At first glance the term “Double Irish Dutch Sandwich” might sound like an exquisite culinary dish.

But this is in fact the tax equivalent of a ‘perfect crime’ – it is a tax strategy used by many multinational corporations to effectively eliminate their total worldwide tax liability.

For example, Google paid just 2.4 per cent income tax on its non-US revenue.

This is despite the fact that the company tax rate in most of the countries in which Google operates is in excess of 20 per cent.

For example, the company tax rate in United Kingdom (Google’s second largest market by revenue) is currently 21 per cent.

Google is not alone in winning this tax lottery – numerous other corporations involved in the scheme include Apple, Facebook, Microsoft and IBM.

The following example shows how the scheme works:

A customer from Fiji places an advertisement on Google. The contract is entered with Google Ireland and the money is paid by the Fijian customer to the Irish company. The company tax rates in Ireland is very low at only 12.5%. But further tax savings are gained when Google Ireland passes the money to Google Netherlands. Google Ireland shows a full deduction for the money paid and show no profit as a result.

Google Netherlands then passes it back to a second Google company in Ireland. This is done to get out of reach of US tax law. The second Google Ireland Company then passes the money to Google Bermuda. In effect, all the money paid by the Fijian customer has come to Google Bermuda and no income tax is payable since Bermuda does not have income tax.

These schemes have generated massive tax savings for the participants.

Google, for example, is estimated to have added US$100 to its share price (currently US$575) as a result of the tax scheme. Google shareholders have effectively made a 17 per cent profit as a result of Google’s participation in the tax scheme.

Tax revenue missed out

No doubt Google and the other multi-national corporations mentioned above also derive revenue from Fiji and it is doubtful whether any tax is paid in Fiji from their activities here.

Hence it is difficult to quantify how much tax revenue Fiji is currently missing out.

As the digitisation of the world economy gathers pace, the amount of tax revenue lost will become more significant.

These schemes have become a focus for strong criticism from the governments that are bleeding revenue from the multinational corporations.

The schemes are widely perceived to be unfair to ‘bricks and mortar’ taxpayers who are unable to take advantage of the scheme and so have to pay tax at the full rate.

The upshot is that despite the dramatic tax savings, the schemes are perfectly legal under current tax laws.

And there is no clear answer how governments can unilaterally change their tax laws to prevent the revenue loss.

The multinational companies would argue that if they did not take advantage of these tax schemes, they would in fact be negligent to their shareholders by not maximising profits.

If it’s legal and makes money, then the multinational has no choice but to take advantage of it – so the theory goes anyway.

The Organisation for Economic Co-operation and Development (‘OECD’) has recently taken a leadership role in bringing together governments and stakeholders in trying to come up with a workable solution.

The OECD has recognised that solving the issue will require simultaneous co-operation amongst all the countries affected by the scheme.

The OECD has also recently issued an action plan which discusses the changes to tax laws required to counter the tax advantages obtained under the scheme.

Fijian tax regime

Fiji’s current tax regime is low tax rate based, yet Fiji must generate enough tax revenue to fund its social and economic programmes.

Hence every bit of tax revenue matters. And as the digitisation of the world economy increases, Fiji will not be able to afford to miss out on the revenue loss from multinationals like Google, Facebook and Microsoft.

Fiji is currently undergoing a modernisation of its income tax laws – undoubtedly the OECD’s recommendation will also feature in the modernisation process.

– Roneil Prasad is a Sydney based tax Barrister and Solicitor available for consultation on Fiji tax matters. Mr Prasad can be contacted on rvprasad@prasadlegal.com.au