How Yahoo Can Lighten Its Tax Load: Be More Like Apple and Google

Economist Ludwig von Mises once said that capitalism breathes through tax loopholes. Loopholes get a bad rap because they are perceived as “unfair.” But loopholes are the natural outcome of a political system controlled by the compromise of hundreds of politicians in a single room that have to agree and pass something. It is never a clean, loophole-free bill. Perhaps what is more unfair is the fact that a group of people who contribute nothing to a business can take away that business’s income at will just by agreeing to it through some loophole-ridden compromise.

Yahoo! Inc. (NASDAQ: YHOO) has had serious problems with its tax bill lately, and it is trying to lighten the load by spinning off its remaining shares of Alibaba Group Holding Ltd. (NYSE: BABA). The IRS has not ruled on the move, leaving the door open to the possibility of it working, but still making shareholders substantially nervous because the decision is ultimately left up frivolous bureaucrats.

There is much more Yahoo can do to lighten its tax load. It just has to risk being branded as a tax-dodger and take the consequences, if there indeed are any negative ones at all.

Google Inc. (NASDAQ: GOOGL) and Apple Inc. (NASDAQ: AAPL), for example, pay much less in taxes by digging around for the loopholes through which capitalism breathes. Over the past three years, according to official filings, Yahoo has paid 37% in taxes. Google has paid only 18% and Apple 25% on paper, though much less in practice because both Google and Apple are known to exaggerate the amounts they pay in taxes by reporting what they expect to pay in the future, but then find more loopholes through which to avoid actually paying it. Apple’s effective tax rate is said to be as low as 3.7%.

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One very simple thing that Apple does to avoid taxes is incorporate U.S. income in Reno, Nev. Nevada does not have a state income tax, while California, where it is headquartered, does. Over the past three years, Apple has paid just over 1% in state income taxes. Yahoo has paid 4%.

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