starting an offshore Project
Money and IP accumulated in a primary taxhaven should be deployed
for generating yet more income and
to avoid showing excess capital on the
consolidated books. Money will be
needed to pay for workers on new projects, and IP is needed to make them
effective and bring future income to
non-routine levels. The period covered by Figure 3 may extend 10 years
or more. The value of the IP needed for
a new project is based on the expectation of the income it will generate and
is very high for a promising project.
The export of IP, just like any property export, should generate income to
the provider. Such exported income,
moved via a primary taxhaven, avoids
any payment of taxes. Note that only
an appropriate fraction of the rights to
the IP is shipped out of the taxhaven.
The actual documents are provided by
the originators, wherever they might
work, but the documents are kept by
the CFH in the taxhaven, which formally owns the IP.
Since the value of IP is not reported
anywhere, nothing is visible to employees or shareholders, except a few
financial experts in the company, or
more typically, their financial advisors.
If new projects are initiated fully
by the primary taxhaven and not located with the parent, both the IP exports and resulting non-routine income enabled by IP transfers escape
all taxation. In most jurisdictions no
regulatory authority will check if the
IP valuations and related royalties are
fair. 21 Funding a similar new project
at a taxing locale that requires visibility, as in the U.S., would be costly and
awkward; for instance, profit margins
would be out of line and raise suspicion. Investing in low-cost countries
that tax profits still provides tax benefits, since high license fees paid to a
CFH greatly reduce the taxable profit
in those countries.
Over time, the share of profits directly available to the parent decreases, and dividends may have to be paid
out of CFH funds. These payments are
taxed twice, first as part of corporate
taxes and then, at a greatly reduced
rate, as shareholder income. Paying
few dividends out of CFH funds and
starting new projects instead is an attractive alternative.
taxation as a way to
avoid the distortion
now driving the
outflow of iP and
of the motivation
for keeping capital
and iP offshore.
financial and iP assets
Several issues should be of concern to
computer professionals, even though
their effects are indirect. For example,
three effects of moving IP rights to a
taxhaven are instability of work opportunities, imbalance of large-versus-small companies, and loss of infrastructure support.
Having funds in a primary taxhaven
gives multinational corporations
enough flexibility to exploit global opportunities. Whenever and wherever
business opportunities and incentives
are available, funds can be deployed
quickly. Of course, moving work to
semi-taxhavens is more advantageous
than supporting work in countries that
tax at typical rates. The flexibility for
high-tech industries is notably great
compared to industries that rely on
tangible assets. When semi-taxhaven
countries attract investment in tangibles (such as a car factory), benefits are
retained after the tax holiday, but IP investments can be redeployed quickly.
Only a few senior people may have to
move (physically). When the semi-taxhaven also has a low-wage structure,
benefits for the consolidated corporation multiply.
Countries seeking jobs for growing populations are pleased about any
investment that creates jobs, even if
structured to minimize local corporate profits and taxes. Governments
often create semi-taxhavens to encourage new projects but rarely realize how rapidly corporations can move
facilities that depend primarily on IP.
Temporary tax incentives then fail to
provide the long-term benefits these
countries expected in return for the
The tax avoidance enabled by accumulating IP and funds in any taxhaven
reduces the ability of governments of
the countries where the actual work is
performed to support the infrastructure they need for a healthy economy.
That infrastructure includes public
roads and transportation, health services, and education for future generations. Scarcities can be seen in Silicon Valley, California, Silicon Glen,
Scotland, and Electronics City, Bangalore, 1 but tracing cause and effect is
Smaller companies that have
not had the opportunity to employ