Do you want to avoid paying taxes? Most of us do. Let's look at how one company legally found a way to avoid paying taxes through a complicated company holding structure.
“Take money from your right pocket and put it in your left pocket. Now you have yourself a solution.” – Anonymous
One of the reasons I went to Budapest earlier this year was to see if it was a suitable city to establish a Financial Samurai Inc. subsidiary.
Before my trip, I had learned that Gawker Global (now owned by Univision) had set up a subsidiary in Hungary to significantly reduce its tax liability. As an owner of a much nicer and more empathetic media company to help people achieve financial freedom sooner, I had to do some first-hand research!
Avoid Paying Taxes Like Gawker Media
Now, in a fascinating exposé, Jeff John Robert from Fortune magazine highlights how Gawker Media was able to “legally” reduce its IRS tax bill by ~80%. Here's what Gawker Global did.
1) Set up a subsidiary in Hungary, a lower tax country. Gawker Global's effective tax rate in Hungary was 5% versus 34% in the US.
2) Get the Hungarian subsidiary to bill the US subsidiary in order to reduce the US subsidiary's taxable income. Let's say the US side generated $1,000 in revenue from an article. To avoid the 34% effective US tax rate, the Hungarian side would send $1,000 worth of invoices for editorial and design to the US side so that taxable revenue in the US was $0. The Hungarian side now had $1,000 in revenue from its services, but since it only had to pay a 5% effective tax, it saved 29%.
3) Decide where the overall Gawker Global revenue flows. Between 2010 – 2015, Gawker Global generated roughly $200M in revenue. According to Fortune's Jeff John Robert, of the $200M, 55% were U.S. profits diverted to Hungary, and 25% were profits that never entered the U.S. and were recorded in Hungary. This seems shady, but my guess is this is legal because apparently the IRS hasn't gone after them all these years.
To justify geographic revenue recognition, perhaps one of the US-based writers did all his writing for the year while visiting the Budapest office for a week. But given that a media company's revenue is derived mostly from advertising, it seems logical that if the advertiser is based in the US, the revenue should be taxed in the US. But wait just a minute! What if the advertiser itself is a global company with offices in Hungary like Coca Cola? Ah, so wonderfully confusing and clever.
4) Have one subsidiary lend back money to another subsidiary. Gawker Hungary would lend back the money it made with interest, from Gawker US so that Gawker US wouldn't pay any taxes on cash flow.
Make Sure To Own All Your Subsidies To Avoid Paying Taxes
The key for all of this to work is to be the owner of all the subsidiaries so all the money flows to you. It's like taking money from your right pocket and putting it in your left pocket!
How To Still Win After A Legal Settlement
Now that you know how to legally avoid paying taxes, take a look at this beautiful chart below. According to the Hulk Hogan versus Gawker Global trial, Gawker Global owes Hulk Hogan $140M for violating his privacy ($10M of which is owed directly by Nick Denton, founder of Gawker Global). With Gawker being sold for only $135M, and Nick Denton owning only 53% of the company, it would seem Nick might be SOL given the liabilities are greater than the sale.
Not so fast! Filing for bankruptcy helps protect Nick and his interests outside of the company. Creditors can only go after what the company is worth. Further, prior to the judgement, Nick cleverly sold a portion of his company to a family trust called Greenmount Creek. As part of the sale, Greenmount Creek, controlled by Nick's sister, agreed to pay Nick $12.8M tax-free in 2028! Why the payment is 15 years out, I'm not sure. Perhaps it's due to the statue of limitations.
If your company is facing a large unfavorable judgement, it's important to try and hollow out as much as you can from the company before the verdict. Diversify, diversify, diversify.
Check out this corporate structure.
How To Avoid Paying Taxes From Others
I'm not a tax lawyer or a CPA. Please find one for tax advice. I'm just a tax enthusiast who's been doing his own taxes for over 10 years. Tax is consistently the #1 expense for most of us working stiffs, so it only makes sense to learn how other people and companies legally reduce their taxable liability.
To verify what Gawker Global is doing is legal and whether the rest of us can do the same thing, I'd love to get the thoughts of all you tax lawyers and CPAs.
