BUSINESS

Tech giants taunt the taxman

Major US technology groups paid Spain’s revenue agency just 1.2 million euros in 2012

Apple, Google, Amazon, Facebook, eBay and others use fiscal engineering to avoid payments

An employee cleans the Apple symbol at one of its Spanish stores. Apple is said to have discovered “the Holy Grail of tax avoidance.” / TEJEDERAS

All the major US technology groups continue to dodge the Spanish taxman. The fiscal engineering tactics developed by their advisors allow them to pay hardly any tax on their business operations in Spain. Financial data for the main Spanish affiliates of Google, Apple, Amazon, Facebook, Yahoo, eBay and Microsoft show that their joint provisions for tax on profits in 2012 — the last year for which figures are available — was just 1,251,608 euros. That’s to say: 1.2 million in taxes among seven giants of the industry.

This aggregate figure is not taken from their tax filings but from their annual accounts, which must be deposited at the Spanish Business Register, and which reflect the money that the companies provision in a given year for tax on profits.

This aggregate figure conceals the fact that some companies paid taxes while others claimed tax credits or deferred tax payments after incurring losses. The accounting provisions may slightly differ from the actual tax filings because of timing issues.

The last of the companies to deposit its accounts with the Business Register was Facebook, which did so in December. However, this information was not available in digital format until Thursday of last week, when EL PAÍS expressly requested it from the registrar’s office.

The picture that emerges reveals that all of these technology and internet firms try to transfer the bulk of their sales (or failing that, their profits) to other countries with lower tax rates for corporate earnings, such as Ireland and Luxembourg. Even then, complex fiscal structures ensure that these profits barely get taxed there, either.

Google takes most of its US profits offshore to Bermuda, where its holding company is headquartered — despite the fact that it operates out of Ireland. Meanwhile, Apple has discovered what one US senator described as “the Holy Grail of tax avoidance”: thanks to a loophole in tax residency legislation, its subsidiaries do not pay taxes in the US because Apple’s primary offshore holding company is based in Ireland; yet they do not pay taxes in Ireland either because this holding company is actually managed and controlled not from Ireland but from the US. American legislation determines tax residency by a company’s place of incorporation, while Ireland does so based on the place where it is managed.

Corporations claim that they are strictly observing tax legislation. The Organisation for Economic Co-operation and Development (OECD) and G-20 have made attempts at closing these loopholes. (In October 2013, following international pressure, Ireland announced it would force companies operating on its territory to declare tax residency, ending the possibility of “stateless” companies such as Apple.) But so far, the battle to ensure that multinationals pay taxes in accordance with their profits in each country is being won by the industry, hands down.

In Spain, the Tax Agency has issued incendiary statements against this fiscal engineering and created a special unit that has scored a few successes, extracting more taxes from traditional multinationals. Yet Google underwent a tax inspection that only found minor discrepancies in its filings. The company’s fiscal model was thus validated, as well as that of other corporations that follow the same system.

In Britain, an investigative story published this month by the Financial Times found that “the total UK tax charge to the seven companies rose from 38.5m pounds sterling to 54m in 2012. Those payments are dwarfed by the scale of the businesses, at least for Apple, Google, Microsoft and eBay, which reported sales of billions of pounds.”

In Spain, the data analyzed by EL PAÍS show much lower tax payments by those same companies, who paid a collective net 1.25 million euros. Microsoft International Holdings Spain’s share was six million euros, Google Spain’s 1.66 million euros, Apple Marketing Iberia’s 2.58 million; Amazon Spain Fulfillment’s 184,000 euros; Facebook Spain’s 50,000 euros, eBay Spain’s 37,000 euros; while Yahoo Spain paid nothing at all. But this collective amount dwindled to 1.25 million euros after Apple Retail Spain and Amazon Spain Services claimed tax credits and taxes to pay in the future after declaring losses.

The subsidiaries analyzed by EL PAÍS declared total revenues of 577.8 million euros and aggregate losses of 15.8 million euros. Each one of them has a different story.

Apple: Stores claim losses

Apple, which ranks second in the world in terms of profits, declares losses in Spain. Thanks to the way the group books its sales, it managed to claim it was in the red in the same year that it broke its own sales records in the Spanish market, both through its own network of stores and through third-party sales.

The maker of the iPhone operates in Spain through two major subsidiaries. Apple Marketing Iberia acts as a commission agent for marketing and sales support services for other Apple units, which book their sales to third parties in the Spanish market from Ireland. Apple Retail Spain manages the group’s network of Apple Stores.

The bulk of Apple’s sales in the Spanish market is not conducted through its network of stores but through third parties. Apple Marketing Iberia booked 20.31 million euros in the fiscal year ending on September 30, 2012 according to the information filed with the Business Register. In reality, this is just a small commission on sales.

