Reddit Gold: “ELI5: How exactly do big international companies like apple avoid paying taxes (or just at a very low rate)?”

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Today’s post is from u/Sentient_Blade who answers the question: “ELI5: How exactly do big international companies like apple avoid paying taxes (or just at a very low rate)?

Very highly paid accountants and lawyers.

The world is a mish-mash of taxation and accounting schemes which all have to interact with each other as money transfers over local and national borders. Wherever you have a differing taxation system you have an opportunity to reduce the tax you pay through clever accounting and making it appear that your profits originate in a place where the tax is at its lowest.

Let’s take a hypothetical country A called Lowtaxland that has a very low tax rate, but not many customers, and country B called Hightaxland which has a much higher tax rate, but lots of customers.

Then let’s in introduce hypothetical company called CleverTraders Inc that wants to reduce its tax. Let’s say CleverTraders Inc is in the business of manufacturing and selling beverages of some kind.

CleverTraders Inc sets up in Lowtaxland and then also sets up another “independent” company in Hightaxland called Shellsell Ltd (this new company would be a subsidiary of Clevertraders, Inc., but would have an independent balance sheet).

Instead of doing it themselves and selling their beverages in Hightaxland, Clevertraders Inc gets Shellsell Ltd to do it for them.

Shellsell Ltd is required to buy all the beverages they resell on to customers from Clevertraders, Inc. which owns all the intellectual property to those beverages. When Clevertraders, Inc. sells its products to Shellsell Ltd, it does so at a crazy price, far higher than what could ever be normally justified (so creating justification is where the expensive accountants come in).

Shellsell Ltd that is actually selling the product to customers in Hightaxland is bringing in huge amounts of money, but is making almost no actual profit (i.e. what is taxed) because almost everything they take in is going towards paying Clevertraders Inc for their products and licensing.

Clevertraders, Inc. by contrast, is making huge amounts of profit from selling their extremely marked-up beverages not to the consumer, but to Shellsell Ltd., but because Clevertraders, Inc. is located in Lowtaxland, they get to keep a much higher percentage of the profits vs if they themselves sold to customers and made profits in Hightaxland.

In other words, by shifting where the profits are made, you can reduce your overall tax burden that you pay on those profits.

For a real-world example, here’s an interesting article on how Starbucks in the UK has never made a profit, because most of their revenue goes into services to the parent companies: https://uk.reuters.com/article/us-britain-starbucks-tax/special-report-how-starbucks-avoids-uk-taxes-idUKBRE89E0EX20121015

This is just one way of doing it. Hire expensive accountants and lawyers, and they will find other ways.

Edit: This is a very, very simplified example of just one mechanism. As u/zjh31 and others point out here there are attempts to curtail this via mechanisms called transfer pricing, but they’re way too complicated for a top-level ELI5. If someone more knowledgeable than I wants to take a stab at summarising them, i’ll gladly link the post here.

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