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Starbucks vs the people
Starbucks vs the people
The world is changing
The world is changing
https://www
https://www
First of all, some principles
First of all, some principles
Where to start
Where to start
What role play states in this
What role play states in this
Google
Google
To be created
To be created
Few words on US system
Few words on US system
US Legal Framework (2)
US Legal Framework (2)
Googles Tax Planning Toolkit
Googles Tax Planning Toolkit
How did Google do this
How did Google do this
Step 2: The Double Irish
Step 2: The Double Irish
Google checked the box
Google checked the box
Creation of a Hybrid
Creation of a Hybrid
Using the Netherlands
Using the Netherlands
How does the condensed P&L look
How does the condensed P&L look
Dutch Sandwich
Dutch Sandwich
Tax aspects Ireland-Netherlands
Tax aspects Ireland-Netherlands
And Bermuda
And Bermuda
Uncork the champagne
Uncork the champagne
And Google shareholders
And Google shareholders
Is Google to blame
Is Google to blame
What do other companies use
What do other companies use
Bad boys
Bad boys
Another example
Another example
Conclusion
Conclusion
And now
And now
The Gs
The Gs
United Nations
United Nations
European Union
European Union
Other EU Tax developments
Other EU Tax developments
And also
And also
Once ignored, now important
Once ignored, now important
How will they impact Tax Planning
How will they impact Tax Planning
What are the real problems
What are the real problems
Solutions for ALP
Solutions for ALP
Conclusion
Conclusion
Starbucks vs the people
Starbucks vs the people
@Hansvandenhurk Hans
@Hansvandenhurk Hans
Thank you
Thank you

: Apple 2013. : Vormgeversassociatie / Sjoerd Kulsdom. : Apple 2013.ppt. zip-: 1130 .

Apple 2013

Apple 2013.ppt
1 Starbucks vs the people

Starbucks vs the people

Prof. dr Hans van den Hurk

2 The world is changing

The world is changing

...

3 https://www

https://www

youtube.com/watch?v=alcKsti_8QQ

4 First of all, some principles

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

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 NGOs

6 What role play states in this

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 NGOs What is wrong with it? Let us see....

7 Google

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 Googles 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

To be created

EMEA subsidiaries

US

IP income

Bermuda

Ireland

Netherlands

GIL

9 Few words on US system

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)

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 Googles Tax Planning Toolkit

Googles 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

How did Google do this

Google creates in 2003 subsidiary in Ireland, called Ireland Holdings Through CSA the latter obtained rights to Googles 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

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 Googles overseas profits flow to GIL But are these profits taxable in GIL?

14 Google checked the box

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 IHs income

15 Creation of a Hybrid

Creation of a Hybrid

IHs 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

Using the Netherlands

Dutch Sandwich looks as follows:

EMEA subsidiaries

US

IP income

Bermuda

Ireland

Netherlands

GIL

17 How does the condensed P&L look

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 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 Companys 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

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 royaltys 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

And Bermuda

Bermudas directors are two attorneys 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

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

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

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

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

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

Another example from yesterdays papers Frances 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

Conclusion

... Deadlock!

28 And now

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 Gs

The Gs

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

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

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 PEs Beneficial treatment of Interest, Royaltys etc. Some specifics regarding third countries like Liechtenstein

32 Other EU Tax developments

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 ?emeta 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 NGOs 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

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

Once ignored, now important

NGOs 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 NGOs want

35 How will they impact Tax Planning

How will they impact Tax Planning

From blame to shame It is perhaps correct what you do but you shouldnt 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 NGOs expect from companies to behave as good tax paying citizens NGOs are also fighting against Governments which retain their competitive laws

36 What are the real problems

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

Solutions for ALP

In a way there are many solutions The vary between: Old fashioned ALP OECDs 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 OECDs ALP approach See Brazil and also India

38 Conclusion

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 MNEs report tax in their CSR though still less than 20% But the battle just begun!

39 Starbucks vs the people
40 @Hansvandenhurk Hans

@Hansvandenhurk Hans

vandenhurk@maastrichtuniversity.nl

Contact details

Hans van den Hurk

41 Thank you

Thank you

Apple 2013
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