Stock Groups

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


© Reuters. Adobe Inc.’s logo is displayed at its office, Citywest Business Campus in Saggart, Ireland, October 19, 2021. REUTERS/ Tom Bergin

Tom Bergin

DUBLIN (Reuters) – Leaders of the world’s largest economies hailed a recent agreement to overhaul global corporate tax rules as key ensuring multinationals paid their fair share of tax.

In October, a minimum global corporate tax rate of 15% was established. It is intended to curtail profit-shifting from higher-tax jurisdictions like Ireland (where many multinational companies have their European headquarters), and other countries. “It will eliminate incentives to shift jobs and profits abroad,” U.S. President Joe Biden in early October.

However, there are still some businesses that could use Ireland for lower tax bills after the agreement is in effect. This was according to tax experts and a Reuters review on corporate filings.

That’s because the new agreement won’t stop companies benefiting from a strategy widely implemented in recent years that reduces taxes over a period of up to a decade or more. Ireland’s relatively generous tax allowances permit multinationals with a presence in the country to sell intellectual property, such as patents and brands, from one subsidiary to another to generate deductions that can be used to shield future profits from tax.

In recent years, U.S. technology firms Adobe Inc. and others have used this tax-minimizing strategy to create deductions in order to lower their taxable income by over $10 billion. Oracle Corp (NYSE:) Corporate filings.

Business-software provider Oracle declined to comment and Adobe, creator of software such as Acrobat pdf-maker, didn’t respond to requests for comment. Both have confirmed that they adhere to tax laws.

This agreement was mediated by the Organisation for Economic Co-operation and Development. It is expected to go into effect in 2023. The agreement was signed by over 130 jurisdictions including Ireland.

The Irish finance ministry said Ireland’s tax treatment of intellectual property transactions is in line with other OECD countries.

In response to Reuters’ questions, the OECD acknowledged that companies could continue to benefit from profit-shifting strategies already in place but that it expects companies to be unable to build up such tax shields in the future. This method relies on companies having subsidiaries in countries with zero corporate income taxes, such as Bermuda. These allow the company’s sale to be tax-free. The OECD believes that the global minimum tax will render the strategy less attractive by eliminating zero-tax jurisdictions in multilaterals.

“We’re trying to design rules for the future,” said John Peterson, an OECD official.

Peterson added that the OECD can’t be certain how each country’s rules would interact with the global minimum tax. Peterson said however that the OECD believes that misuses of this tax will be minimized by requiring that all countries calculate taxable earnings in compliance with accounting standards.

Tax specialists say the deal’s impact remains unclear because key details are yet to be agreed, including how to calculate the pot of profit that is to be taxed. Countries currently debate carve outs to allow certain tax breaks. The specialists also said that jurisdictions may retain broad latitude when it comes to how companies can calculate their taxable income.

“Where there isn’t accounting consistency, there is scope for gaming,” said Nicholas Gardner, a tax partner at law firm Ashurst in London.

New rules will be approved by some lawmakers in certain jurisdictions and are due to be completed next year. This includes the United States where many top Republican politicians oppose the agreement.

Malta allows multinational companies to reduce taxes by selling intra-company intellectual estate. Malta’s finance ministry did not respond to requests for comment on its intellectual property-related tax allowances.

TAX SHIELD

International pressure forced Ireland in recent years to phase out one of the world’s best-known corporate-tax loopholes, known as the “double Irish.”’ In response, companies have increasingly accumulated tax deductions known as capital allowances via intra-group sales of intellectual property, according to tax advisors, economists and company filings.

Economists claim that multinationals have brought hundreds of billions in intellectual property to Ireland since 2015. This has led to vast annual tax deductions for foreign companies related to so-called intangible assets – more than 45 billion euros in 2019 up from under 2.7 billion euros in 2014, according to data from Ireland’s tax authority. The data doesn’t break down what portion of those deductions were related to intellectual-property transactions within a corporation.

“Virtually every multinational has moved intellectual property,” said Christopher Sibley, a senior statistician at Ireland’s Central Statistics Office.

According to corporate filings and tax professionals, the majority of profits that are exempted by U.S. companies come from exports to Europe, Asia, and Africa. According to academics, the U.S. Treasury is losing out as the services and products sold depend on American research and investments.

U.S. Treasury did not comment on the U.S. company’s ability to benefit from or continue using pre-existing tax strategies.

According to corporate filings, Adobe accounts for most of its U.S. client sales via an Irish subsidiary. It is located in an office block with four floors in Dublin’s Office Park.

Adobe Systems (NASDAQ – Software Ireland Ltd) purchased intellectual property from a subsidiary in 2020. This was an Irish company that had been registered and a Bermuda resident to tax purposes. This arrangement meant that no taxes were due on $11 billion of the profit made from the sale. Meanwhile, Irish-tax resident Adobe Systems Software Ireland registered an $11 billion expense that could be used to offset taxes on profits over a period of about eight years because it is an asset that depreciates over time, according to the subsidiaries’ accounts.

According to its accounts, Adobe paid $197million of taxes on reported profits in Ireland of $3.1 billion and $5.6 billion in sales in 2020. This equates to an effective tax rate of about half of Ireland’s current statutory 12.5% corporate income tax rate, thanks to the impact of the capital allowances.

Another American firm that has amassed tax deductions in the multi-billion dollar range from intellectual property sales made to affiliates within three years is semiconductor maker Analog Devices Inc (NASDAQ:), medical devices maker Stryker Publicly available accounts of their Irish subsidiaries include those for Corp (NYSE:) as well as Cadence Design (NASDAQ.) Systems Inc.

Analog Devices stated they adhere to all tax laws and regulations, but did not respond to questions regarding their particular tax arrangements. Cadence did not comment.

(Reporting Tom Bergin. Editing by Cassell Bran-Low, Rachel Armstrong).

Mike Robinson
Mike covers the financial, utilities and biotechnology sectors for Street Register. He has been writing about investment and personal finance topics for almost 12 years. Mike has an MBA in Finance from Wake Forest University.