The IRS can't discriminate on the tax laws by favoring a British citizen making millions in America over its own American citizens, can they? And since the IRS hasn't gone after Gawker Global for “transfer pricing,” are they giving their stamp of approval such actions are legitimate?
Related: Three Ways To Make Money And Pay Less Taxes
Buffer App – Boondoggles
From a company called Buffer App, we learned they spend more on monthly company retreats than they make in monthly operating profits as a great way to lower their tax liability while having a good time. This strategy is directly applicable to small business owners, especially those that have raised investor money. It's much more fun boondoggling on another's dime.
Apple – Offshore Accounts
From a company called Apple, we know it holds over $180B in offshore accounts and plans to continue keeping this money offshore in order to avoid paying a ~$60B tax bill. Apple's effective tax rate on overseas earnings is under 3%. This strategy is not applicable to most of us, but gives people incentive to move abroad to take advantage of the Foreign Earned Income Exclusion.
And now from a company called Gawker Global, we learn specifically the benefits of creating subsidiaries in lower tax countries to drastically reduce tax liability through inter-company dealings. Most small businesses will just hire their friends and family to help them out or get favorable rates.
It's important as a Financial Samurai reader to always be learning from others. I've heard about creating subsidiaries to save on taxes, but I've never read actually how to do so until I read Fortune Magazine's article and created my own sample income statement above. The more you learn, the better your finances will be.
Budapest, Hungary Is Great
So what about the great city of Budapest? On a scale of 1-10, 10 being the best, I give Budapest an 8 in terms of livability. The public transportation is easy. The city is by a beautiful river. And the cost of living is relatively low.
Budapest is definitely a great place to set up a subsidiary. But in order to do so, I think you may need to get your annual business revenue up to at least $1M before you can justify the necessary extra overhead and legal fees to ultimately take advantage of these tax savings.
Here are some pictures.
Blogging From Budapest
Being a personal finance blogger might very well be the best profession ever. What other business allows you see the world, write about what you've discovered, improve the financial well-being of others, and make money off what you've learned? I hope this article gives everybody something to think about regarding the power of starting a business to lead a more fulfilling life.
I don't plan to go back to being a full-time W2 employee. To work 12 hour days for the pleasure of paying a 50%+ Federal and State marginal tax rate is a very bad proposition. It's much better to follow the lead of all these great companies to live a better lifestyle. If the IRS approves of their inner dealings, isn't that good enough for you and me?
Other Learnings
- Try to be nice to people. Nice people generally don't get sued for $140M.
- Try and be congruent in how you act and how you think.
- Try and stay off the grid or earn less. The Defense Department’s Inspector General, in a June 2016 report, said the Army made $6.5 trillion in wrongful adjustments to accounting entries in 2015. Yet the Army lacked receipts and invoices to support those numbers or simply made them up. Despite this information, the IRS goes after individuals instead of its own government colleagues. Scary.
The best income or most tax-efficient income is around $180,000 per person in 2023.
Tax enthusiasts, please share your thoughts about creating subsidiaries to save on taxes. Any other creative ways you know about to save on taxes? Why would the IRS bother to go after individuals when they could get a bigger return by going after huge corporations? Doesn't moving your money from your right pocket to your left pocket seem a little shady? If so, why hasn't the IRS done anything about it? What do people think of Budapest as a place to live and work?
Related: How To Pay Little To No Taxes For The Rest Of Your Life
Tax Recommendation To Avoid Paying Tax
If you want to avoid paying taxes, start a business. A business is one of the best ways to shield your income from more taxes.
You can either incorporate as an LLC, S-Corp, or simply be a Sole Proprietor (no incorporating necessary, just be a consultant and file a schedule C). Every business person can start a Self-Employed 401k where you can contribute up to $66,000 in 2023 ($22,500 from you and ~20% of operating profits). All your business-related expenses are tax deductible as well.
Simply launch your own website like this one in under 30 minutes to legitimize your business. Here's my step-by-step guide to starting your own website.
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What's incredible is the investment minimum is only $10! In addition, you can see what the Innovation Fund holds before deciding to invest.
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For further suggestions on saving money and growing wealth, check out my Top Financial Products page.
