Interesting article in the Weekend Wall Street Journal:  Making Sense of Big Disparity in Tax Rates for Two Rivals, by Herb Greenberg:

Consider this a tale of two companies: Network Appliance and EMC, which compete against one another in the network storage business. While competing in the same space, the similarities end on their income statements, where Network Appliance has a tax rate of 18% compared with 27% for EMC. Network Appliance’s tax rate is based on earnings that don’t include the hit from options-related charges, which its surveys say is preferred by its investors. EMC, by contrast, guides more conservatively, including options expenses, which waters down reported results. Most analysts who cover the company prefer it that way, EMC says….

But the tax rate and the way investors view Network Appliance’s earnings tell another story — one that its investors might not want to dismiss out of hand. While Network Appliance is hardly the only company with an ultra-low tax rate — Hewlett-Packard and Corning are two standouts on that score — rarely do companies in the same industry have such vastly different tax rates. And the gulch between Network Appliance and EMC has been getting wider in recent years. "Based upon the current laws that exist," says Michael Gallant, EMC’s senior director of public relations, "it leaves us mystified that any U.S. multinational public company with that type of international revenue mix could have a tax rate below 20%."

Neither, it would appear, does the Internal Revenue Service, which has undertaken an audit of Network Appliance.

The company first disclosed the audit in its July annual filing with the Securities and Exchange Commission. While not giving a specific focus of the review, the company (in the very next breath) explained that some of its intellectual property is owned by its foreign subsidiaries, resulting in cross-border payments.

These complicated deals, which J.P. Morgan Chase analyst Bill Shope calls "tax havens," are widely used by tech and drug companies. EMC itself has used these transactions, which are generally considered legal. But that’s not the reason for the low tax rate, according to Andy Kryder, Network Appliance’s vice president of tax and legal. He says the company has done only one of these cross-border deals since its tax rate started falling in 2001. The bigger reason for the decline, he says, is the company’s favorable tax rate in the Netherlands, through which 45% to 50% of its business flows. "We negotiated the equivalent of a 2% to 3% tax rate with them," he says. That caveat, he added, is that the company has to keep any money earned offshore out of the U.S. Still, can’t the IRS challenge such an obvious tax dodge? "The IRS," Mr. Kryder says, "cannot touch the Dutch."