Here's one from personal experience.
I was the financial analyst for Sir Stelios Haji-Ioannou's personal holding company, the EasyGroup.
EasyGroup owns a big chunk of EasyJet, EasyHotel, EasyGym, EasyPizza (no rly)... the list goes on. Basically, if it's easy and orange, EasyGroup owns it.
EasyGroup is a Cayman Islands registered company. In the Cayman Islands, there is no corporate tax.
EasyJet plc is a London based company.
Every year, EasyJet is required to pay EasyGroup a certain percentage of its revenue. This is paid to the EasyGroup as a "brand licensing fee."
In layman's terms, this means that EasyGroup owns the brand "Easy", and EasyJet is simply renting the brand FROM EasyGroup.
Accounting-wise, this means that EasyJet has an expense called "brand royalties expense." A company deducts its expenses before paying taxes, so this income comes out of EasyJet from pre-tax money and is never taxed.
This income is received by the EasyGroup, as an accounting line of "brand royalties income."
However, as I mentioned before, in the Cayman Islands, there is no corporate tax. So this income engenders a 0% income tax.
All well and good, now the money is sitting in a bank account owned by a Cayman Islands company.
The second part of the step is getting the money from the EasyGroup to Sir Stelios.
Stelios himself lives in Monaco. Monaco is a country that has a 0% personal income tax.
So, EasyGroup pays Stelios this money as a dividend. The money now transfers ownership from EasyGroup to Stelios.
Normally, this would be when someone would pay personal income tax on their income, but because Monaco has no personal income tax, again this transfer of money experiences no taxes.
Thus, through this method, Sir Stelios earned hundreds of millions of quid while I worked for him, and paid less in taxes than I did as his analyst earning 40k EUR per year. (I had to pay for my caisse publique, UEI, and French pension/social security).
Are we having fun yet?
To keep it really simple:
Lets say I own a large company in the US called XYZ Records America which records and sells music albums online.
You buy an album from me online for $10 (+state taxes which come out of your pocket, not mine). Lets assume that on average it costs me $0.50/album to record and produce the album, $0.50/album to maintain the servers and site, and $1/album in royalties to the artist.
For each album, I get $10 in revenue, and have $2 of expenses, for $8 of profit.
Corporate income tax is only paid on the profit my company makes, so I pay the tax rate on $8. Lets assume it's 25%, which means I'll have to pay $2 in tax. Now my net profit is only $6.
As a corporation, my primary goal is to increase profits. More profits = more money for me, more expansion for the company, more jobs or better pay for my employees, more charitable donations, etc. No matter what my philosophy is, it's almost always driven by more profits.
* $0.50/album goes to recording. Maybe I can negotiate this down, but that means paying my workers less and that wont make them happy.
* $0.50/album goes to server management. Maybe I can outsource my servers to Asia for a better rate but at a customer service loss.
* $1.00/album to the artist. Maybe I can skim them for more next album, but they could always sign with someone else.
* I could also sell the album for more, but then that could hurt sales, and the artist would want more.
* $2.00/album is taxed. It's already the biggest factor in my profits, and if I were to shave costs elsewhere, this would go up.
It's obvious in this example that the most effective way to increase profits is to pay less tax.
So what do I do? I send my accountants on a quest to find an answer, and they come back to me with the information that Ireland's corporate tax is only 10% instead of the 25% I pay here. So what do I do? Well I could move the company there, but there's a lot of assets in the US. I don't want to relocate the studios, servers, etc. I'll lose business if I do that.
Instead, lets just found XYZ Records Ireland. I'll structure my brand so that they're the "Parent Company" of XYZ Records America.
All of the licenses XYZ Records America owns, I'll "sell" to them for $0.01 each.
When I record a new album in the U.S. I can immediately sell the rights to XYZ Ireland for $0.01.
Now I still want to *sell* the albums in the US to the same customers. So when you go to my online store and buy a record from XYZ America, I'll sell it to you for $10 just the same. You won't see a difference.
