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\ Overview of tax miBgaBng structures by global e-­‐commerce businesses
Alan M. Rhode Thursday 27 February 2014 Google – “Double sandwich” 7 Google Inc. Holds and licenses IP for non-­‐US acBBviBes 5 2 6 Google France SARL MarkeBng services billed to Google Ireland Limited Google Bermuda Limited IP dealer Google Ireland Holdings IP dealer managed from Bermuda RoyalBes Agreement 1 RoyalBes Payment End customer Purchases adverBsing for display on the French and global web 3 RoyalBes Google Ireland Limited IP dealer EMEA headquarter. Sales acBviBes, markeBng, R&D 1 4 Google Netherlands B.V. IP dealer Financial flows – Tax treatment 1 End customer AdverBsing fees (€100) subject to Irish CIT (12.5%) on the part retained (only €1) 3 0.12 Google Ireland Limited 3 2 Service fees (€10) subject to French CIT (33%) 3.3 Google Ireland Limited Google France SARL 3 4 Google Ireland Limited 4 Google Netherlands B.V. 5 Google Ireland Holdings 6 Google Bermuda Limited Tax
DTC exempBon on royalBes to the Netherlands and Dutch CIT (25%) on the fees (€1) retained 0.25 Google Netherlands B.V. DTC exempBon on royalBes to Ireland (€78) and no royalBes are withheld by GIH No witholding tax applies in Ireland and no CIT in Bermuda on the royalBes (€78) Revenues (€78) are repatriated only when tax incenBves apply (5.25%) 5 0 Google Ireland Holdings 6 0 Google Bermuda Limited 7 4.1 Google Inc. = 7.77 2 Main tax features §  Google Ireland Holdings is not subject to CIT in Ireland because its place of management is located in Bermuda. According to Irish law, the company resides in Bermuda for tax purposes. §  The interposiBon of Google Netherlands B.V. avoids the applicaBon of any withholding tax in Ireland; due if Google Ireland Limited paid Google Ireland Holdings directly. §  U.S. Controlled Foreign Company (CFC): it is avoided by by sefng up the second Irish company as a fully-­‐owned subsidiary of the first Irish company managed in the Bermuda and making an enBty classificaBon elecBon for the two companies to be considered as a joint enBty: hence, all payments between the two companies will be ignored for US tax purposes. 3 Tax burden – Comparison ①  Double sandwich structure: the actual tax burden amounts to some 7.77% if profits are repatriated when tax incenBve applies (e.g., 2005 Homeland Investment Act). No withholding tax apply to any transacBon. ②  Google Inc.’s license to the end consumer: average 40% US CIT may apply. ③  France subsidiary’s sub-­‐license to the End consumer: 29% French CIT may apply on part of the revenues, with an US average 40% on the remainder + 5% WT on royalBes from France to the USA. 4 PotenBal tax challenges §  Irish transfer pricing regulaBons: up to 2010, Irish law did not envisage transfer pricing regulaBons; but the Finance Act 2010 has introduced the requirement that transacBons between associated enBBes should be entered into “at arm’s length”. §  On Fall 2013, Dublin published drao legislaBon that will prevent Irish registered companies not to be taxed in Ireland when they are managed from abroad. §  U.S. Transfer pricing regulaBons. A strict interpretaBon of the arm’s lenght principle is endorsed by the IRS. 5 -­‐ Luxembourg 3 4 Apple Inc. Holds and licenses IP rights on iTunes to iTunes S.a.r.l. RoyalBes (30%) 2 iTunes SARL Centralizes sales of Europe, Africa and Middle-­‐East RoyalBes (100%) 1 End consumer Purchases licences on iTunes 6 Braeburn Capital Inc. Asset management company based in Reno, Nevada Financial flows – Tax treatment 1 Licence fees (€100) subject to a 80% exempBon in Luxembourg (CIT rate: 29.22%) End customer 3 iTunes Sarl 3 Tax
4.09 Itunes Sarl 2 No WT in Luxembourg on oyalBes (€30), subject to CIT in the US (40%) 12 Apple Inc. = 16.09 7 Main tax features §  A 80% exempBon on royalBes and capital gains with regard to certain intellectual properBes apply in Luxembourg. §  Luxembourg VAT rate is 15% with a reduced 3% rate for e-­‐books. §  Aoer-­‐tax profits are managed by a company based in Nevada with 0% state taxaBon. 8 Tax burden -­‐ Comparison •  Current structure: the actual tax burden amounts to some 16.09% owing to the 80% exempBon in Luxembourg and a VAT rate lower than the European average. •  Direct licensing from Apple Inc. would lead to a 40% CIT (with possible reliefs) and VAT would be applicable in Italy. •  Licensing by an Italian subsidiary would lead to a 31.4% taxaBon on the royalBes withheld in Italy and VAT at 22% instead of 15%. 9 PotenBal tax challenges •  StarBng from 2015, VAT on electronic services will be applied in the State where the consumer resides (=Italy). •  PotenBal permanent establishment of iTunes Sarl in Italy. 10 -­‐ Luxembourg 1 Amazon SARL Centralizes sales of Europe Amazon services Srl 100% owned by Amazon SARL. MarkeBng, accounBng and other services to the Parent company. Payment (100%) 3 2 End consumer Purchases goods or e-­‐
books on Amazon. 11 4 Amazon LogisNca S.r.l. Manages the warehouse based in Italy. Main tax features §  Even if the CIT rate in Luxembourg is only slightly lower than in Italy (29.9 vs. 31.4%), actual taxaBon is much lower due to higher claimable expenses. §  No withholding taxes apply on dividends from Luxembourg to the US parent company (vs. %5 WT from Italy to the US). §  80% CIT exempBon on digital products. 12 PotenBal tax challenges •  The EU Commission has launched an infringement procedure against Luxembourg because the 3% VAT rate they are applying to digital books is potenBally incompaBble with EU law. •  PotenBal permanent establishment in Italy of Amazon EU Sarl within the Italian subsidiaries. 13