In addition, if you enjoyed this article and want to get more personal finance insights and tips, please sign up for the free Financial Samurai newsletter. You’ll get access to exclusive content only available to subscribers. Avoid Paying Taxes is a FS original post.
Hi! Intriguing article, any interest in following a real life case study?
Sure, feel free to share.
Hi Sam!
I jave been reading your blog for a few months really like it, I’m glad you enjoy providing this to us. This post inspired me to finally comment…or, more accurately, make a request.
I’m an expat living in Germany and I was wondering if you have any insights on taxes for myself and other expats, or if you know of any resources you would recommend. Your mention of the Foreign Earned Income Exclusion emboldened me to ask. :)
Keep up the good work!
Hi Sam, been reading your blog for a few months now, and just came across this post which finally prompted me to comment… or, rather, make a request.
As am expat currently living in Germany, I’m curious if you having any information or insights about about investing or minimizing taxes.
Your reference to the foreign earned income exclusion has emboldened me to ask. :)
What do you think of Act 20, Export Services Act in Puerto Rico? Similar opportunity to offshore subsidiary but less established, potential risk of Congress changing IRS laws, but seems attractive for a media service business.
My simple but hopefully effective plan for avoiding taxes is to make my taxable income low enough that no taxes are owed.
That obviously means lowering my spending a certain amount to match that income, but I plan on having non-taxable income to supplement.
It also helps that I am perfectly happy to live on relatively little.
Qualified dividends are your friend. If you’re in the 15% tax bracket or less (that’s under $37k for a single filer) and all your income is from qualified dividends you will pay 0% tax rate. I believe this is how it works, but I am not entirely certain.
But that means you have to live life earning less than $37,000 a year. Wouldn’t you want to make more?
$37k can go a long way if you have minimal expenses. But yes, I would prefer to make more than that.
Yup, taxes suck. Good thing we don’t live in Denmark.
“Being a personal finance blogger might very well be the best profession ever. What other business allows you see the world, write about what you’ve discovered, improve the financial well-being of others, and make money off what you’ve learned?”
And 100% agree with this statement.
On a much smaller scale and on a personal level, we can do this same practice moving to different states to avoid paying state income taxes.
Here in California the state income tax rate can be as high as 13.3%… where as our next door neighbor Nevada has ZERO income taxes.
Imagine if your annual income was $1 million. In California you would have to pay $133,000 just in state income taxes (on top of what you paid for federal income taxes). If you lived in Nevada you would pay $0.00!
I live in Sacramento, so I plan on eventually relocating to either Reno or Tahoe (less than 2 hour drive) at some point to take advantage of this.
This is certainly an eye opening post. There is absolutely a very big difference between legal tax avoidance and illegal tax evasion. In the United States, corporate taxes can be as high as 38%. Compare that to several other top tax rates from countries worldwide:
Canada – 16%
Hong Kong – 16.5%
Ireland – 12.5%
Singapore – 17%
United Kingdom – 21%
People wonder why big companies such as Burger King (recently moved to Canada) leave the US to seek more tax friendly environments. In my opinion this is shrewd business… it upsets some people because we lose jobs, but if the people would vote for tax friendly politicians then maybe we would have a more competitive corporate tax rate and companies would want to stay.
I think that small companies can definitely take advantage of this also!
A few countries that actually have zero corporate taxes:
Bahamas – 0%
Bermuda – 0%
Cayman Islands – 0%
Excellent stab at the BEPS conversation (Base Erosion, Profit Sharing).
As a tax professional and CPA, this is the realm I occupy since it happens all the time and let’s face it, there’s a lot of paperwork involved. I can see both sides of the argument.
On one side, a tax lawyer or CPA is employed by management with the intention to maximize shareholder value. Management and the board have a fiduciary duty to optimize tax incentives and “loopholes”, so doing otherwise would be considered negligent and would result in them being out of the job.
On the other hand, recording profit overseas and loaning the money back inherently appears to be shady. Legality should not take a backseat to morality in countries made up of corporate citizens.
Then again, CPAs only follow the laws created by, often, elected officials in various countries. As an upset citizen, perhaps the corporation is the last person you want to blame.