Apple Retail Spain enjoyed spectacular turnover growth. These retail sales get booked in Spain, but the price at which the company buys its products from two Irish affiliates, Apple Sales International and Apple Distribution International, results in losses for the Spanish subsidiary. Sales at the Spanish Apple Stores grew 86 percent in 2012, reaching 142 million euros. Apple began the year with three stores in Spain and opened a further six in the following months. Besides the associated costs of opening new stores, the gross margin (the difference between what the Spanish stores charge for the products and what they themselves pay the Irish affiliates for them) is so low that it does not make up for the cost of store rentals and personnel.

And so Apple Retail Spain had pre-tax losses of 22 million euros. These losses enabled it not only to avoid paying any taxes, but also to claim tax assets worth 6.5 million euros, more than the taxes paid out by the other subsidiary.

Google: Passes the inspection

In 2011 the Spanish Tax Agency launched a two-year investigation that concluded with the company being forced to pay an additional 1.9 million euros in connection with its 2007 and 2008 tax filings. There were no fines to be paid, however. This constituted a major triumph for the US company, since it meant that Spanish tax authorities were essentially validating a model that lets it pay very few taxes in Spain.

Google Spain continues to book a very small portion of its Spanish income in Spain. In 2012 it declared losses of 1.4 million euros (compared with 75,000 euros the year before) after paying 1.66 million euros in taxes, mostly representing additional required payments from earlier filings.

Amazon: From Luxembourg

Amazon, the e-commerce giant, has reorganized its activity in Spain after acquiring BuyVip and opening its online store here. The company transformed the fashion-focused BuyVip into a services firm, renamed it Amazon Spain Services and shifted sales to Luxembourg, where its other sales also get booked. This structure imitates its other subsidiary, Amazon Spain Fulfillment, which even applies for the small- and medium-sized business tax rates since booking its Spanish sales abroad reduces its size. Pre-tax profits were 129,611.70 euros, but the company declared net losses because part of its expenses are not tax deductible, pushing up its accounting provision for profit tax to 183,941.63 euros.

Meanwhile, the former BuyVip ended 2012 with turnover of 64.3 million euros and losses of 23.6 million, which generated tax credits of 7.57 million euros. Amazon Spain Services accumulates negative taxable income of 47 million euros and deferred tax assets worth another four million. This makes it very unlikely that the Spanish Tax Agency will get a single euro in corporate taxes from Amazon anytime in the near future.

Facebook: Turnover of two million

Facebook Spain has adopted a similar structure to Google’s. It provides marketing services and does not book the advertising revenues in Spain. Its balance is diminutive, reflecting capital of just 3,006 euros. All its income is billed to a single client, the Irish affiliate Facebook Ireland Services. This income was 2.1 million euros in 2012, enough to cover expenses and have a small margin left over. Expenditure focused on personnel (1.1 million euros), rent (175,238 euros), hiring independent professionals (143,383 euros) and advertising and PR (142,515 euros). The company declared pre-tax profits of 155,607 euros and paid 50,538 euros.

Microsoft: In trouble with the taxman

Of the seven tech giants analyzed by EL PAÍS, Microsoft’s subsidiaries pay the most taxes in Spain. The group owns Microsoft International Holdings Spain, which enjoys a privileged tax system, and another commercial and services firm, Microsoft Ibérica, an affiliate of the latter. In 2012 Microsoft Ibérica billed 120.6 million euros to Microsoft Ireland Operations Limited as a commission agent for the sale of product licenses in Spain. Meanwhile, the holding company declared profits of 31.3 million and tax provisions of 10.9 million, although 4.6 million of that is tied to other subsidiaries that depend on it, including some located abroad.

The group has been in trouble with the Tax Agency over filings of previous years. In November 2011, following an inspection of Microsoft Ibérica, the Tax Agency resolved that the company needed to pay 11.9 million (including interest) for corporate tax from 2004 and 2005. The company has appealed.

Yahoo: Negative assets

Yahoo Iberia also provides services to other group units, but its structure is somewhat different. It depends on Yahoo Netherlands, but bills 86 percent of its sales (basically from advertising) to a Yahoo company based in Luxembourg and another 13 percent to an Irish firm (for R&D services). The Spanish subsidiary ended 2012 with negative assets of 0.9 million euros, excluding subsidies worth 1.4 million. The company said it was working to achieve balanced assets. The group has bailed out the Spanish affiliate to 2012 through a loan that was returned that same year.

eBay: 36,000 euros in taxes

eBay Spain International continues to book its Spanish commercial activity elsewhere. The Spanish subsidiary quadrupled its turnover in 2012 (from 443,109 euros to 1.8 million euros) after acquiring classified adds site Kijiji, but its entire turnover represented services provided to other group companies. This allowed eBay Spain to end 2012 with net profits of 97,349 euros, more than double the previous year’s profits, after paying around 36,000 euros in corporate tax. In 2011 it paid nothing.

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