“Take money from your right pocket and put it in your left pocket. Now you have yourself a solution.” – Anonymous
One of the reasons I went to Budapest earlier this year was to see if it was a suitable city to establish a Financial Samurai Inc. subsidiary. Before my trip, I had learned that Gawker Global (now owned by Univision) had set up a subsidiary in Hungary to significantly reduce its tax liability. As an owner of a much nicer and more empathetic media company to help people achieve financial freedom sooner, I had to do some first-hand research!
Now, in a fascinating exposé, Jeff John Robert from Fortune magazine highlights how Gawker Media was able to “legally” reduce its IRS tax bill by ~80%. Here’s what Gawker Global did.
1) Set up a subsidiary in Hungary, a lower tax country. Gawker Global’s effective tax rate in Hungary was 5% versus 34% in the US.
2) Get the Hungarian subsidiary to bill the US subsidiary in order to reduce the US subsidiary’s taxable income. Let’s say the US side generated $1,000 in revenue from an article. To avoid the 34% effective US tax rate, the Hungarian side would send $1,000 worth of invoices for editorial and design to the US side so that taxable revenue in the US was $0. The Hungarian side now had $1,000 in revenue from its services, but since it only had to pay a 5% effective tax, it saved 29%.
3) Decide where the overall Gawker Global revenue flows. Between 2010 – 2015, Gawker Global generated roughly $200M in revenue. According to Fortune’s Jeff John Robert, of the $200M, 55% were U.S. profits diverted to Hungary, and 25% were profits that never entered the U.S. and were recorded in Hungary. This seems shady, but my guess is this is legal because apparently the IRS hasn’t gone after them all these years.
To justify geographic revenue recognition, perhaps one of the US-based writers did all his writing for the year while visiting the Budapest office for a week. But given that a media company’s revenue is derived mostly from advertising, it seems logical that if the advertiser is based in the US, the revenue should be taxed in the US. But wait just a minute! What if the advertiser itself is a global company with offices in Hungary like Coca Cola? Ah, so wonderfully confusing and clever.
4) Have one subsidiary lend back money to another subsidiary. Gawker Hungary would lend back the money it made with interest, from Gawker US so that Gawker US wouldn’t pay any taxes on cash flow.
The key for all of this to work is to be the owner of all the subsidiaries so all the money flows to you. It’s like taking money from your right pocket and putting it in your left pocket!