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.

eliminate corporate
taxation as a way to
avoid the distortion
now driving the
outflow of iP and
providing much
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 tax losses.

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 complex.

Smaller companies that have not had the opportunity to employ