions, and also creates a situation where industries buy politicians in order to get their products exempted. Another approach is to offer rebates equal to the consumption taxes paid by a typical low-income family, so that such families will pay zero net tax, but that's complex and expensive to administer.
And, more recently, some details about how they do it: http://www.ft.com/intl/cms/s/0/2437643c-2985-11e0-bb9b-00144...
The founder of ikea essentially owns everything through a charity and avoid all taxes for effective purposes.
Personally, I am tired of millionaires (or well of people like John) complaining about taxes.
They pay their tax staff very well and truly are some of the best in the field within every tax specialty.
But it's unfair to single out John. I'm sure given the opportunity you'd attempt to maximize your profit. It's quoted from judge Learned Hand of New York, one of the most respected legal minds that it is your legal right and American duty to tax plan.
The code is set this way obviously due to politics but also because the American people value jobs over taxes. We would rather have high employment that additional Corp tax revenue.
This allows them to pay yearly taxes as if they made little profit.
This is actually a good thing - it avoids disproportionately taxing companies with volatile incomes.
It is IRS policy to generally audit fortune 500 companies annually. Usually they hold an area for the IRS because it makes sense for them to be kept away from daily operations. A former coworker works in the LMSB dept that handles these cases.
When the IRS starts printing special forms for you because the lines don't fit your revenues, you know you've made it lol.
When you reinvest into equipment, the logic goes that the productivity increases and new higher paid jobs are created even though the lower end labor is eliminated or reduced.
Increasing capital gains tax would in effect make everyone accelerate the sale of their company before the taxes are effective, so it was a mass liquidation of capital.
But, I don't believe it would discourage investment because people would simply tax plan around the capital gains tax. A while back, during Reagan and friends presidency, the personal income tax as well as capital gains tax was more than 35%. People actually invested more into corporations because the corporate tax rates were lower (ironically).
Another suggestion I’ve seen would be to not tax corporations directly, but to pass the obligation down to the shareholders: if you own 100 shares of Apple, and Apple made $15 of taxable profit per share, your taxable income goes up by $1,500. (Presumably Apple would pay you a dividend to make up for your tax bite, but note that this kind of scheme would make stock ownership more attractive for people with modest incomes.)
It's BS to say that they owe it to their shareholders to try to defraud the federal government of as much tax revenue as possible. They should instead be fighting for corporate tax reform and closing loopholes to make a level playing field and not rewarding "scumbag" corporations.
Should Toyota pay the majority of it's taxes to the US because they sell a large amount of cars there, or only the income taxes of their employees in the US and the profits they receive from car sales in the USA? Should Japan get the majority of Toyota's tax revenue because they are headquartered there? Even though the majority of Toyota's income from Japan is minor vs the rest of the world combined? What incentive would they have other than personal reasons to stay then vs just use it as a net-loss R&D center and minor manufacturing plant to avoid tariffs?
These things are significantly more gray than you think.
I think in the case of Google, they should at least be paying higher tax rates on all advertising earnings from US users; it seems to me they are maying barely 1 tenth of that amount currently.
Just as "selective enforcement" of laws leads to corruption, so too does gaming the tax system. Large corporations pay legislators to create these tax loopholes for them.
The presence of ambiguities in the system breeds mistrust among the citizenry. This cannot be healthy for society.
Google may pay 2.4% but presumably the money is getting taxed at a higher rate when it gets to individuals.
For your second point, I don't know the specifics in this case. But even if it's just deferring taxes that have to be paid eventually, that can be a huge win, since it lets you collect interest or store funds for an emergency. There are probably other financial benefits too though; maybe someone who knows can comment.
In the general case, an increase in costs will come out of some combination of: 1) increased prices passed onto consumers; 2) decreased wages at the firm; and 3) decreased profits at the firm. There's no economic law that says they'll all come out of #1, unless it's such a perfectly-competitive commodity business that everyone is charging barely above cost for their services to begin with (not the usual case in Silicon Valley).
Consider the flip side: If all cost reduction were automatically passed on directly into price cuts, there would be no incentive for companies to trim costs. But that isn't the case, of course; one reason firms aim to reduce their costs is that reducing costs while keeping prices fixed is one way to increase profits. Similarly, increased costs without the ability to raise prices can reduce profits. In both cases it depends on the surrounding market.
The problem with googling this is that it only tells you the basic premise and fails to tell you the problems and the reality of actually applying these tax models.
As someone who's worked on these tax models in the past, I can tell you that its never as picture perfect as they make it sound. These companies are always getting audited even though these plans were drafted, approved and done by the "big 4 accounting firms."
It was a running joke that the big 4 plans it and the law firms would defend it. It was like we were self-generating projects for us to work on by creating a new "plan" every other year. The IRS always comes back and audits these clients.
The IRS was not amused.