Tango with the Tax Man: Multinationals Find Loopholes Galore in Europe

Large multinationals, many of them based in the United States, are masters at avoiding taxes on profits made abroad. Apple, for example, paid just $100 million in taxes in 2010 on overseas profits of $13 billion. But Germany would like to put a stop to the practice, and is finding some influential support. By SPIEGEL Staff

Photo Gallery: Masters at Tax Avoidance Photos
REUTERS

Johannes Teyssen sees himself as a manager with a global outlook. The CEO of Düsseldorf-based energy giant E.on is proud of the fact that two-thirds of his revenues come from abroad. He also takes a global perspective when it comes to solving the major issues facing the future of his industry, from Germany's shift to renewal energy to climate change. "Anyone who thinks in national terms is thinking too narrowly," says Teyssen.

But now that his company is also seeing lower profits, it makes sense that Teyssen is trying to improve E.on's bottom line with international help. The energy giant is making the final preparations to transform itself into a European stock corporation (SE) next year. What is now a German joint-stock company is to become a European corporation. The transformation will provide the group with new options, and the advantages are not just limited to escaping Germany's rigid rules granting employees a say in company management.

The new designation will allow E.on to move its headquarters abroad, making it easier for the company to circumvent national and international fiscal authorities. In the jargon of tax experts, E.on is providing itself with new "options for fiscal optimization." It's completely legal, but it comes at the expense of the treasury.

The switch to SE will also allow the corporation, intentionally or unintentionally, the opportunity to catch up in a discipline where German competitors have lagged behind an elite league of multinational corporations: that of raking in billions while paying almost no taxes at all.

Corporations like Pepsi, Starbucks and Intel sell their products around the world, and seek to establish reputations for being environmentally conscious, progressive and socially responsible. But when it comes to allowing the government to collect a suitable portion of their corporate profits, the icons of global capitalism prove to be antisocial in the extreme.

How to Look Poor

According to data compiled by independent tax experts, US technology giant Apple paid a paltry $130 million (€102 million) in taxes on foreign earnings of about $13 billion in 2010. Microsoft paid only $1.7 billion on $15 billion in foreign earnings, while software giant Cisco paid a tax bill of $400 million on foreign earnings of more than $8 billion.

The operations corporations launch to optimize their tax bill go by various names, including "Double Irish" and "Dutch Sandwich," but the principle is always the same. In a confusing network of parent companies and subsidiaries, foreign branches and holding companies, sales, earnings and costs are shifted back and forth so many times that the companies end up looking poor wherever tax rates are high. The remaining earnings are generated primarily in low-tax countries.

Years ago, the Organization for Economic Cooperation and Development (OECD) estimated that 60 percent of all international trade happens within multi-national corporations. Following the letter of the law, they do business with themselves, taking advantage of tax laws in different countries to minimize their burdens.

This has disastrous consequences for governments, whose financial clout is compromised by the corporations' fiscal tricks. Government budgets become tighter as a result and pressure on those companies and employees who are unable to circumvent taxation is increased.

But now there is growing opposition to these practices among policymakers. German Finance Minister Wolfgang Schäuble has joined forces with his counterparts in Paris and London -- and a few weeks ago, he also wrote to US Treasury Secretary Timothy Geithner to gain his support for his cause. Schäuble's project is directed in part against his counterparts in European countries like Ireland and the Netherlands, whose business model consists primarily of enticing foreign companies with tax benefits.

Particularly Glaring

For years, a task force at the Paris-based OECD, the club of the world's most important industrialized nations, has been studying the methods of excessive tax structuring and the ways countries can defend themselves. Its work illustrates just how much corporations can benefit from these practices. The experts see Apple and Google as particularly glaring cases.

Google, the highly profitable company based in Mountain View, California, managed to reduced its tax burden in the United States to 21 percent, even though the nominal tax rate in California is actually 41 percent.

According to its annual report, Google paid less than $2.6 billion in taxes on income of $12.3 billion in 2011. There is nothing illegal about this. The earnings from its US business are taxed according to the law. Rather, the company's low overall tax burden is the result of its earnings being taxed at much lower rates abroad.

This is how the Google system works: All earnings achieved in Europe are posted to Google Ireland Ltd., headquartered in the Irish capital Dublin. German fiscal authorities have no access to these revenues and profits, because the company does not maintain any places of business in the classic sense in Germany.

Google Ireland reported revenues of €10.1 billion in 2010, but they were almost completely consumed by advertising expenses and personnel costs for the company's 2,000 employees. The largest expense, about €7.2 billion, consisted of licensing fees that Google Ireland paid to another Google subsidiary in the Netherlands. In this manner, almost all of the income was sucked away from Dublin. The Irish state was left with only €16.8 million in revenues subject to corporate income tax, as well as the taxes on employee wages.

Google Netherlands Holdings B.V. in Amsterdam, which collected the licensing fees from Dublin, is a company without employees. It paid only €2.7 million in corporate income tax in the Netherlands. That's because the Dutch company funneled the lion's share of its revenues from Ireland back to the Emerald Isle, in the form of a licensing fee to Google Ireland Holdings.

The Bermuda Treasure Chest

Shuffling billions back and forth may seem absurd to the uninitiated, but it's worthwhile. Google Ireland Holdings is in fact domiciled in two places. It was established under Irish law, but its administrative headquarters are in Bermuda. The benefit for Google is that there's no corporate income tax in Bermuda.

