Tax competition

by Henry Farrell on February 23, 2007

This “story”: from the _Irish Times_ ought to be of interest to US readers.

A Californian technology firm with only a handful of workers in Dublin funnelled revenues of almost $1 billion (€762 million) into an Irish holding company which made more than a quarter of its profits. SanDisk Manufacturing made a net profit of $105.96 million on revenues of $955 million in the eight months after its Irish unit started business in April 2005 …By accounting for such revenues in Ireland, they take advantage of the 12.5 per cent rate of corporate taxation on their profits, a rate that compares favourably with other EU states and the US. … SanDisk indicated last year that the total cost of setting up its Irish operation was less than $500,000. It said then that tax “certainly was part of the consideration” when moving here but that tax “certainly was not the determining factor,”

Sandisk isn’t the only company doing this, of course, but its (to employ the common euphemism) ‘tax-avoidance strategy’ is more blatant than most. The US is pretty vigorous about reclaiming taxes from citizens living abroad, but has been curiously supine in its attitude to the various schemes that US companies have come up withto relocate revenues outside the taxman’s grasp. Some of this is probably unavoidable – large multinational corporations have complicated internal flows of revenue which they can manipulate to make tax-dodges look legitimate – but the failure of companies like Sandisk even to try to hide what they’re up to suggests that they don’t expect much in the way of enforcement action.



Andrew 02.23.07 at 5:38 pm

Microsoft apparantly saves almost half a billion dollars in tax by running its profits through its Irish office, and with profits of about $9bn in 2004, gave Ireland more than a $1.12 bn (at that time near parity with the euro), that year in tax revenue.

ROI’s total tax intake was 33.4 bn Euros in 2004, which that Microsoft alone is paying about 3 percent of Ireland’s tax burden.

(numbers come from and


P O'Neill 02.23.07 at 5:42 pm

Gordon Brown has been trying to get his paws on more of the money that Irish sales operations of multinational firms generate from their activities in the UK. Without much success.


Andrew 02.23.07 at 5:45 pm

Wow I am awesome at spelling and grammar. I should teach children how to spell or something.


Jacob T. Levy 02.23.07 at 7:01 pm

Could someone with more knowledge of corporate law than I comment on whether US companies are *obligated* to do this kind of thing? Shareholder suits are hard but not impossible, and failing to make a $500,000 exenditure that would have resulted in savings of tens or hundreds of millions of dollars seems like a dereliction of fiduciary duty unless the action’s illegal (which it’s not).


john m. 02.23.07 at 7:30 pm

#4 – The real trick of the light is the fact that they manage to remain considered US corporations at all. They enjoy all the benefits and access to the US market but make no (or an actively minimised) contribution to the US state. Would it be in shareholders interests for the US govt. to declare them profiteering foreigners?


Peter 02.23.07 at 10:03 pm

The real sham is that The US has a deal with Ireland that says “Pay Irish tax on your intellectual property (12.5%) and we’ll call it even”, and Ireland has a similar deal the with Bahamas. So, with a little wrangling, you can pay Bahamas tax (0.0%) and that will count for your Ireland tax, which will count for your US tax, and the only tax that ends up being paid is the fees that the tax attorneys charge.


agm 02.23.07 at 11:13 pm

It’s interesting, no? But the implication here is that it’s not all of a multinational’s sales are run through Ireland for tax purposes. And in fact, depending on various tax credits, deductions, structures, case law, …, it’s not necessarily wise to lose US status, so a significant portion of the company’s activities would be conducted in US territory. (It’s also interesting to note that whether Puerto Rico, Guam, and other US possessions count as part of the US for tax purposes differently based on which part of the tax code you’re reading.)

If I understand some basic parts of the strategem, you want significant revenues passing through a country (e.g., Ireland) to gain tax benefits while not losing the benefits from having significant operations in other countries (e.g., the US). The important word is significant, or substantial, as opposed to “all”.

There are also often treaties and international trade regulations that apply. For example, the US has reworked one of its tax provisions twice that I know of to bring it into line with WTO rulings regarding the subsidization of domestic production activities.

