Tech Giants’ Foreign Tax Strategies Under Fire

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Apple’s (NASDAQ:AAPL) subsidiary Apple Operations International, located in Ireland, has earned $30 billion in profits in the last three years. During that time, the company has filed no income tax and has not paid taxes to any government in the last five years. The situation has given rise to the term “ocean income” — and Apple isn’t the only company doing it. Both Google (NASDAQ:GOOG) and Microsoft (NASDAQ:MSFT) have offices in Ireland as well.

In India, several tech giants are at war with Indian authorities over tax issues. Apple India, whose parent company is AOI, is one of the many companies embroiled in a battle over disputed taxes. Google India and Microsoft India are involved as well — Microsoft having more tax demands than the others, stemming from both service and income tax.

Google’s tax issues revolve around its Adwords advertising service, which allows for a person to buy an ad that is displayed when someone searches for a specific keyword. What India has problems with is the path of money for Adwords — the money goes from Indian customer, to Ireland, and then back to India in such a way that tax fees are extracted from the process. India argues that because the Adwords service involves selling customers on the product in India, the process is being used to undermine Indian taxes.

Overall, it has been noted that Google routes 88 percent of its sales outside the U.S. through its Irish subsidiary.

It’s also a problem when multinational companies make deal with one another. In what accountants call “transfer pricing,” a company can profit from a deal in a country where taxes are low — like Ireland — and record a loss in a country where taxes are higher — like India — in order to avoid taxes. A fix to the system could involve forcing companies to look at the deal as if they were two separate companies in order to get a “fair” price.

It remains to be seen whether these contentious tax issues will change the way large companies do business. The chips appear to be stacked against the tax collectors in foreign countries, but that might all change soon.

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