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The technique has evolved a little since the 1930s but the principle remains the same. While transfer prices are legitimate in many cases, it is not uncommon for subsidiaries of the same multinational to overcharge their services to other group entities in order to reduce overall taxation.For the prices of transfers on material goods, this technique sometimes leads to fixing prices in an aberrant way. If you own a business that operates in the UK and need advice on tax issues, get in touch with HMRC agents.

Thus in 2002, a study by two American economists, Simon Pak and John Zdanowicz, highlights some examples of particularly bizarre transfer prices such as smoke detectors from Germany sold for nearly $ 3,500 per unit in the United States and American missiles sold to Israel for $ 52 a copy. Each time, these products passed through tax havens. These examples may seem grotesque today because they are easily detectable, but what about when it concerns intangible services for which the “fair” market price is very hard to assess? For the estimate tax return this is important.

The Google trick: the Dutch sandwich and the Irish double

Google understood the transfer pricing trick perfectly and applied it to patents and intellectual property. In October 2010, a Bloomberg investigation uncovered a technique that allowed Google to pay only 2.4% in income tax outside the United States. For Europe, the Middle East and Africa, it is the company Google Ireland Ltd which manages the activities of the American giant. Almost 88% of the multinational’s turnover outside the United States is thus concentrated in this company because each European subsidiary depends on this parent company. However, in Ireland, corporate tax is 12.5%, against 33% at the time for France. But this is only the first step.

  • To further reduce its taxes, Google has gone much further because if Google Ireland Ltd manages the group’s activities in the region, it does not hold the intellectual property rights for the exploitation of the patents and the trademark. These are controlled by Google Ireland Holding s, a Bermuda-based company. Google Ireland Ltd must therefore pay the latter royalties which, as if by a miracle, correspond more or less to the profits made in Europe. This allows Google to avoid paying corporate tax in Ireland. This is called the “Irish double”.

The problem is that these fees are normally taxed in Ireland

  • Except in one case, when they are transferred to certain countries of the European Union. Google has therefore found the solution by forwarding these royalties through the Netherlands. Google therefore pays virtually no tax in Ireland on these famous royalties. But why go through the Netherlands in particular? Because the country exempts the profits which leave the borders to go to Bermuda. And Google Netherlands Holdings BV pays nearly 99.8% of the amounts collected to Google Ireland Holdings in Bermuda. This is called the “Dutch sandwich” to transfer funds between two other companies.


Arbitration, at the heart of the news with the affair, is sometimes also used by companies to optimize their taxation. As tax specialist in commercial law, explained to Challenges, a USA company can, for example, arrange with another company located in a tax haven to invent a commercial dispute between the two groups. For example on a question of infringement of patents, image rights, etc. An arbitration is made in Paris and the USAcompany loses. For example, it owes 40 million euros to the offshore company. An amount that it can deduct from its profits to reduce the amount of its taxes.