Do I know more ways to save money through subsidiaries? Of course, but those methods are (often) not available to individuals (from a legal entity perspective) and describing them becomes overly complicated, fast. Part of it is intentional, but part of it is because the legal framework established between countries can be confusing. Anyone can google “Double Irish with a Dutch Sandwich,” and you’ll see what I mean.
Having dealt with auditors on basically every day of my career in the past few years, I would first highlight they’re normal people. They don’t get everything 100% of the time, and they often appear to be spread too thin amongst too many audits. The great auditors are often picked up and hired by public accounting firms, so any auditors with institutional knowledge of a client or topic might have mixed blessings.
From a structural level, auditing isn’t the solution as its coming in after the fact. What one auditor might say is perfectly legal is what a citizen might call corruption. From this perspective, the IRS doesn’t care about the perception of shadiness, they only care if the law has been followed and the right paperwork is in order.
On the flip side, I have been on the end of a client not wanting what was legally there’s because of the PR nightmare it would create since it would appear shady.
As for the Army bit you mentioned at the end, that is unfamiliar territory for me. My first impression is wrongful appropriation of Defense funds might be a realm for someone like the House Committee on Oversight, similar to their investigation of Blackwater back in 2007 on private military spending.
Great post as usual and I especially love the tax topic! I can talk all day about this stuff!
I read last week that Gawker.com is ending operations for good next week. Do you think this tax dodge activity is the reason?
I am not a tax expert either, but in my prior company we employed quite a few.
And one of the creative solutions they came up with to lower taxes was taking a position on the deductibility of certain interest payments we were making from one entity to another. Because it was a highly leveraged situation back when interest rates were high, we knew that even if the IRS came back and required payment of back taxes, penalties, and interest, the cost would still be significantly less than borrowing the money from investors.
By lowering taxes, we effectively financed a portion of the buyout with government funds which was much less expensive than high-yield debt.
First, Budapest is a nice, architecturally pleasing city and having been there several times for work, I am amazed at how inexpensive it generally is. My Hungarian business colleague tells me that you can easily have a good life there for $2000 a month. Three bedroom apartments in nice parts of the city (except the Danube waterfront) go for under $600 a month! Enough about Budapest, this post raises a serious issue!
Apple’s case is different as it is actually generating revenues and profits from other countries. In fact, most of their sales is outside US. That’s entirely different from Gawker Media you cited.
Your example of Gawker Media’s ‘legal’ method of tax avoidance is sure to raise a lot of eyebrows in IRS and in current political environment. This sort of tax avoidance is what OECD countries are trying to plug. If they do bulk of the value addition in US, having the Hungarian subsidiary invoice them just so that much of the revenue recognition and profits are ‘created’ in Hungary is just plain tax evasion strategy that will soon get plugged. Having a shell corporation in a tax haven like Cayman Islands and a low tax subsidiary in Hungary with the main objective of shielding taxes from the country (US) where actual work happens is the sort of chicanery that IRS will take aim at.
This tax story smells fishier than what you catch on the downstream of Danube! Let’s see how long they are able to keep this up.
Hey Sam,
I can see why you are considering this, the tax savings are potentially big. Ireland and Budapest are nice places. Maybe you could consider Mauritius too
I’m just a lil surprised that you’re considering this route when you made this post https://www.financialsamurai.com/how-much-time-and-money-should-i-give-to-charity/ not too long ago. Kind of goes against the spirit of what you were saying a lil?
Not really mate. It’s all about the spirit of learning from others to help invigorate the mind and improve your own finances to help other people. I firmly believe you are more capable of helping someone else than the government is.
Normal people may go to Budapest to just sightsee. Why not go to Budapest to sightsee and explore the possibilities of living their part-time or full-time because of establishing a potential subsidiary?
In building my Travel business, I want to differentiate mine from other travel sites that talk mainly about where to stay, what to eat, and what to see. All that’s fine, but I don’t want to rehash what has already been written. Instead, I’d like to weave in unique personal finance angles with travel to make things more interesting.
And I think this whole Hungarian subsidiary strategy by a British man who made millions in America is fascinating! If you have found other articles online that talk about this, I’d love to read them!
