|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
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
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
Netherlands to renegotiate tax treaties, reform tax haven company
Bono's hypocrisy on Africa, corporate tax avoidance in Ireland
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
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
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
Corporate Tax 2014: UK's revenues plunge; France considers reform