Last year, the Organisation for Economic Co-operation and Development (OECD)—a group of the world’s top economies—decided it was time to crack down on international tax shenanigans through meaningful reform.

These legal loopholes allow major tech corporations to move money around on paper through a series of shell corporations in Ireland, Bermuda, and the Netherlands. The companies save big, and "best" of all, it’s currently legal! This widespread strategy of moving money around involves two specific tactics better known as the “Dutch Sandwich” and the “Double Irish.”

Starting February 3, the Task Force on the Digital Economy is set to convene at the OECD’s office in Paris to discuss the global corporate response to these potential plans to rein in questionable tax practices. Last week, the OECD published various corporate responses to its initial proposal—needless to say, companies don’t want to stop what they’re doing.

“This kind of tax planning, I believe, will end—the tax rate on the tech firms is going to go up, and they are squealing like stuck pigs,” Edward Kleinbard , a professor of tax law at the University of Southern California, told Ars.

“It is inevitable in a world where every jurisdiction is short of revenue, where every jurisdiction is worried about the fairness of competition of wholly domestic [firms] and multinational companies that seem to reach into the country in commercial terms but without tax purposes. When everyone is worried about that kind of competition, it strikes me as very unlikely that US tech firms will be able to preserve their extraordinarily low effective tax rates. Sooner or later, we’re going to get to a tax reporting system that has some stronger nexus where business is actually conducted.”

Double Irish—sadly not a delicious pub sandwich

Lots of companies engage in these strategies—Apple, Google, Amazon, Adobe, and Microsoft to name a few. How beneficial are they? Google’s overseas tax rate was 2.4 percent in 2009, the lowest of all American tech companies when measured by market capitalization. This shifting move saves the company billions of dollars annually.

As Ars reported in October 2013, Google is now moving even more money through a shell corporation in Bermuda—reaching a total of €8.8 billion ($11.91 billion) in 2012, 25 percent more than it did in 2011. (Ars obtained a copy of a Google financial filing from the Netherlands, dated September 27, 2013, from an anonymous source.)

Bloomberg first described the process of the Double Irish in 2010. As we have reported, here’s how the Double Irish works: a company sells or licenses its foreign rights to intellectual property developed in the United States to a subsidiary in a country with lower tax rates. The result? Foreign profits that come from that tech—like the rights to Google’s search and advertising technology, effectively the keys to the kingdom—are now attributed to that offshore subsidiary rather than the Mountain View, California headquarters. The subsidiaries have to pay “arm’s length” prices for those rights, just like an outside company would.

Bloomberg concluded, “Because the payments contribute to taxable income, the parent company has an incentive to set them as low as possible. Cutting the foreign subsidiary’s expenses effectively shifts profits overseas.”

So who does Google license its tech to? A fun little company called Google Ireland Holdings, headquartered in Bermuda. Bermuda, of course, has zero corporate income tax. So as a Bermuda company, Google Ireland Holdings pays none.

Google Ireland Holdings, in turn, owns Google Ireland Limited, which employs 2,000 people in downtown Dublin. Google Ireland Limited reported a pretax income of less than one percent of sales in 2008 and paid $5.4 billion in royalties to Google Ireland Holdings. (French investigative news site OWNI.fr published Google Ireland Limited’s 2011 annual report and its Irish Registration Office documents in 2012.)

This holding company based in Bermuda is owned by yet another Bermuda-based subsidiary, Google Bermuda Unlimited. It is managed by Conyers, Dill, and Pearman, a law firm specializing in such offshore transactions. That “unlimited” corporation means it is not required to disclose income statements, balance sheets, and other financial information.

But getting money tax-free from Ireland to Bermuda requires a stopover in the Netherlands (the "Dutch Sandwich" part) at Google Netherlands Holdings B.V. This entity, according to Bloomberg, “pays out about 99.8 percent of what it collects to the Bermuda entity, company filings show. The Amsterdam-based subsidiary lists no employees.”

It’s serious because it’s an “Action Plan”

Back in July 2013, the OECD put forward an “Action Plan,” which “identifies 15 specific actions that will give governments the domestic and international instruments to prevent corporations from paying little or no taxes.”