Google if I remember right pays tax in Ireland at lower tax rate.
You seem correct. Maybe move to Thailand, Budapest and run your blog and pay little to no taxes. One of my close US coder friend wants to move to South East Asian while coding for American companies. He wants to do it in 2017. For the same reason as you. Another US coder friend wants to live in South America while coding remotely for US porn networks. He is just afraid of ‘actually’ making the move, all talk for a whole year, while continuing to code remotely for USA porn sites.
I’m partially Hungarian, so partial to Hungary myself. I visited and it was beautiful (though I think it was my least favorite city I visited in Europe!) Anyway, this article is fascinating. It’s upsetting to me that there are so many tax loopholes that usually only big corporations can take advantage of – and interesting to see you as a self-employed individual trying to figure out how to do the same thing. I would think one needs expensive legal funds in order to get away with this – got to love capitalism.
I really went Budapest to first see anew place and to develop travel blogging material. I have a goal of developing my travel category as part of my business. But when I heard about this hungarian subsidiary by Gawker media, I figured let me pretend to be a resident there to see whether living in Budapest would be worthwhile.
I really like to learn and understand how things work. And if it is legal, then why not follow suit right?
I wanted to point out in a short succinct way that all large and profitable tech companies have ways to shift US profits into tax-friendly jurisdictions such as Ireland, the Netherlands, Bermuda, and yes even Hungary if it makes sense for the company’s facts.
If you google “Double Irish Dutch Sandwich” you might find some interesting material on how Google, Apple, and Microsoft shift profits overseas. The key with tax planning for tech companies or any company that deals with intangibles (think insurance or reinsurance – why are all reinsurance companies located in Bermuda!) is to set up the IP and/or the “service” that the company is providing to be truly taking place overseas.
Google for example has a lot of its servers sitting in Ireland and a fair number of people sitting there as well. As we all know, its advertising business is its cash cow. How easy is it to set up a contract with its AdSense/AdWords customers to be paying their advertising fees to an Irish company instead of a US company. Pretty darn easy when you have the resources of an MNC. Does it mean that the people in Mountain View aren’t still creating most of the value? Nope. But it is easy enough for the Irish sub to be the “party to the contract” with Google’s customer. And what is the customer buying? Quite simply, it’s buying a “service” that is performed by a computer that is physically sitting in Ireland. Under our old system of tax laws, income has always been taxed in the place where it was created and definitionally it is difficult to say that the Irish server farm didn’t create that advertising revenue! So…. voila, you’ve moved profits over into Ireland which are only taxed at 12.5% (or zero if you have “nowhere income” because Ireland doesn’t under its rules actually think the income is Irish source).
The money mostly sits in Ireland “permanently reinvested” offshore so Google’s financials won’t typically show the US rate of 35% being imposed on those profits. Instead, they show a rate of 12.5%. This means that Google’s effective rate looks a heckuva lot lower than 35% even though it’s a US headquartered company.
Apple has stockpiled similar gobs of cash offshore and its strategy is to leave the cash offshore and borrow in the US at 1% with its AAA rating to pay dividends (rather than dividend the cash up and pay 35% tax on it). Thus, it borrows at 1% and pays dividends to shareholders instead of repatriating foreign cash which would cost 35%.
There’s a wholeeeee lotttt moreeee to this story but hopefully that gives a little color about what companies do to move US profits offshore.
Makes sense. So why can’t a media company like Gawker just hire a full-time editor/designer/webmaster in Budapest, who also acts as the head of the subsidiary in his one room office? Gawker can just have the guy in Budapest charge an amount for his services close to the value of the revenue coming into the US to reduce parent co taxable income.
OR, they can just make the Budapest office manager the advertising account manager for their largest clients so revenue flows directly to Budapest.
This seems exactly like what Google is doing in your example, and Google has done phenomenally well over the years.
That comes back to the “transfer pricing” point that financial libre mentioned earlier. The IRS will require that the Hungarian sub only charge an “Arm’s length fee” for its services rendered to the US parent so you can’t artificially juice up your tax deductions taken by the US Co. But…. you have the right idea!!