When I do that though, XYZ America will account for:
* $0.50/album towards recording - this covers the operating expenses for producing the album.
* $0.50/album towards server management - this keeps the site up and running
* $1.00/album royalties to the artist
* and lastly $8.00 in licensing fees paid to XYZ Ireland.
My revenue was $10, my total expenses were $10, "damn, the company didn't make any money". No profits to report, and 25% tax on $0 is $0 to pay in tax.
I end up paying no tax in America.
I still have to report my income in Ireland though.
So per album sold in America, XYZ Ireland's books look like this:
* $8.00 revenue from licensing fees (Paid by XYZ America to XYZ Ireland).
* $0.05 in operating costs to keep XYZ Ireland operating (I have an office to pay rent in, and a few employees there)
XYZ Records Ireland reports $7.95 of profits per album. The tax on that is 10% of $7.95, so I'll pay $0.795 = $0.80.
Net profit is $7.15 per album.
By opening a parent company in Ireland, I can now earn $1.15 extra per album.
I pay $0 to the US government in taxes, and I pay less tax overall.
If I sell 1,000,000 albums every year, that's $2,000,000 that the US Government no longer receives from me, and it's $1,150,000 of extra profits for the company.
My favorite is the ridiculous license fee scheme.
Globocorp Inc is in the USA, where it does all its business and makes all its money. But Globocorp doesn't want to pay taxes. So Globocorp Inc founds Globocorp LLC in Ireland or a similar tax haven. Globocorp Inc sells all of its trademarks to Globocorp LLC for $1. Then Globocorp LLC licenses those trademarks back to Globocorp Inc for however much profit Globocorp Inc makes every year.
Now Globocorp Inc can write off 100% of its profit as a business expense. Booyah, no taxes!
Here's a great one
As a result of this loophole, a company can save thousands of dollars by
Building 2 seats.
Attaching them to the vehicle.
Shipping it to America.
Removing the seats.
Throwing the seats *in the garbage*
This whole process is thousands of dollars cheaper than
Building zero seats.
Shipping to America
Because of the tax loophole. Click and read
Most loopholes occur during international transactions. When you're dealing with the laws of dozens of countries it's easy to find an obscure scenario where you pay less taxes than you otherwise would need to. This is extremely common in video game sales, where up to 50% of your revenue may come from digital goods. Digital sales are 'new' when it comes to tax laws and they don't handle them very well.
Many companies have a tax shelter based in the Netherlands. The company based in the Netherlands 'owns' the IP for a specific video game.
When you buy a video game in the US or say France, you pay money to a company in that country. That company pays royalties to the company in the Netherlands that owns the IP. So they get to write off that amount as a business expense and pay less France/US tax.
Then, you have the Netherlands based company which made all the profit from the smaller international offices. US law, for example, says they should pay incomes taxes to the country that earned the income, Netherlands law says you should pay taxes to the country it originated from.
As a result, you pay no one taxes. Since you aren't paying income tax on up to half of your revenue, you pay less tax overall as a business.
I'm Australian so I'll use an Australian example but I imagine it's prevalent everywhere. Foreign or even Aus owned companies (mining companies are bad for this) will have their overseas branches lend money for projects etc to their Australian operations at ridiculous interest rates far above market rates so it looks like the local arm isn't making any money and therefore isn't taxed as much.
The other one mining companies use are "marketing hubs". This means the Australian operations of BHP or Rio Tinto for example will sell their commodity to a Singaporean or Hong Kong trading house (owned by the same company) at a discount rate then they will sell the product to the end customer. Same deal as before in that the transaction by the local operation is less than market value for the goods so less tax is paid.
International tax lawyer here--
This topic is a bit of a sore subject with me, as it is FAR less prevalent than people like to believe. Many of the so called 'planning techniques' that have been listed have been shut down. More on that in a bit.
The potential for abuse comes in large part from arbitraging the two major types of tax systems--worldwide and territorial. Territorial means that the local country taxes the taxpayer on monies earned in that country--so a Mauritius company generally wouldn't tax you on income the Mauritius company earns in England. Worldwide systems (like the US), however, tax you on 100% of your worldwide income.
