Outsourcing US intellectual property to avoid paying taxes

NY Times editorial: American Ingenuity, Irish Residence

The newest expatriates aren't people. They're ideas, and we can't afford to watch them go. The Wall Street Journal reported last week that Microsoft had trimmed more than $500 million from its annual tax bill by putting a small subsidiary in Dublin in charge of $16 billion in assets. The game is simple: a company sends intellectual property to a tax-haven country like Ireland and keeps the tax difference on the money it earns.

The world is used to seeing manufacturing businesses move to countries where labor is cheaper, like Mexico or China. But profits from software created and designed at Microsoft's headquarters, in Redmond, Wash., should be taxed in America, not Ireland. Unfortunately, outsourcing is extending itself to taxes, in large part because the United States Congress has given businesses the loopholes to do it. That means that America's greatest asset - its intellectual property - could be sent offshore to reduce corporate tax burdens.

Microsoft's subsidiary is raking in the dough from licensing fees for copyrighted software, much of it originating in the United States. And what is the subsidiary's legal address? A Dublin law firm that advertises its smarts in turning Ireland into a tax shelter.

Microsoft's response is that it pays all taxes required by law. Worldwide, that came to more than $4 billion for the company's last fiscal year. Tax avoidance is a gray area, and exploiting the cracks in the system isn't a crime. But the resulting damage, in terms of bigger budget deficits at home, sure makes it feel as if something is wrong.

Microsoft isn't alone. A host of American tech companies have set up shop overseas, both for business and tax purposes. And as for the destinations, they're more than just Ireland; Singapore, for example, also attracts businesses with low corporate rates. But one of Ireland's advantages for tax dodging over, say, Bermuda, is its plausibility as a home for genuine investment because it is a place where foreign corporations have built and staffed offices and plants. Microsoft has 1,100 full-time employees in Ireland, for example, compared with 40,000 in the United States.

That means, in a particularly hard-to-swallow twist, that the tax havens encourage companies to send increasingly large chunks of their businesses offshore as well. By pushing more of their jobs and investments overseas, the companies make the tax havens seem more legitimate.

American companies' successful hunt for low-tax opportunities overseas has been used as an argument for slashing corporate taxes at home. Maybe we should close the loopholes first, and provide the Treasury Department with the resources it needs to enforce existing law. After that, it's clear that meaningful corporate tax reform is needed. For an economy increasingly based on products with little physical substance - drug recipes, images, sounds, strings of ones and zeroes - it wouldn't take long to lose it all.