1 ‘Starbucks vs the people’ Prof. dr Hans van den Hurk
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‘Starbucks vs the people’
Prof. dr Hans van den Hurk
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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
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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....
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• Some facts: – Annual revenues (2011): $ 37.905.000.000
• (2012: $ 50.170.000.000)
– 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
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To be created…
GIL
Netherlands
Ireland
Bermuda
US
IP income
EMEA subsidiaries
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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
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US Legal Framework (2)
• Principle three – Anti-avoidance legislation
• Subpart F Regulations – Passive Income
– Income derived from inter-company dealings
• Intention
– protect US Tax Base by inhibiting artificial shifting abroad of profits and the subsequent use of tax havens
• Principle four
– Transfer Pricing • According to OECD criteria ‘at arms length’
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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 (§1.482-7 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
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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
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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?
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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
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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
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Using the Netherlands
• Dutch Sandwich looks as follows:
GIL
Netherlands
Ireland
Bermuda
US
IP income
EMEA subsidiaries
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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 1.96
-/- ____
To be distributed to Bermuda 978.04
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?
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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: $ 37.905 Billion, the latter criterion is easily met
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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
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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
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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
– $ 1.375.000.000.000!
– Lobbying for Repatriation Tax Holiday
• First time in 2004
– 5.25% 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!!!
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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: http:/www.nytimes.com/2013/05/03/business/how-apple-and-other-corporations-
move-profit-to-avoid-taxes.html?_/r=1&
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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’
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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 • Swiss holding regime
• Luxembourg ruling regime
• Hungary
– Etc.
• But are all of these elements responsible for tax avoidance?
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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
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Conclusion.... Deadlock!
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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: http://www.bbc.co.uk/news/business-22476233
• G8, June 2013
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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
» http://www.un.org/ga/search/view_doc.asp?symbol=A/RES/67/218&Lang=E
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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: http://ec.europa.eu/taxation_customs/resources/documents/primarolo_en.pdf
• 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
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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
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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
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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’ http://www.youtube.com/watch?v=XAenlYsV7A4
• NGO’s expect from companies to behave as ‘good tax paying citizens’
• NGO’s are also fighting against Governments which retain their competitive laws
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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!
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Want to be ‘up to date’?
@Hansvandenhurk [email protected] [email protected]
http://www.deloitte.com/view/nl_NL/nl/diensten/belastingadvies/fiscale-informatie/fiscale-expertisegroep/hans-vanden-hurk/
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Thank you!