By Richard Rubin
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (April 9, 2020).
Multinational corporations are devising new strategies to keep
their taxes low, saving billions of dollars by navigating around
attempts by the U.S. and European countries to tighten the tax
net.
Companies that prospered for years with low tax rates are
learning how to keep them that way, even as political pressure
builds to tax them more. They are doing so by moving intangible
assets such as patents and trademarks between subsidiaries and
across borders.
The moves don't fundamentally change a company's operations or
pretax profit, but they can generate significant new deductions
that can offset income for years or ensure that income gets taxed
at lower rates.
"The large multinationals continue to find ways to keep their
taxes on their global income low," said Brad Setser, a senior
fellow at the Council on Foreign Relations.
More than a dozen major U.S. companies -- including ViacomCBS
Inc., Gilead Sciences Inc. and Activision Blizzard Inc. -- have
disclosed such maneuvers, reporting total future tax savings of at
least $13.6 billion, according to a review of recent securities
filings that companies completed prior to the coronavirus
pandemic.
Before the U.S. and Europe changed their tax laws over the past
few years, American companies had a cut-and-paste model for global
tax planning. They transferred intellectual property -- or the
rights to use it -- to foreign subsidiaries.
Because taxation is tied to places where value is created,
companies could reduce their tax bills by moving those assets, and
the profits they generated, to subsidiaries outside the U.S. or
other high-tax countries. In many cases, those subsidiaries
ultimately reported their profits in places without corporate taxes
such as Bermuda or the Cayman Islands.
"The location of intellectual property is more of a tax-planning
exercise than movements of people and activities," said Thomas
Horst, managing director of Horst Frisch, a consulting firm that
works on international corporate transactions.
Before the 2017 tax law, overseas income theoretically was
subject to U.S. taxes of as much as 35%. But companies could
postpone payment of those taxes as long as the profits remained in
segregated accounts at a foreign subsidiary. For years, companies
achieved single-digit tax rates on their non-U.S. income and
indefinite deferral of U.S. taxes.
In 2017, Congress lowered corporate rates and created a
deduction designed to encourage technology companies and exporters
to keep assets in the U.S. It imposed a one-time tax of as much as
15.5% on past overseas profits and created a minimum tax of 10.5%
on future foreign profits, whether or not companies left them
abroad.
Separately, European countries collaborated to end maneuvers
such as the Double Irish, which companies used to funnel profits
via Ireland to no-tax jurisdictions such as Bermuda. European
countries, responding to their citizens' concerns about tax
avoidance, also made it harder for companies to park their
intellectual property in tax havens without having real operations
alongside them.
Corporate securities filings reveal that U.S. companies have
found new ways to keep their tax bills low. A common tactic: A
subsidiary in one country sells intellectual property to a
subsidiary in another. Normally, that would produce taxable income
in the first country and deductions in the second.
But if that first country has no corporate income tax, or no tax
on such asset sales, there is no immediate tax bill. In the second
country, companies get to deduct the cost of that purchase. They
can do that over many years, generating annual deductions.
That stream of deductions lowers future tax bills in the
intellectual property's new home, and it is a strategy encouraged
by Irish law. In 2019, Ireland reported a 93% increase in
investment that was driven by movement of intellectual
property.
Media conglomerate ViacomCBS offers an example. The company was
born of the 2019 merger between Viacom and CBS. As part of the
merger, it moved some intellectual property from the Netherlands to
the U.K., according to an executive familiar with the
transaction.
The transaction wasn't subject to Dutch taxes and will generate
deductions over 25 years in the U.K., the executive said. The
company does significant business in the U.K. and will continue to
be a taxpayer there, the executive said. The result: a $768 million
tax benefit.
Similarly, Gilead Sciences, a biopharmaceutical firm based in
Foster City, Calif., completed "an intra-entity asset transfer of
certain intangible assets from a foreign subsidiary to Ireland" in
late 2019, according to securities filings. The result was a $1.2
billion deferred tax benefit.
"Gilead has realigned its intellectual property holdings in
compliance with guidelines and requirements in the various
jurisdictions where we conduct business," spokesman Chris Ridley
said in a written statement. "The majority of our innovative
pipeline intellectual property resides in the U.S."
Activision Blizzard, which makes the "World of Warcraft"
videogame, moved assets to a U.K. subsidiary in October 2019,
recording a net benefit of $230 million. Activision declined to
comment.
Not all of the moves involved transfers between foreign
jurisdictions. Some companies have begun using the U.S. as the base
for their intellectual property, an aim of some authors of the 2017
tax law.
"The U.S. is relatively more attractive than it ever was
before," said David Rosenbloom, an international tax lawyer at
Caplin & Drysdale in Washington.
For example, Garmin Ltd., a navigation-technology company,
announced a February 2020 transaction to move intellectual property
from Switzerland, where it is based, to the U.S. As part of the
change, the company's U.S. entities will pay royalties to those in
Switzerland.
"That lowers the amount of income recognized in the United
States, increases it in Switzerland," Douglas Boessen, the
company's chief financial officer, told analysts Feb. 19. "That
gives us a favorable income mix by jurisdiction during that license
period."
As a result, the company forecasts a 10% tax rate, down from
15.5% in 2019.
Among the incentives for basing intellectual property in the
U.S. now: Companies can deduct expenses for research, which was
difficult if not impossible when the property was kept
offshore.
The new law also created a deduction to encourage companies to
record more of their profits in the U.S. in return for tax rates as
low as 13.125%, instead of the standard 21% rate.
Transfers of intellectual property to the U.S. -- unthinkable
before 2017 -- show how the gap between U.S. and foreign tax rates
has narrowed.
"The goal is more tax neutrality," said George Callas of Steptoe
& Johnson LLP, who was the tax-policy aide to House Speaker
Paul Ryan during the writing of the 2017 law, known as the Tax Cuts
and Jobs Act.
But there are still reasons to keep intellectual property
overseas. Once a company moves those assets to the U.S., it cannot
move them back out again without paying significant taxes.
"If you somehow decide later that you didn't want that IP in the
U.S., it's going to be really difficult to get it back out again,"
said Albert Liguori, a managing director at Alvarez and Marsal
Taxand, an advisory firm. "That's what leads most companies" to
keep their assets abroad.
Tax professionals caution that the international tax system
remains in an unusual state of flux, making it difficult for
companies to make the forecasts needed for long-term decisions.
Countries are still trying to craft new rules on where corporate
profits are taxed, and U.S. tax rules and low rates could change
quickly if Democrats retake Congress and the White House in
2020.
"It's a little hard to see, if you're advising a company, where
it goes, " Mr. Rosenbloom said. "You have to take it almost day by
day, week by week."
Write to Richard Rubin at richard.rubin@wsj.com
(END) Dow Jones Newswires
April 09, 2020 02:47 ET (06:47 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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