OK, at least I have the right idea. I always have a burning desire to understand how things work. If I don’t understand something that bothers me until I do enough research where I feel satisfied. Taxes are so complicated, so it is fascinating to learn about all these different strategies. I’m also very grateful for readers like you to help shined a light.
And we’re grateful to you for consistently putting out high quality content!!!
I’m not sure how popular this is, but speaking from my own experience, the last 3 companies I’ve worked for all ope EU base offices in Dublin Ireland. Ireland offers the best corporate tax structure in the EU. I suspect some fancy accounting is going on as well. Thanks for the article Sam.
If your ‘twin’ was able to secure the coveted second in the world Financial Samurai hoodie, I can only hope the recent 100% expansion in availability signals a trend and mass market availability of such branded products is your next revenue stream. I know I’d love to sport one to prominently display my personal finance awareness/acumen and I assume very much impress the ladies of the South Bay.
Must keep supply artificially low to prop up scarcity value and prices! I must admit, I have had several ladies come up to me in the FS hoodie while at dinner and ask, “Are you the Financial Samurai?” Of course I said I was just a fan w/ the only one hoodie in existence!
The earlier comments re transfer pricing are correct. Setting up, and “dividing” income among, international subsidiaries is not something for the novice.
It is, however, a fabulous way to get embroiled in very expensive disputes with the IRS and other tax authorities – for which the costs of defending your strategy can quickly outweigh the anticipated benefits, especially for small-timers.
Regarding the scale common among corporations using approaches sort of like the one you outline, it’s instructive to consider some particulars of what they do. For starters, one of the most popular ways multinationals take advantage of low-tax international jurisdictions is by housing intellectual property assets in subs based in low-tax countries. There are many reasons why this is popular that I won’t get into, but if you give it a little thought you’ll probably get the rough outlines. Nevertheless, given the expenses associated just with acquiring and maintaining a stable of intellectual property that can justify meaningful revenue funneling, you begin to see the sort of structural costs required to make something like this go. And that’s just a small part of it.
With deference to your success on this blog, Sam, this realm of corporate strategy is almost certainly too expensive and risky to be justified in your case or in cases of those similarly situated. The $1 million annual revenue threshold you suggest is insufficient. This is the kind of thing best reserved for companies for which something like five or ten percentage points of savings will translate into seven or eight figures.
And since you’ll ask: Yes, I have experience in this realm. If you want particulars, you can head to my site’s “About” page.
“Revenue funneling”…. awesome words that surely sounds bad if the IRS were to say this about your company.
Maybe the revenue threshold is $5M or greater, as I originally wrote. I’m definitely not serious about setting up a FS subsidiary in Budapest. But is nice to imagine what it would be like by going there and experience the city firsthand. To combine my Travel business creation efforts while also learning about foreign subsidiaries in Budapest is a more efficient use of time and money.
My question to you and others is: If what Gawker Global did was frowned upon, why hasn’t the IRS investigated their books like Fortune Magazine did? If Fortune could do the analysis, surely the IRS could too w/ all their people and tools? And if the IRS didn’t go after them, does that mean they are giving the greenlight for other businesses to do the same?
Revenue funneling/transfer pricing to lower income tax foreign subsidiaries etc looks pretty shady. But I wonder why nobody cares?
Let’s keep watching the news. I’m sure it won’t be long before there’s something like a disclosure about an official inquiry here.
The evidentiary threshold is very different for the IRS and a dude from Fortune Mag. Good cases take time to build.
Transfer pricing in itself is a perfectly legitimate practice that has real business merits aside from taxation issues, and it is worth a lot of money to lots of companies in tax benefits. So it’s very, very closely monitored by the IRS. Which is to say that lots of people care about it. And which explains why there are entire offices in Big X accounting firms that employ hundreds of people specifically to devise, refine and defend transfer pricing strategies and those strategies’ accounting and tax consequences.
Which is another way of saying that the IRS is almost certainly looking into this specific case and, anticipating the defenses that will be raised, is carefully constructing its assembly of evidence and monetary demands before it officially gets involved.
Can you take a look at my chart and see where anything breaks down, if anything? I try to simplify the income statement to make it easy to understand. Where would you see an error or something fishy and such and income structure if there were actually people in Hungary doing the work?
