Smart IT companies pay very low taxes…. a location-based competitive advantage

“Two thousand U.S. companies paid a median effective cash rate of 28.3 percent in federal, state and foreign income taxes in a 2005 study by academics at the University of Michigan and the University of North Carolina. The combined national-local statutory rate is 34.4 percent in France, 30.2 percent in Germany and 39.5 percent in Japan, according to the Paris-based Organization for Economic Cooperation and Development. “

Within this picture, that shows how IT companies have very different treatment depending on where they are based, there are noteworthy exceptions – the text above is taken from a Bloomberg article where the big news is that Google paid taxes at a rate of (only!) 2.4%, by leveraging the “Double Irish” and “ Double Dutch” strategies.

Nothing new there, Microsoft and IBM have been doing some of the same for a while.
The scandal, if anything, is that this time we’re talking about the largest amount of tax avoidance ever, thanks to the very high contribution margin that Google enjoys in high tax countries.

Now, I am not advocating that software companies do all the same, but it is inevitable to note that it is only big corporations that can afford the costs to implement these strategies.

What are then the options for smaller companies, trying to be smart as they can afford to? How can you be smart in order to finance your growth plans?

Given the growing opportunities that the cloud, online, telework offer, here my grain of salt: at least improve your current tax baseline, and assess the opportunities of opening an office, a subsidiary in a country that has lower taxes.
Look also for specific incentives, tax breaks that may be available for IT investments.
Consider this together with other possible advantages connected to locations
Understand the cost and availability of capital in these countries, how the financial community is looking at IT now;
Evaluate the opportunity of running your global operations or online services from this location, while development, sales and other teams can still be elsewhere;
Understand the richness of the local ecosystem, how easy is to find and hire skilled people in your segment, how vibrant is the tech culture;
Look at the growth dynamics of each country IT spending.

Hope this makes sense – but please check it also with some tax specialist!
Now, whatever you do you will not avoid to pay some taxes, but it will help you challenge the fact that you have to be in a high tax situation, and limit your growth because of this. Yup, location becomes a competitive advantage.

As per all this, I believe Seattle and Washington are a great destination in the US, both because of current taxes and incentives, and because of the other opportunities – specifically in games, mobile, biotech, cloud computing….

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