Corporate  taxation would be straightforward in a closed economy but gets more complicated as soon as companies operate in different countries.  A U.S. person pays taxes on all her income, wherever it comes from.  Because the corporate tax is essentially a prepayment, so too should U.S.-­‐owned corporations pay taxes on all their profits, whether they originate from the U.S. or abroad.  A problem, then, arises: there is a risk of two countries taxing the same profits. Concerned with such double taxation, in the 1920s the League of Nations asked four economists to think about how best to avoid it (Bruins et al., 1923).
 
They came up with three principles, which since then have been the pillars of international taxation.
  
First, the corporate tax is to be paid to the “source” country’s government.  If a U.S. person owns a Brazilian coffee producer – call it Coffee Rio then Brazil ought to levy the  tax.

First, the choice of thousands of bilateral treaties over a multilateral agreement has created a web of inconsistent rules.  By carefully choosing  the location of their affiliates – what is known as “treaty shopping” – multinationals can exploit these inconsistencies to avoid taxes.  

A prime example is given by Google’s “double Irish Dutch sandwich” strategy – so named because it involves two Irish affiliates and a Dutch shell company squeezed in between. The first Irish affiliate, “Ireland Limited”, licenses Google’s intangible capital – its search and advertisement technologies – to all Google affiliates in Europe, the Middle East and Africa. (A similar strategy, with Singapore in lieu of Ireland, is used for Asia).  Google France, for instance, pays royalties to “Ireland limited” in order to have the right to use the firm’s technologies.  At this stage, the bulk of Google’s non-­‐U.S. profits end up being taxable in Ireland only, where the corporate tax is 12.5%.
 
But 12.5% is still a lot.  The next stage involves sending the profits to Bermuda, where the tax rate is a modest 0%.  To that end, Google has created a second affiliate, “Google Holdings”.  Although it is incorporated in Ireland, for Irish tax purposes “Holdings” is a resident of Bermuda (where its mind and management are supposedly located).  Because Ireland withholds a tax on royalty payments to Bermuda, Google cannot directly send the profits collected by its first Irish affiliate to the Irish/Bermuda hybrid.  A detour by the Netherlands is necessary.  “Ireland Limited” pays royalties to a Dutch shell company – a tax-­‐free payment because Ireland and the Netherlands are both part of the European Union – and the Dutch shell pays back everything to the Irish/Bermuda holding – tax-­‐free again because to the Dutch authorities the holding is Irish, not Bermudian.