So if the Mauritius company has 100 income in the US, and 100 income in Mauritius, and a 15% corporate tax rate, it would be paying $15 on its Mauritius income, and 0 on it's US income for a total of 15/200 = 7.5% tax. (Please keep in mind, this is HUGELY simplified right now--I'll complicate it in a bit.)
Compare to the US. The US company might have 100 in Mauritius and 100 in the US, and it would pay 35% of 200 = $70 = 35%.
If there were local taxes applied (lots of rules around this, including treaties, local law, etc.), the numbers change. The US would likely apply 35% on the Mauritius income, so the Mauritius company would actually be paying 35% of 100 US income and 15% of its Mauritius income for a total of 50/200 or 25%.
Obviously, the US company can't be competitive with those kinds of rates, so the US government actually allows a deferral of tax even though it has a worldwide system. If the money isn't distributed back to the US (under the assumption that it is reinvested in Mauritius to build additional wealth), the US won't tax it. Don't worry, though--there are a lot of anti-abuse regulations here (the concept of controlled foreign corporations, subpart F income, passive foreign investment companies, immediate income for excessive cash/cash equivalent build ups so that companies don't hoard cash overseas to avoid tax, etc.).
Bottom line, you can shift income using a number of different methods, and you shift it to where the tax rates are lowest. That's just good business practice. People whine about corporations paying their 'fair share' as if that was a stick in the sand. If foreign corporations have a super low foreign tax rate (e.g. what about the 20% rate in the UK?) then how are US corporations with a WORLDWIDE 35% rate supposed to compete on similar products? If the US government starts forcing all companies to pay 35% on their worldwide income with no deferral, and no ability to shift things around, any foreign corporation would be able to beat them out of the market--you can't beat a 15% lower cost easily. If we tax our corporations out of business, we (a) have nothing to tax, and (b) no where to work to earn a living.
Smart US corporations use every trick in the book to minimize (NOT AVOID) their taxes. They have to in order to get their effective tax rate down around to the same worldwide level that foreign corporations routinely see. However, for every 'trick' you see, there is generally a countervailing anti-abuse regime to prevent people from abusing it wholesale. For instance:
USCo owns Cayman Co. US Co makes a widget for $50, sells it to Cayman Co. for $50, and Cayman Co. sells to client for $200. That would leave $150 in the Cayman Islands for a 0% rate. Transfer pricing regulations require a fair share of profit amongst related parties be given at each level, so this no longer works. (There are also rules on manufacturing that would also disallow this scenario.) Transfer pricing impacts the profit percentage, intercompany loans etc. Basically any transaction between related parties have to be set at a rate a reasonable 3rd party might accept.
Most treaties now contain a Limitation of Benefits clause that disallow use of the treaty in certain abusive scenarios.
The US only allows deferral of active income, so you can't just shift all of your profits overseas and leave them to avoid US tax. (Subpart F income, passive foreign investment company rules)
BEPS (base erosion and profit shifting) rules are being promulgated worldwide after the OECD recommended them. These rules target financing structure where the Cayman company might 'lend' $1B to the US, and the US pays 'interest' (e.g. sucks the profit out of the US). These are a recent change, and there are a TON of countries putting these new rules into effect (like 30+ of the biggest countries, and more following).
Local rules tax income locally before it goes to the parent corporation. (e.g. UK taxes UK income before the income goes up to the foreign parent)
Many jurisdictions have withholding on payments leaving the country.
There are also indirect taxes that can impact the profits of companies (taxes on gross income, taxes on gross assets, value-added tax, sales tax)
I won't say that there aren't abuses, but the abuses are becoming much harder to find, and are constantly under attack. When you see an article claiming 'abuse,' please keep in mind that you are (at best) getting about 30% of the facts, and most of the authors are being sensationalist to spur readership. They don't care about reputation or honesty, so much as they do about creating a furor--usually over nothing.
I'm happy to answer questions if you guys are bored.