The G20 finance ministers have once again agreed to cooperate to counter aggressive cross-border tax avoidance by multinationals.
Many US firms are using tax avoidance schemes for their non-US earnings while they shamelessly claim they are paying appropriate taxes in the source countries in which they operate.
The OECD responded to earlier requests for action from the G20 by initiating the “Base Erosion and Profit Shifting” (BEPS) project, and since then has published an action plan to address the issue. The aim of the OECD is to develop measures to counter aggressive tax avoidance in both member and non-member countries, and to limit the risk of double taxation.
When US multinationals assert that their entire non-US income is derived through the double Irish scheme (see explanation below), and is subjected to a very low rate of tax, the artificial and contrived nature of the arrangements is obvious. The OECD is making progress, but there does appear to be some unintended consequences for the OECD and national governments as they develop measures to counter tax avoidance.
Despite the extra scrutiny facing US multinationals since 2012, when Starbucks agreed to “voluntarily” pay company tax in the UK, tax avoidance activities appear not to have slowed.
Yahoo betting against BEPS project?
Since the BEPS project commenced it would be expected that US multinationals not using the double Irish scheme would at least hesitate before implementing it. And that other US multinationals might consider unwinding the arrangement. Regrettably, the reverse appears to be taking place with the announcement that Yahoo is moving to Ireland in March to exploit the double Irish scheme.
Yahoo is moving the headquarters for its European operations from Switzerland to Ireland and has boldly asserted that the move is not motivated by tax reasons. Twitter set up a double Irish scheme when it was floated last year after the BEPS project commenced.
The news that Yahoo is moving to Ireland and that other US multinationals may follow suggests an unforeseen consequence of BEPS may have been to highlight the aggressive avoidance opportunities available to US multinationals.
There may be pressure within the management of US multinationals that are paying higher amounts of foreign tax on non-US earnings to use the double Irish scheme to reduce their foreign tax liability. It appears US multinationals are betting BEPS is unlikely to be significant.
Yahoo would be incurring transaction costs in moving to Ireland and it would be pointless to move to a double Irish structure if the BEPS project were to eliminate the tax advantages that Ireland is able to provide to US multinationals. Moreover, Yahoo’s decision would have been based on advice from its accountants and lawyers on the tax benefits of the move, especially in light of the BEPS project.
National governments need revenue and they want to ensure that US multinationals deriving income from within their borders pay an appropriate amount of tax, which is not unreasonable. In these source countries, US multinationals get the benefit of infrastructure and reliable legal systems provided by governments.
Unlike national governments, US multinationals engaging in aggressive tax avoidance are well funded. US multinationals are estimated to be holding more than US$1.7 trillion in undistributed foreign earnings. One of the largest tax avoiders is Apple Inc, which in 2013 was reported to have US$102 billion in offshore untaxed foreign earnings.
Information on Apple’s tax position was first exposed in 2012 by the US Congress’ Permanent Subcommittee on Investigations. The Subcommittee was able to obtain insight into the foreign taxes that Apple Inc’s subsidiaries paid on their foreign earnings which is information that is not made publicly available for US listed companies.
It was disclosed that Apple negotiated a tax rate with the Irish government of 2% compared to the normal low company tax rate of 12.5%. In 2011, one of Apple Inc’s Irish subsidiaries, Apple Sales International, had a foreign tax rate of 0.05% on non-US earnings of US$22 billion. Apple Inc’s first tier subsidiary, Apple Operations International (AOI) is incorporated in Ireland, but claims it is not a tax resident in any country and accordingly it does not submit tax returns in any country. AOI’s entire foreign income of US$29.9 billion for the period 2009-12 was untaxed and represents 30% of the Apple group’s entire income during this period. The artificial nature of the arrangement is reflected in the fact that AOI has no employees.
In comparison, Yahoo Inc’s annual reports indicate it has paid relatively higher amounts of foreign tax on its non-US earnings. It is impossible to make a direct comparison of Yahoo’s and Apple’s effective rate of foreign tax on non-US earnings because Yahoo’s tax returns are confidential; the only source of information is the annual report of US listed companies which is an accounting statement and is different to the tax returns that the foreign subsidiaries of US listed companies lodge in their countries of tax residence.
Yahoo’s 2012 Annual Report does not report the foreign “cash taxes paid” by Yahoo subsidiaries. In Yahoo Inc’s 2012 Annual Report the provision for non-US tax (which is a prediction) on non-US income indicates that its average rate of tax for the period 2010-12 was 26.42%.
The tax information in Yahoo’s 2012 annual report suggests the reason for its migration to Ireland is to reduce the foreign taxes it pays on permanently deferred income. As the OECD develops consensus measures in response to BEPS, the stakes for governments appear to be rising.
How the Double Irish Dutch Sandwich scheme works
US multinationals are exploiting a gap in US domestic tax law that allows for tax on foreign income to be deferred indefinitely. The foreign income is only subject to tax when the income is remitted to the US parent with a credit for any foreign tax paid. This in turn provides US multinationals with the incentive to avoid taxes in the source countries in which they derive income and then indefinitely defer remitting the income to the US parent company.
The commonly used “Double Irish Dutch Sandwich” scheme involves shifting profits from an Irish to Dutch subsidiary, and then a second Irish company headquartered in a tax haven, such as Bermuda. The practice, known as tax avoidance rather than tax evasion, is not currently illegal. Tax evasion is fraud, such as not declaring income, whereas tax avoidance is legal but conflicts with the spirit of the law.