Question

Orange is an cell phone manufacturer headquartered in the U.S., with a subsidiary located in Bermuda. Assume the U.S. has a 20% corporate tax rate and Bermuda has a 0% corporate tax rate. Orange has licensed all of its cell phone technology to the subsidiary. This past year, Orange made $10 million dollars in pre-tax profits in the U.S., and out of those profit also paid $4 million in licensing fees to its Bermuda subsidiary. How much LESS total corporate tax (in both countries) did Orange pay because it set up the tax haven subsidiary in Bermuda?

Answer 1

Orange saved tax on $ 4 million which was transfered to Bermuda as licensing fees.

Hence tax saved = Amount transfered * Tax rate

= 4000000*20%

=$800,000