Starbucks vs the people. Prof. dr Hans van den Hurk

Transcription

1 Starbucks vs the people Prof. dr Hans van den Hurk 1

2 The world is changing... 2

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4 Where to start? International tax planning will be influenced by: OECD-modeltreaties and softlaw UN-modeltreaty Emerging countries and upcoming economies BRIC Taiwan etc Ghana EU NGO s 4

5 What role play EU MS s in this? Best way to illustrate this is with an example In this situation: Google Why Google? Well: Use of Ireland Use of Netherlands Thus.. Standard tax planning and challenged by NGO s What is wrong with it? Let us see... 5

6 Google Some facts: Annual revenues (2011): $ (2012: $ ) Incorporated 1998 in California Effective Tax Rate: 2,4% Regular US Tax Rate: 35% To be discussed: US legal framework in a nutshell Google s Tax Planning Toolkit Step 1: IP shifting Step 2: The Double Irish Step 3: The Dutch Sandwich Step 4: H(e)avely Bermuda 6

7 To be created US Bermuda Ireland Netherlands EMEA subsidiaries GIL IP income 7

8 Few words on US system Principle one Worldwide Taxation for companies incorporated in the US Credit system Overseas profits are taxed when brought to the US Principle two Avoidance of Double Taxation, two systems (Deduct foreign taxes from their domestic US taxable base) Ordinary foreign tax credit Most companies use the latter No foreign tax credit for Voluntary taxes Companies have to exhaust remedies to reduce foreign income taxes Or companies have to have an at least should opinion from a respected firm 8

9 US Legal Framework (2) Principle three Anti-avoidance legislation Subpart F Regulations Passive Income Income derived from inter-company dealings Intention Principle four protect US Tax Base by inhibiting artificial shifting abroad of profits and the subsequent use of tax havens Transfer Pricing According to OECD criteria at arms length 9

10 Google s Tax Planning Toolkit Step 1: IP shifting Google did foresee a raise in value of the IP IP was shifted oversea based on a Cost Sharing Agreement ( FTR) CSA: agreement that parties share costs to develop IP in proportion to their shares of reasonable exploitation of the interest in the IP Allocation of costs should be at arms length In case of existing IP to be brought in the CSA, other participants are required to effect a so-called buy in payment at arms length If IRS agrees there will be no TP adjustments 10

11 How did Google do this? Google creates in 2003 subsidiary in Ireland, called Ireland Holdings Through CSA the latter obtained rights to Google s IP for EMEA Since Google owned pre-existing IP Ireland Holding effected a buy-in payment to comply with the US rules In 2006 Google created legal certainty by obtaining an APA It is expected that the buy-in payment was at arms length EMEA revenues are now attributable to Ireland Holdings 11

12 Step 2: The Double Irish Google Ireland Limited Establishment of second Irish subsidiary in 2003 Functions of GIL: Generation of passive income through collection of royalties But mostly coordination of activities in EMEA Google Ireland Limited (GIL) was created by a Dutch intermediary company Ireland Holdings (IH) licenses IP to GIL via Netherlands EMEA countries pay fees to GIL Deductible in these countries Margin of fees taxable in Ireland at 12.5% Press: 88% of Google s overseas profits flow to GIL But are these profits taxable in GIL? 12

13 Google checked the box? Assumingly they did... Irish Ltd is not on per se list Subsidiary (GIL) is clearly a separate legal entity GIL can therefore choose to be treated as disregarded entity What does it mean? IH could be caught by Subpart F legislation IH merely receives royalties and has no active income Under Subpart F IH would be qualified as follows: Wholly owned subsidiary of Google US and only generates passive income This triggers US CFC legislation and profits would be deemed to be distributed to the US By checking the Box GIL becomes division of IH for US tax purposes Since GIL is predominantly active its business income will be attributed to IH There it will outweigh the passive character of IH s income 13

