Assignment #2

-Case

THREE-CARD MONTE

THREE-CARD MONTE

Have you ever seen street vendors encouraging you to try your luck with the classic scam known as find the lady or three-card monte? You are shown the queen card, and then the three cards are mixed with increasing speed. You place a bet on being able to point out the queen when the vendor stops. You win at first, but then.

Technology companies such as Microsoft, Apple, Hewlett-Packard (HP), and Google have come under intense scrutiny lately for their movement of revenues around the world with the same dexterity as one of those street vendors. The reason for the movement of those funds? Critics call it deliberate tax avoidance; supporters call it profit maximization. Microsoft, for example, elected to shift the intellectual property (IP) rights for software that the company developed in America to Puerto Rico, Ireland, and Singapore. As a result, the earnings from those IP rights can now be taxed at a much lower local rate rather than at the American rate of as much as 35 percent, which contributes significantly to Microsofts overall tax rate of only 4 percent. Google avoided almost $2 billion in worldwide income taxes in 2011 by moving $9.8 billion in revenues to a Bermuda shell company (where there is no corporate income tax). However, in January 2016, the company settled a lawsuit with the British government for 130 million (almost $200 million) relating to how it recognized UK revenues from 2005 to 2015.

According to Citizens for Tax Justice, unrepatriated foreign profits reached $2.4 trillion in 2015, allowing companies to avoid up to $695 billion in taxes. Should any one of these companies ever need any of the money being held overseas, rather than repatriating the funds (and paying taxes), the company simply borrows the money from its subsidiary as a short-term loan (and pays no taxes). HP has used this strategy to borrow funds from subsidiaries in Belgium and the Cayman Islands.

QUESTIONS

1. Summarize the positions of both critics and supporters of these tax strategies.

2. Supporters and critics of these tax strategies agree that corporations are making use of legal financial options that are available to them under current tax law. However, does that equate to ethical business conduct? Why or why not?

3. The French chairman and CEO of Louis Vuitton, Bernard Arnault, announced that he would leave France for Belgium, allegedly to avoid the new highest-income tax rate of 75 percent. Is that any different from what corporations are doing? Why or why not?

4. Is there a potential solution that would represent a more ethical business approach to the payment of corporate taxes? Explain your answer.