By Richard Rubin 

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 08, 2020 08:14 ET (12:14 GMT)

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