14 Creation of a Hybrid IH s effective place of management (mind and management) is in Bermuda, although almost 2000 people work in HQ in Dublin Tax Rate 0% Irish tax rate as said 12.5% So any IP income that is received via the GIL/EMEA will be taxed at 0% No Permanent Establishment risk since most of the more than 2000 employees work for GIL Hybrid classification US still sees IH as a Irish corporation Ireland looks at IH as a Bermuda corporation One problem: No tax treaty between Ireland an Bermuda, therefore WHT 20% How to solve this?... Use a Dutch intermediary 14

15 Using the Netherlands Dutch Sandwich looks as follows: US Bermuda Ireland Netherlands EMEA subsidiaries GIL IP income 15

16 How does the condensed P&L look? Suppose income 1000 GIL receives 1000 Suppose 2% remains in Ireland 20 -/- Netherlands receives 980 Due to Dutch tax ruling 0.2% is payable /- To be distributed to Bermuda Effective tax rate in chain: 21,96/1000 = 2.2% In reality it is 2.4% whereby only 88% flows through GIL How does the Dutch sandwich work? 16

17 Dutch Sandwich Dutch BV is called Holding BV Private limited liability company The box is checked From US tax perspective it does not exist Other countries see it as a separate legal entity Holding BV acts as conduit company Holding BV has an exploitation license from IH for IP Holding BV sublicenses this IP to GIL In the Netherlands a small taxable spread will be reported, provided that Substance Real risk incurred Company s equity is 50% of average anticipated yearly gross royalty income Or 2M, whatever criterion has been met first Since Annual revenues: $ Billion, the latter criterion is easily met 17

18 Tax aspects Ireland-Netherlands Yes, there is a treaty Art.10, par.1 Treaty between Ireland and the Netherlands And the Interest & Royalty directive No withholding tax between Ireland and the Netherlands with respect to Royalty payments Beneficial owner versus Ultimate Beneficial Owner And back to the IH? Netherlands do not levy withholding taxes on outbound royalty payments So net royalty s arrive tax free in Bermuda And the Dutch spread? This is taxed in the Netherlands Dutch position contributes in total 1.5 Billion to the Dutch Economy But this taxation can be credited in the US 18

19 And Bermuda? Bermuda s directors are two attorney s at a Hamilton based law firm It is not fully clear but it is expected that Google Bermuda is nothing more than a letter box company Dividends have to remain in Bermuda in order to avoid US Taxation In order to optimize IH was transferred from LLC to Unlimited Liability Company in order to prevent publication of IH accounts IH is still checkable so this step does not harm the structure 19

20 Uncork the champagne? Well, better wait a while... Locked Out Profits Repatriation leads to US CIT This is the main problem of the structure It is expected that companies like Google, Pfizer, Apple, Cisco etc. have $1.375 trillion accumulated profits in overseas tax havens $ ! Lobbying for Repatriation Tax Holiday First time in % tax rate provided that corporations would invest this money in job creation, R&D etc. In the US However many loopholes where found to not having to do so Can US challenge this behavior? Not sure: multinationals spend alone $3.5Billion on lobbying!!! 20

21 And Google shareholders? Two ways to get a dividend First alternative: selling their shares and realizing the dividends via a capital gain Second alternative Google Holding US acquires a lone to finance the buy back of shares Possibly (I am not sure in this) from the Bermuda company Interest deductible in US Taxed at 0% in Bermuda See: 21

22 Is Google to blame? Tax strategy is commonly used Other companies take comparable approaches Questionable is probably whether Bermuda is a letterbox If so, the dual resident status should be ignored Ireland has to fully tax IH in that situation A little bit of hypocrisy is the request for a tax repatriation holiday 22

23 What do other companies use? Other companies use either comparable structures or structures based on the following elements: Profit participating loans Tax treaties Substance Withholding taxes Participation Exemption Beneficial tax treatment for certain areas Etc. Swiss holding regime Luxembourg ruling regime Hungary But are all of these elements responsible for tax avoidance? 23