Your I/S as presented isn’t where the “breakdowns” would be discernible, specifically. It’d be in the details underlying all the stuff going on in Hungary: What work? By whom? When? What’s the market value of their work? Is there really no economic value in any work being done in the U.S.? Etc., etc.
The very fact that there’s an int’l sub would raise some eyebrows. Reporting zero U.S. profit would probably garner laughs and motivate some IRS bros to pay you a visit.
On the surface, the river might look calm and easily navigable; it’s all the stuff going on beneath the surface that causes the trouble. And which is prone to pulling you under.
After going through the comments, this thread appears to highlight most of what is needed. Thank you FinanciaLibre and Brian Chong!!
Most people view tax avoidance and tax evasion as the same activity, despite one being perfectly legal.
I think a similar breakdown of understanding is occurring between transfer pricing and inversions. The latter of which has been cracked down in the US, but was again, perfectly legal for quite some time. Even the former is being heavily scrutinized, but it isn’t people “getting away with it,” as much as people doing their proper due diligence.
If anything, you now have a new goal Sam: create enough revenue for Financial Samurai to justify a Big4 transfer pricing study!
Sam,
To answer your question about the IRS… just because Gawker hasn’t gotten caught doesn’t mean it’s legal or the IRS approves their strategy.
1. IRS is under funded because Congress keeps cutting their budget, so they have fewer IRS agent to audit taxpayers. Because the IRS is so back logged, sometimes it takes 3 years after you’ve filed a tax return until they audit you.
2. The Fortune 500 companies get audited by the IRS every year because the dollars are bigger. When I worked at Cisco Systems we set up a separate office for the IRS auditors who stayed there year-round to audit us.
-Brian Chong, CPA
https://www.yelp.com/biz/u-savetax-santa-clara-2
Just wanted to add one piece to the great discussion going on here. But I should first say I agree with Brian Chong, who makes some great points.
For those interested, there’s a really good Stanford GSB article that does a nice job describing transfer pricing, audit and IRS enforcement issues in the context of multinationals using low-tax foreign subs to avoid taxes.
As suggested earlier in this comment thread, intellectual property is singled out as particularly useful for a variety of reasons.
It’s a good read and seems useful to round out this discussion. Sam, thanks for facilitating here – good stuff from lots of people on a complex topic.
https://www.gsb.stanford.edu/insights/game-global-income-shifting-feds-are-overmatched?utm_source=Stanford+Business&utm_campaign=ec357949c2-Stanford-Business-Impact-Issue-95-8-21-2016&utm_medium=email&utm_term=0_0b5214e34b-ec357949c2-70236997&ct=t(Stanford-Business-Impact-Issue-95-8-21-2016)
My preference would be Dublin – which is where all the major US multinationals have based themselves. Added benefit of language and an Anglo Saxon legal model – Apple, Google, LinkedIn, Facebook etc., able to “sell” the intellectual branding and property rights to the new subsidiary to bill back usage rights etc. All sales in Europe are through the Irish subsidiary. Also taking advantage of a “double Irish” route to reduce the corp tax further from the nominal 12%. Beyond a certain point evasion becomes an ethical concern as to the contribution of the entity within the society, essentially freeloading off the state (taking the profits, but pushing losses onto the state- tax breaks etc)
Good to know about Ireland! I’ve never been so perhaps my next business board meeting will be there to do some feasibility studies and review of the business of course.
If everybody’s doing it, shouldn’t we all as well? Hmmmm.
Sam, I’m a tax lawyer, and what you are describing is not legal. It’s called transfer pricing and there are rules for that. Either that is not what Gawker is doing or they have been very lucky they have not been caught yet. I suggest you seek professional advice before setting up foreign subs and start invoicing yourself.
Let’s see what happens with Gawker. I take forever to do my due diligence before making any moves. I’m just fascinated with all these various ways companies can pay less taxes.
And if the IRS hasn’t gone after them after so many years, then are they not giving a greenlight for other Businesses follow suit? I guess time will tell.
