1 / 41

‘Starbucks vs the people’

‘Starbucks vs the people’. Prof. dr Hans van den Hurk. The world is changing. https://www.youtube.com/watch?v=alcKsti_8QQ. First of all, some principles. How to deal with: Corporation versus Permanent Establishment Double taxation Capital Import Neutrality versus Capital Export Neutrality

livvy
Download Presentation

‘Starbucks vs the people’

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


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

  2. The world is changing....

  3. https://www.youtube.com/watch?v=alcKsti_8QQ

  4. First of all, some principles • How to deal with: • Corporation versus Permanent Establishment • Double taxation • Capital Import Neutrality versus Capital Export Neutrality • Seat of a corporation • Withholding Taxes • Beneficial Owner • Influence of tax treaties • Intragroup pricing • Tax competition • Patent boxes etc.

  5. 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

  6. What role play states 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....

  7. Google • 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

  8. To be created… US Bermuda Ireland Netherlands GIL IP income EMEA subsidiaries

  9. 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

  10. 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’

  11. 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

  12. 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

  13. 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?

  14. 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

  15. 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

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

  17. 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?

  18. 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

  19. 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’ • More and more countries take different view (Denmark) • 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 (in principle) be credited in the US

  20. 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

  21. 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 have spent alone more than $1Billion on lobbying!!!

  22. 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&

  23. 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’

  24. 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?

  25. 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 • US • The following 4 minute movie says it all: • http://www.youtube.com/watch?v=yN96cFnnguE

  26. Another example… • 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

  27. Conclusion.... Deadlock!

  28. And now? • Three main influences, OECD, UN and EU • OECD, in the beginning… • 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 this OECD help solving tax competition? • Probably not. Politically too complicated • However since 2012: • 2012……….. • Quite a start with ‘Base Erosion and Profit Shifting’ (January and July 2013) • ‘After Tax Hedging’ • Brilliant initiative, also for non-OECD countries

  29. The G’s….. • 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 • G20, St Petersburg • Statements Obama and Poetin

  30. United Nations • UN • Main difference to OECD: ‘more source state based’ • Relevance of UN strongly underestimated • See problems with BRICS 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. discussions with India, Brazil etc. • 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

  31. 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 • 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

  32. Other 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 Šemeta is pushing this Action Plan • Commission Decision of April 23, 2013 • A Platform for Tax Good Governance, Aggressive Tax Planning and Double Taxation is created • Participation of amongst others NGO’s • May 22, 2013: Country leaders have discussed tax evasion in EU • Van Rompuy: a trillion euro's is lost every year by tax planning

  33. And also….. • EU and OECD agree in developing a global standard in automatic exchange of information • See memo September 16th • http://www.eu2013.lt/en/news/pressreleases/european-union-and-oecd-agreed-to-foster-the-progress-in-developing-global-standard-of-automatic-exchange-of-tax-information

  34. Once ignored, now important • NGO’s • Action Aid • Christian Aid • Robinhoodtaxes.org • http://www.youtube.com/watch?v=qYtNwmXKIvM • 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

  35. 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

  36. What are the real problems? • Well, often the main problem is US tax system • In an ordinary tax credit system a rate of 35% kills all competitiveness • A bad system which is economically not defendable urges companies to go beyond this • So in a way a tax holiday is necessary • But what about the ‘arms length principle’? • Stems from the old colonial days • Adidas example clearly shows the shortcomings • Many states offend this principle or go easily beyond this

  37. Solutions for ALP • In a way there are many solutions • The vary between: • Old fashioned ALP • OECD’s prefered ALP • Prices are determined by real added value • Difficult with a.o. intangibles • Problem: how will this be determined? • Formulary Apportionment • A way to go around difficult discussions like OECD’s ALP approach • See Brazil and also India

  38. 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 tend to 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’ • More and more MNE’s report tax in their CSR though still less than 20% • But the battle just begun!

  39. Contact details Hans van den Hurk @Hansvandenhurk Hans.vandenhurk@maastrichtuniversity.nl

  40. Thank you!

More Related