24 Bad boys... And governments? For example the UK... On the one hand: George Osborne: In 2014 the UK will have lowest CIT rate for any Western economy! Several new tax arrangements which will increase the position of the UK as the country to invest in Innovation tax breaks, etc. On the other hand: Thousands of new hires to become tax inspectors See his justification in Wall Street Journal, April 13, 2013 Another example from yesterday s papers France s EDF, state owned for 84% uses a Dutch financial holding As do many other French companies And the Netherlands? Discussion going on is merely about letterbox companies And we lease our trains from an Irish company 24

25 Conclusion... Deadlock! 25

26 And now? Three main influences, OECD, UN and EU OECD OECD Report on Harmful Taxation OECD Harmful Tax Project 2004 Progress Report Several other reports like: Tackling Aggressive Tax Planning through Improved Transparency and Disclosure Corporate Loss Utilization through Aggressive Tax Planning Hybrid Mismatch Arrangements: Tax Policy and Compliance Issues Will OECD help solving tax competition? Probably not. Politically too complicated However in 2013:» Report Base Erosion and Profit Shifting» After Tax Hedging Recent report to G20: April 2013-OECD-SG-Report-to-G20-Heads-of-Governments» Part I, developments on exchange of information (Progress Report).» Part II is report by OECD on current work that is relevant to tackle offshore tax evasion and tax avoidance Decision G7, May 2013: G8, June

27 United Nations UN Main difference to OECD: more source state based Relevance of UN strongly underestimated See problems with BRIC Countries UN Model Treaty is more focused on the (developing) state» Sometimes due to lack of knowledge free interpretation by some states which will normally not lead to a more favorable position for companies Some countries go even beyond UN basis See e.g. TP-discussions with India Also coordinated initiatives for further development, one example: Resolution from March 20, 2013: Promoting transparency, participation and accountability» 27

28 European Union In 1997 the first Code of Conduct Group was established From a legal point of view the so-called Primarolo-report is softlaw However the results have been widely accepted See: New list of Code of Conduct Group (June 2012) List contains: Rollback measures Standstill Discussion UK: Guernsey, Gibraltar» Progress has been made recently Anti-Abuse measures Profit Participating Loans Mismatches Hybrids and PE s Beneficial treatment of Interest, Royalty s etc. Some specifics regarding third countries like Liechtenstein 28

29 New EU Tax developments Communication December 2012: An Action Plan to strengthen the fight against tax fraud and tax evasion Will it be successful? After the result of the 1999 report it is expected that it will be partially successful Commissioner Algirdas Semeta is pushing this Action Plan Commission Decision of April 23, 2013 A Platform for Tax Good Governance, Aggressive Tax Planning and Double Taxation will be created Support of MS, NGO s and Industry is being requested May 22, 2013: Country leaders have discussed tax evasion in EU Van Rompuy: a trillion euro's is lost every year by tax planning 29

30 Once ignored, now important NGO s Action Aid Christian Aid Robinhoodtaxes.org Tax Justice Network War on Want UK Uncut You really think it has no impact on YOUR tax practice? Forget it, every tax director is concerned for Getting information in the press (Reputation) Not being able to deliver information requested by the people E.g. What did you pay in which country based on what profit? Country by country reporting with respect to taxes is what NGO s want 30

31 How will they impact Tax Planning? From blame to shame It is perhaps correct what you do but you shouldn t Tax Planning often based on legal concepts Profit allocation PE: functions, risks But that legal approach is not always strong See video called Vodafone Swiss Swizz NGO s expect from companies to behave as good tax paying citizens NGO s are also fighting against Governments which retain their competitive laws 31

32 Conclusion The world is changing Due to modern media the world turns smaller People use these media to impose change Governments seem to act passively Simply because they have their financial interest Companies retain their traditional tax planning schemes Since shareholders see tax as costs In the end the weakest position seems to be for the companies Corporate Social Responsibility influences Shareholders Value But the battle just begun! 32

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34 Want to be up to Some recent publications can be downloaded via: 34

35 Thank you! 35