“This Action Plan, which we will roll out over the coming two years, marks a turning point in the history of international tax co-operation. It will allow countries to draw up the coordinated, comprehensive, and transparent standards they need to prevent BEPS [base erosion and profit shifting],” said OECD Secretary General Angel Gurría in a speech at the time. “International tax rules, many of them dating from the 1920s, ensure that businesses don’t pay taxes in two countries—double taxation. This is laudable, but unfortunately these rules are now being abused to permit double non-taxation. The Action Plan aims to remedy this, so multinationals also pay their fair share of taxes.”

The 44-page Action Plan, which would require legislative action by OECD countries to take effect, includes paragraphs like:

Develop model treaty provisions and recommendations regarding the design of domestic rules to neutralise the effect (e.g. double non-taxation, double deduction, long-term deferral) of hybrid instruments and entities. This may include: (i) changes to the OECD Model Tax Convention to ensure that hybrid instruments and entities (as well as dual resident entities) are not used to obtain the benefits of treaties unduly; (ii) domestic law provisions that prevent exemption or non-recognition for payments that are deductible by the payor; (iii) domestic law provisions that deny a deduction for a payment that is not includible in income by the recipient (and is not subject to taxation under controlled foreign company (CFC) or similar rules); (iv) domestic law provisions that deny a deduction for a payment that is also deductible in another jurisdiction; and (v) where necessary, guidance on co-ordination or tie-breaker rules if more than one country seeks to apply such rules to a transaction or structure. Special attention should be given to the interaction between possible changes to domestic law and the provisions of the OECD Model Tax Convention. This work will be co-ordinated with the work on interest expense deduction limitations, the work on CFC rules, and the work on treaty shopping.

If such reform passed, it would harmonize tax law within the European Union (and ideally worldwide) such that these types of shell games (albeit legal) would no longer be necessary.

Meanwhile, the companies and organizations that would be most affected by this are strongly countering the OECD proposals. The law firm Baker & McKenzie spearheaded the response by the “Digital Economy Group,” a lobbying organization of various Silicon Valley firms.

In a 13-page response to the OECD, three attorneys from the Palo Alto offices of Baker & McKenzie argued that these successful tech companies rely on large amounts of venture capital, which in turn depend on low taxation rates.

In some cases, the market will give significant value to an enterprise even before the enterprise has revenue. Investors are willing to contribute capital to loss-making enterprises on the belief that these enterprises are investing heavily in the creation of value which at some point in the future might be successfully monetized. This value is created through innovation in the company's intangible property, market visibility, or other assets. For example, investors may consider a pure play streaming media enterprise, which has attracted users across many jurisdictions but which has yet to turn a profit, to be worthy of continued investment because the enterprise has the potential to become a profitable company. These investments are not without risk. The enterprise may fail to retain the talent necessary to continuously innovate, lose market share to one or more competitors, and fail before generating any return on investment. The enterprise's technological approaches may not be sufficiently advanced or stable. The point for tax policy is that the return on making risky investments to create value and the return on commercializing a business's valuable assets are different, and tax policy should not allow the value created by investment to be taxed in jurisdictions whose only connection to the business is commercialization.

Ars’ attempts to contact the authors of this letter were not immediately successful.

“The plan will have real impact!”

Tax law experts say that if the OECD reforms actually get translated into law, it would ultimately be a good thing for all countries and companies concerned.

“I am encouraged by the fact that groups are trying to stop it—it demonstrates that the plan will have real impact!” Sheila Killian, a finance lecturer at the University of Limerick, told Ars. “And yes, it's broadly accepted that the Double Irish as a structure is unlikely to survive BEPS, which is a good thing. It should make Ireland a more sustainable destination for foreign direct investment.

“BEPS engages way beyond OECD countries, involving G20 directly and the UN indirectly as observers. The OECD model tax treaty is so influential that the changes will be global in reach. As to whether it goes far enough? Well, not everyone is happy. It aims to fix the system, and many people would like a more complete redesign. There are concerns, but so far BEPS is shaping up to make real change for good.”

Others seem to indicate that while the OECD likely won’t be able to fully internationalize tax systems—as they are the product of national sovereignty—perhaps there could be a larger multilateral tax treaty that could achieve the same ends via different means.

“Because tax treaties are generally bilateral, introducing new terms is hugely labor-intensive, requiring bilateral negotiations with every treaty partner,” Samuel Brunson, a tax law professor at Loyola University Chicago, told Ars. “If you produced a multilateral treaty, though, you could change a relevant term with many treaty partners with far less effort.”