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News : EU Economy Last Updated: Feb 16, 2014 - 8:11 AM


Corporate Tax 2014: IBM in aggressive avoidance with Dutch help but India pushes back
By Michael Hennigan, Finfacts founder and editor
Feb 11, 2014 - 7:41 AM

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IBM Ireland's technology campus in West Dublin.

Corporate Tax 2014: International Business Machines (IBM), the computer and IT services giant, has made aggressive avoidance moves in recent years with Dutch help to cut its tax bill to boost earnings but it's meeting tough resistance in India.

Bloomberg reporters, Alex Barinka and Jesse Drucker, wrote last week that IBM cut its tax rate to a two-decade low with help from a tax strategy that sends profits through a Dutch subsidiary.

The report says that the strategy, which involves routing almost all sales in Europe, the Middle East, Africa, Asia and some of the Americas through the Netherlands unit, helped IBM as it gradually reduced its tax rate over 20 years at the same time pretax income quadrupled. Then last year, the rate slid to the lowest level since at least 1994, lifting earnings above analysts’ estimates.

Barinka and Jesse Drucker say that IBM International Group BV was incorporated under Dutch laws in 1999, according to filings in the Netherlands. "The subsidiary acts as a holding company for more than 40 IBM-owned companies worldwide, including its operations in Ireland, a corporate tax haven where IBM has thousands of employees. The Dutch group had three employees in 2008, a number that has since swelled to about 205,000 as of the end of 2012 -- only 2% of whom actually work in the Netherlands. IBM overall has about 430,000 workers worldwide."

Bono, the Irish U2 frontman, avails of Dutch tax haven facilities where 20,000 mailbox companies are used to evade and avoid taxes.

Last September, the Dutch government promised to reduce the corruption including renegotiating new tax agreements with African countries.

Finfacts 2013: Netherlands to renegotiate tax treaties, reform tax haven company rules

Finfacts 2013: Bono's hypocrisy on Africa, corporate tax avoidance in Ireland

We reported on Sunday that Pfizer Ireland, which is owned by a Dutch partnership, is Ireland's biggest merchandise exporters and in recent years the world's biggest drugs firms has reported losses in the US, where 39% of its revenues were located in 2012.

IBM has had an average effective rate of 5.8% in the period 2008-2012, according to Citizens for Tax Justice, a US advocacy, which suggests that it is loading up its US accounts with intercompany charges from no-tax or low tax jurisdictions. 

The Wall Street Journal reported last month that Sanford Bernstein analyst Toni Sacconaghi estimated that without a lower tax rate, IBM would have missed analysts’ fourth quarter earnings estimates by a significant margin. Sacconaghi said in a January 13 research note that he expects “continued questions about earnings quality and free cash flow.” Morgan Stanley analyst Katy Huberty said any earnings upside “is more likely to come from tax benefits as our checks point to an aggressive pricing environment.”

In recent days IBM confirmed to India's Economic Times that it had appealed to the Karnataka High Court against the Income Tax Department's demand of INR53.57bn ($863.41m). The company claims that the draft assessment issued by the Department last October "ignores fundamental accounting and tax principles."

However, the authorities claim that IBM failed to maintain separate accounts for the export income it earned via establishments in the Software Technology Park of India (STPI) and Special Economic Zones (SZEs) in 2008-09. Although the Income Tax Appellate Tribunal stayed this demand, the Karnataka High Court ruled in the Department's favour, instructing it to collect taxes worth INR10.9bn.

In a separate development, the Appellate Tribunal has asked IBM India to prove that INR60bn of its 2007-08 revenue came from software exports

Arun Anandagiri, Taxsutra.com editor, told the Financial Times last December that besides the Indian government's need to cut a budget deficit, the dispute also reflected a wider “trust deficit” between revenue authorities and multinational companies operating in India.

“The authorities are sceptical of what the MNCs declare as their profits, while the MNCs feel that the tax officers are often going on a ‘fishing expedition’, and are therefore cagey about sharing relevant documents. This is why you are getting so many of these appeals over these cases,” said Anandagiri.

Selection of Finfacts tax reports 2013/14:

Corporate Tax 2014: Obama running with the hare and hunting with the hounds

US company profits per Irish employee at $970,000; Tax paid in Ireland at $25,000

Corporate Tax 2014: Yahoo! joins “Double Irish Dutch Sandwich” club; IDA Ireland wants more members 

Corporate Tax: Kenny reassures Facebook but Ireland's rate is too high

Foreign government requests Bermuda to investigate Microsoft's Irish-linked subsidiaries

G-20 Australian presidency focuses on tax "leaking bucket"; Ireland still in denial?

Corporate tax reform and the biggest tech tax havens

Ireland's new International Tax Charter: More political kabuki

Ireland's tax man for Silicon Valley

Corporate Tax 2014: UK's revenues plunge; France considers reform

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