The operation is complicated, but it's extremely lucrative. It allows Google to move its earnings, which consist mainly of advertising revenues, out of Europe while paying almost no taxes there, depositing them in a tax haven to which the US Treasury has no access. The US authorities would be able to tax these earnings only if they were later distributed to the US parent company, but that seems unlikely at this point. Google has amassed some $24.8 billion in largely tax-free income in its Bermuda treasure chest.

The American Internet giant isn't the only company that has discovered the varying European regulations on the taxation of license fees as a way to boost its earnings. Swedish home furnishings giant Ikea uses the same method to make itself more profitable. In return for using the company's name, Ikea's German subsidiary pays a portion of its sales revenue to a company in the Netherlands. Tax law expert Lorenz Jarass estimates that the German treasury loses out on dozens of millions of euros every year as a result. Meanwhile, Ikea pays almost no taxes in the Netherlands.

License fees aren't the only way to easily move money around within a company. Trademark rights and patents can also be readily shifted around. A no less lucrative method consists of endowing corporations in tax havens with large amounts of capital, so that the money can be invested almost tax-free in the international financial markets.

In the end, the parent companies borrow the money back at high interest rates, which they can then claim in their home countries as operating expenses, reducing profits and, by extension, their tax liability.

Sometimes these tax oases really do look like the palm-tree paradises from travel brochures. They exist in the Caribbean and in Asia, but also in places where palm trees don't grow: in the middle of Europe, supposedly a region of high taxes.

Outsmarting Countries

Belgium, for example, has one of the highest corporate income tax rates in the world: 33.99 percent. In practice, however, the debt-ridden country collects far less from companies, thanks to loopholes in its tax laws. The average tax burden of the 50 most ingenious companies, with total earnings of €27 billion in 2010, was a paltry 1.04 percent.

This may be enough in good times, but in crisis the cash-strapped country is forced to do without billions in tax revenues. Indeed, Prime Minister Elio di Rupo is now seeking to introduce a minimum tax of 12.5 percent on corporate earnings. But the Belgians are hesitant, fearing that the tax could prompt capital to migrate to other European tax havens.

An international treaty could prevent corporations from outsmarting countries. But so far not even the European Union has been able to harmonize the rules of its member states. On the contrary: Countries including Ireland, Bulgaria, Slovakia and Cyprus reject any standardization, because it would jeopardize their business model as low-tax countries.

Such opposition led the European Commission to long ago abandon the idea of harmonizing tax rates throughout Europe. It does, however, want to create uniform standards for the treatment of interest and license fees, as well as other cost factors relevant to corporate income tax.

Two guidelines to this effect have already been presented and, with minor changes, accepted by the members of the European Parliament. But little has happened since. All tax-related measures must be approved unanimously by the 27 EU member states. The Cypriots currently hold the rotating presidency of the Council of the European Union, and next year the Irish will take the helm for six months. Neither country is particularly eager to change the status quo.

US on Board?

Nevertheless, German Finance Minister Schäuble is determined to make another attempt. To apply the necessary pressure, he has enlisted the help of his counterparts from Great Britain and France, George Osborne and Pierre Moscovici, and he brought up the issue at the most recent meeting of G-20 finance ministers in Mexico. An initial package of measures to stem the exodus of tax revenues is expected to be ready by the time the group meets again in St. Petersburg next February.

In a recent letter to US Treasury Secretary Geithner, Schäuble proposed increasing the pressure on tax havens around the world. It is an "unacceptable state of affairs" that places like Bermuda levy no corporate income taxes, Schäuble wrote. "The non-taxation distorts international competition and reduces government revenues." For this reason, Schäuble noted, industrialized countries must cooperate more effectively, especially with regard to the taxation of intangible assets like patents and licenses.

It isn't clear that Schäuble's effort will succeed. When it comes to tax issues, the US government has a history of siding with US corporations. But that might be changing now that Washington is searching for new revenue streams to combat its massive budget deficit. Many US politicians are no longer willing to accept the fact that companies are stashing away billions in tax havens to circumvent taxation at home.

The US government could certainly use the money. In a recent inquiry, a US Senate committee found that about 1,000 US companies have moved substantial assets abroad -- assets valued at roughly $1.5 trillion, or one tenth of the country's national debt.

BY SVEN BÖLL, MARKUS DETTMER, FRANK DOHMEN, CHRISTOPH PAULY, and CHRISTIAN REIERMANN

Translated from the German by Christopher Sultan

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1. Greece.
yiannaki 11/14/2012
And we are complaining about Greece ????
2. Multinationals - Taxation
eks2040@aol.com 11/14/2012
I trust there is no disagreement over the objective of companies to maximize profits for their shareholders, and given the different laws and tax jurisdictions the companies will do their utmost to achieve their goals. Whereas the countries write their tax rules based on differing concepts, companies work on minimizing their impact. It is also clear that high tax rates stimulate their avoidance, and there are plenty of helpers exploiting the loopholes, intended or not. One possible solution is a substantially reduced rate of taxation, the simplification of the system and the elimination of the loopholes. Perhaps too radical for the tax collectors is the elimination of corporate taxes altogether, as the companies merely function as collectors for the states and roll the cost forward into their selling prices. The consumer pays it all anyhow. This would solve the issue for good. Karl
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