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-