@jacob t. levy:
Given the complexity involved in setting up such a structure, and the potential liability, I would (as a non-lawyer who spent a bit of time at a tax place) venture to guess that, practically speaking, corporate officers can make a reasonably strong case that either they didn’t know such an achievement was possible and they’ll now be looking into it, or else they’ll toss the relevant chunks of the IRC at shareholders and say “Ok, show us how”, at which point the shareholders would most likely stop complaining, if only from being knocked unconscious by the impact of such a dense thing as the IRC.


john in california 02.24.07 at 12:11 am

SanDisk was started and is run by Eli Harrari, an Israli. Look into his background and where the money came from to start this company.


maidhc 02.24.07 at 4:29 am

San Jose Mercury News:

SanDisk, struggling in the fiercely competitive memory market, will cut 250 jobs — or 10 percent of its workforce — as part an effort to save $30 million to $35 million a year.

Eli Harari, chief executive of the Milpitas maker of flash storage products, said excess supply of NAND flash memory has led to sharp price cuts in the industry, and he expects selling prices for SanDisk products to drop as much as 40 percent.

In addition to the job cuts, SanDisk will cut pay for its top executives, including a 20 percent reduction in base pay for Harari. (In 2005, Harari had base pay of $725,000, according to a SanDisk regulatory filing, plus a $1.74 million bonus and $15.7 million in stock-option gains.)

SanDisk will freeze pay for other employees at their current level and stop hiring except in what it called “strategic areas including product innovation and future generation technologies.” Costs related to the job cuts will be $15 million to $20 million, mostly in the first quarter, SanDisk said.


tzs 02.24.07 at 5:54 am

Figuring out taxes on the international bits of US corporations is guaranteed to turn anyone into a screaming maniac.

And this is simply arbitraging of tax rates between different countries. Nothing to see here.

Same reason why most insurance companies operate out of the Bahamas.


Timon Braun 02.24.07 at 7:18 am

I think this is a taste of future jurisdictional competition. Why stop at taxes? We tend to think, for example, that you outsource jobs to India that can be done remotely- but why not outsource everything to India, and have the Indians outsource the location-specific tasks back? Companies will pay taxes in the country with the lowest rates, hire people via the country with the most liberal labor laws, store data in the country with the best privacy laws, etc. The US will lose dramatically in a bunch of these areas, and we deserve to. We are already an absolute ogre when it comes to “intellectual property” and a smaller military budget wouldn’t be the end of the world. Taxes on individuals make more sense anyway, and will continue to be as progressive (or not) as politics demand.


Adrian 02.24.07 at 6:34 pm

Just to clarify, SanDisk don’t (based on the IT story) seem to be breaking the law. Two-legged US citizens have to pay US tax on their world-wide income, true, even if they live overseas; but non-US corporations owned by US persons don’t pay US tax on their (business) income unless and until they distribute it to the US owner. Call this concession “deferral”. (SanDisk Ireland counts as foreign because it’s incorporated in Ireland; the US peculiarly doesn’t care where corps are managed or operate.)

SanDisk probably don’t need to fear policy change either. Given deferral, the US is indifferent whether SanDisk books its income from Asian outsourcing in Ireland or in Taiwan. (And when they do eventually remit it to the US, a low foreign tax rate works to the US’s advantage because it means less foreign tax credit.) And far from deferral itself being under threat, the US just had an “amnesty” during which income stuck in foreign corps could actually be repatriated without paying the normal US tax.

(All very simplifed, TINLA, yadda yadda.)


Thomas 02.24.07 at 8:59 pm

In response to No. 4: No, corporate officers aren’t required to do these sorts of things, but they are permitted. Decisions in this area are reviewed under the so-called business judgment rule, which protects the officers from second-guessing by courts. (If you’d like a more complete explanation of the BJR, ask Professor Bainbridge.)


Xboy 02.25.07 at 4:48 am

Far from being of interest, the article struck this American as the financial page equivalent of “Sun Rises in East.” The reason is simple: a Republican President means big tax breaks (legal and otherwise) to big US businesses.

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