taxhavens are disadvantaged, even though most economists view them as the major drivers of growth. In addition to unequal taxation, they are also less likely to be able to benefit from government tax credits for R&D. Such credits enable mature corporations to offset their U.S. R&D labor costs against any taxes remaining on their profits, while the IP generated accrues to their CFH. Smaller companies establish tax shelters as well. Since most large companies have already established them, tax-consult-ing firms intent on their own growth now also market taxhavens to mid-size businesses.

Lack of transparency

The creators of the software, even if they care where their paycheck comes from and where the IP they produce goes, cannot follow the tortuous path from sales to salary. 18 Many intermediate corporate entities are involved, so tracing the sources of programmer income becomes well nigh impossible. Even corporate directors, despite having ultimate responsibility, are not aware of specifics, other than having agreed to a tax-reduction scheme operated by their accountants. Investors and shareholders will not find in consolidated annual reports or 10-K filings any direct evidence of taxhaven use, since regulations devised to reduce paperwork hide amounts held and internal transactions within controlled corporations. Funds transferred for R&D and dividends from taxhavens are first deposited in corporate income accounts, then taxed, but may remain eligible for government tax credits for corporate research. The taxpayers in these countries are not aware of benefits beyond salaries; that is, income from profitable IP will not accrue to the country providing the research credits. 23

Tax-avoidance processes have been
explored in many publications but
not applied to corporate IP transfer16;
the adventures of movie and sports
stars make more interesting reading.
Promoters of corporate tax reduc-
tion, seeking to, perhaps, gain more
business, provide general documen-
tation, and even address the risks of
misvaluation of IP and of faulty roy-
alty rates. 19 The complexity of this ar-
rangement makes it easy to cross the
boundaries of legality. Misvaluations
can greatly reduce the magnitude of IP
exports and consequent tax benefits.
The firms that provide advice for set-
ting up tax shelters have the required
broad competencies not available in
the critical constituencies of the com-
puting community. 1 Staff of firms pro-
viding such advice often function in-
visibly as directors of their customers’
CFHs. Most advising organizations
protect themselves from legal liability
by formally splitting themselves into
distinct companies for each country in
which they operate. These companies
then rejoin by becoming members of
a “club” (Vereinsgesetz) set up under
Swiss laws. The member companies of
such clubs do not assume responsibil-
ity for one another’s work and advice.
But the club can share resources, in-
formation, and income among mem-
ber companies, allowing them to func-
tion as a unit.

incremental suggestions

No matter what conclusions you draw from this article, any follow-up will require increased transparency. U.S. Senate bill S.506 introduced in March 2009 by Senator Carl Levin (Dem., Michigan) “To restrict the use of taxhavens…” includes measures to increase access to corporate data of companies that set up taxhavens and to the information their advisers provide. Its primary goal is to tax CFHs as if they were domestic corporations. It is unclear if the bill will become law, since confounding arguments can be raised about its effects. The role of IP and jobs is not addressed in the bill, and unless the public is well-informed, meaningful reforms will have difficulty gaining traction.

Without transparency one cannot
quantitatively assess the relationships
between IP offshoring and jobs off-
shoring. While it is clear that there is
initial dependency, long-term effects
are only imagined. Tax schemes clearly
create an imbalance of actual tax-rates
being paid by small- versus large-busi-
ness innovators.

change the flow

A radical solution to problems created by tax-avoidance schemes is to do away with corporate taxation altogether and compensate the U.S. government for the loss of tax income by fully taxing dividends and capital gains, that is, by imposing taxes only when corporate profits flow to the individuals consuming the benefits. The net effect on total tax revenues in the U.S. might be modest, since, in light of current tax avoidance strategies, corporations contributed as little as 8% to total U.S. tax revenue in 2004.6 Such a radical change would reduce the motivation for many distortions now seen in corporate behavior. Small businesses unable to pay the fees and manage the complexity of taxhavens would no longer be disadvantaged.

Getting effective international agreement seems futile, and no single government can adequately regulate multinational enterprises. Unilateral alternatives to deal with countries that shelter tax-shy corporations are infeasible as well, even without consideration of the role of IP and malfeasance. 9 An underlying problem is that the law equates a corporation with a person, allowing confusing ar-