* There’s much, much more to this Matt Levine piece in Bloomberg, so you should really read the whole thing. But this’ll do for now…
For instance, if you are a drug company, it costs you like a dollar to make a pill, and you sell it in the U.S. for $10,000. You might say, “well OK then I have $9,999 of net income in the U.S.,” but again you are being naive. The right answer is:
* Your U.S. subsidiary makes a pill for $1.
* Your U.S. subsidiary licenses the patent on that pill from your Bermuda subsidiary for $9,995.
* Your U.S. subsidiary sells the pill for $10,000.
* Your U.S. subsidiary has $4 of net income, which is taxable.
* Your Bermuda subsidiary has $9,995 of net income, which is not.
It’s more complicated than that, but that’s the general idea. If the parent company is a U.S. company, then eventually that Bermuda sub’s net income will be taxable in the U.S. anyway. But if the parent company is Canadian or Dutch or Swiss or whatever, then the Bermuda sub’s income will never be taxed [by the US].
Again, go read the whole thing.