Global tax deal leaves billion-dollar loopholes, Reuters analysis finds

DUBLIN, Dec 3 (Reuters) – The leaders of the world’s largest economies welcomed a recent deal to revise global corporate tax rules as key to getting multinational corporations to pay their fair share of taxes.

The October deal set a global minimum corporate tax rate of 15% aimed at restricting profit shifting to lower tax countries like Ireland, where many large international companies have their European headquarters. “It will reduce incentives to relocate jobs and profits abroad,” said US President Joe Biden in early October.

However, some companies could still use Ireland to lower their tax debt even after the deal went into effect, according to tax experts and a Reuters review of corporate filings.

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This is because the new deal will not prevent companies from benefiting from a strategy that has been widespread in recent years to cut taxes over a period of up to a decade or more. Ireland’s relatively generous tax allowances allow multinationals with offices in the country to sell intellectual property, such as patents and trademarks, from one subsidiary to another for deductions that protect future profits from tax.

Companies in recent years that have used this tax minimization strategy to take deductions to reduce their taxable income by more than $ 10 billion each include US technology companies Adobe Inc (ADBE.O) and Oracle Corp. (ORCL.N) as corporate filings show.

Enterprise software provider Oracle declined to comment and Adobe, the developer of software such as Acrobat PDF Maker, did not respond to requests for comments. Both companies have stated that they comply with the relevant tax laws.

The agreement brokered by the Organization for Economic Cooperation and Development (OECD) is scheduled to come into force in 2023. It has been signed by more than 130 jurisdictions including Ireland.

The Irish Treasury Department said Ireland’s tax treatment of intellectual property transactions is the same as that of other OECD countries.

In response to Reuters’ questions, the OECD acknowledged that companies could continue to benefit from existing profit-shifting strategies, but expects that companies will not be able to develop such tax umbrellas in the future. The approach is usually based on the fact that a company also has a subsidiary in a country with a zero corporate tax rate like Bermuda, which allows the company to conduct the sale tax-free. With the gradual abolition of zero tax areas for multinational companies, the OECD expects that the global minimum tax of 15% will no longer make the strategy attractive.

“We are trying to develop rules for the future,” said John Peterson, an OECD official.

Peterson added that the OECD cannot be sure how individual country rules will interact with the global minimum tax. However, he said the OECD is confident that abuse will be limited by requiring countries to calculate taxable income in accordance with accounting rules.

Tax experts say the ramifications of the deal remain unclear as important details have yet to be agreed upon, including how taxable profit will be calculated. The federal states are currently discussing carve-outs for certain tax breaks. In addition, the jurisdictions could retain a lot of leeway in how they allow companies to calculate taxable income, the experts said.

“Where there is no accounting consistency, there is leeway,” said Nicholas Gardner, tax partner at Ashurst law firm in London.

The new rules are to be finalized next year and require the approval of the legislature in some legal systems. This includes the United States, where several top Republican politicians have spoken out against the agreement.

Malta is another country that allows multinationals to minimize taxes by selling intellectual property within the company. The Maltese Ministry of Finance did not respond to requests for comments on its intellectual property tax allowances.

CONTROL PLATE

International pressure in recent years has forced Ireland to phase out one of the world’s most well-known corporate tax loopholes, known as the “Double Ireland” of intellectual property, according to tax advisors, economists and corporate records.

Since 2015, multinational corporations have brought hundreds of billions of euros in intellectual property to Ireland, economists say. This has resulted in huge annual tax deductions for foreign companies related to so-called intangible assets – more than 45 billion euros in 2019, compared to less than 2.7 billion euros in 2014, according to the Irish tax authorities. The data does not reveal how much of these deductions are due to intellectual property transactions within a company.

“Virtually every multinational has relocated intellectual property,” said Christopher Sibley, a senior statistician with the Irish Bureau of Statistics.

The profits that are protected from tax by U.S. companies typically come from sales to Europe, Asia, and Africa, according to tax experts and corporate filings. The US Treasury Department is losing because the products and services it sells are based on research and investments made in the United States, scientists say.

The US Treasury Department did not want to comment on whether US companies will continue to use existing tax strategies or benefit from future ones.

Adobe books the majority of its sales to non-US customers through an Irish subsidiary based in a four-story block in an office park outside of Dublin, company records show.

In 2020 Adobe Systems Software Ireland Ltd acquired intellectual property from another subsidiary that was both an Ireland registered company and Bermuda tax resident. The facility meant no tax was payable on the $ 11 billion gain on the sale. Meanwhile, Irish taxable Adobe Systems Software Ireland had $ 11 billion in spending that could be used to offset income taxes over a period of approximately eight years as it is an asset according to its subsidiaries’ accounts that depreciates over time.

Adobe paid $ 197 million in taxes on $ 3.1 billion of reported earnings in Ireland in 2020 and revenue of $ 5.6 billion, according to the balance sheet of its principal Irish entity. This equates to an effective tax rate of approximately half the current Irish statutory corporate tax rate of 12.5%, thanks to the effect of the capital allowances.

Other U.S. companies that have made billions of dollars in tax deductions from sales of intellectual property to affiliates over the past three years include semiconductor maker Analog Devices Inc (ADI.O), medical device maker Stryker Corp (SYK.N) and software company Cadence Design Systems Inc (CDNS.O) are showing publicly available accounts for their Irish subsidiaries.

Analog Devices and Stryker said they adhered to tax rules and regulations, but declined to answer questions about their specific tax regimes. Cadence declined to comment.

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Coverage of Tom Bergin; Arrangement by Cassell Bryan-Low and Rachel Armstrong

Our Standards: The Thomson Reuters Trust Principles.

https://www.reuters.com/business/global-tax-deal-leaves-billion-dollar-loopholes-reuters-analysis-finds-2021-12-03/