One thing to know about the IRS is that they are terribly under-funded. Terribly. The Republican Congress is really trying to “starve the Beast.” The reality is that they are allowing cheats to get away with cheating. And causing the Average Joe who calls a help line about a lost tax payment to be sent to a collection agency or get stuck with a tax lien. While we may not like the IRS, we should all be able to agree that fair administration of the laws and enforcement against cheats is in all of our best interests!! But the IRS can’t accomplish these basic goals when their budget gets smaller each year. * End rant *
They are terribly underfunded, yet the still audit regular middle class citizens every year who are just trying to get by. And then they go after small businesses that are being weighed down by red tape and fees.
Meanwhile, the Defense Department’s Inspector General, in a June 2016 report, said the Army made $6.5 trillion in wrongful adjustments to accounting entries in 2015. Yet the Army lacked receipts and invoices to support those numbers or simply made them up. Despite this information, the IRS goes after individuals instead of its own government colleagues.
Now that is scary!
Why isn’t the government ALL OVER THIS $6.5 TRILLION in wrongful accounting? https://www.yahoo.com/news/u-army-fudged-accounts-trillions-dollars-auditor-finds-150803338–finance.html
This is interesting…
Those Turkish baths are gorgeous. The tax avoidance seems too close to evasion for my comfort, but I’m terribly risk adverse. I also don’t like complications. But, I’m not a millionaire, and perhaps I would think differently if I had other people to set things up for me.
The number of tax loop holes that are available for business owners is amazing. However, I do wonder, what the would be the bare minimum for an average person to create that would qualify as a legitimate business. I too wish to one day take advantage of this loop holes, albeit on a much smaller scale.
Don’t know about Hungary, but I got an LLC in Delaware for about 1000 euro. No income limits, so it’s not a threshold I needed to pass. Budapest is 3 hours away from my city (I live in Romania, a neighboring country), so it would make sense to look at their tax system since ours in my country is overtaxing us.
Wow that graphic of the Gawker legal structure is quite impressive. I never would have thought of creating something that complicated, but I can understand why corporations create subsidiaries and go global to limit their tax liability. I’ll be curious to see if the IRS goes after them now that information was made public. I’m glad I’m not in the accounting dept of Gawker. I can’t imagine trying to figure out how to properly file their taxes and prepare their financial statements.
Great pics of Budapest!
*horrified tone* Sam! Have you gone to the dark side?! Advising tax avoidance and other tomfoolery? Photos of suspiciously similar people wearing hoodies (always a suspicious article of clothing) while standing on bridges? What’s next, a guest post by Anonymous?!
Seriously, great post and thought provoking as usual. Sadly I’m entirely tied to ‘Murica for my W-2 employment (The Man needs me, I swear) and can’t play such games until I retire or my passive income streams develop to maturity. Thus, I’m left as an avid observer in the stands while companies and governments maneuver against each other on the field of business and taxation.
It reminds me of an Afghani Interpreter I worked with. He said growing up in Afghanistan you didn’t have anything, but it was so easy. In America you could have anything you wanted “But you have to work…so…damn…hard.” I took his words to heart and admire the captains of industry for their ceaseless efforts.
As for tax games, I once worked Hollywood and was intrigued to watch the outflow of work to states willing to subsidize a company’s project (such as “the Walking Dead” to Georgia). Although a good move for local politicians’ PR, I did notice a few articles in “The Economist” purporting a net loss to such states since most of the technical jobs were handled by Californian firms and crews who subsequently returned to the west.
As an individual, I watch and think the game is so complex that unless you can benefit from economy of scale, it’s not worth it to play the game unless you are planning of cashing out of your current state/country for another one permanently. As a cop, I can’t help but look at Gawker’s maneuver and say, “I don’t know what’s going on here, but I’m pretty sure it’s illegal somehow.” Either way, their lawyers are sure to be paid, and I salute them.
Yeah, such maneuvers require a large enough revenue base to make things worth it. There’s that one New Jersey hedge fund manager, David Tepper who decided to relocate to Florida to save on taxes. There was a massive panic and now a budget shortfall just because of him!
I am constantly amazed by the tax strategies big companies and wealthy individuals deploy to reduce their tax liability. Always be learning!