Thursday, December 02, 2010

Cisco II: the Dutch detour

Having just blogged Marty Sullivan's analysis of Cisco Systems' disappearing tax bill, a Dutch correspondent has kindly sent us some additional pieces of the Cisco puzzle: the annual report for the year ended July 25, 2009 for Cisco subsidiary Cisco Systems Netherlands Holdings B.V.

First, however, for connoisseurs of the 2004 George W. Bush deferred tax loophole we mentioned in the last story, we ought to mention another study by Dhammika Dharmapala of the University of Illinois, C. Fritz Foley at Harvard, and Kristin J. Forbes at MIT, which analysed its effects. The tax holiday was, in terms of its intended purpose, a flop.

"This paper’s results indicate that repatriations did not lead to an increase in domestic investment, domestic employment or R&D—even for the firms that appeared to be financially constrained or lobbied for the holiday. Instead, estimates indicate that a $1 increase in repatriations was associated with a $0.60-$0.92 increase in payouts to shareholders—despite regulations stating that such expenditures were not a permitted use of repatriations qualifying for the tax holiday."

Which is pretty much just how Citizens for Tax Justice put it. Back to Cisco's annual report, though. This gets a little detailed - but the purpose of this blog is merely to illustrate the artificiality of what is going on.

Cisco Systems Netherlands Holdings B.V. is a holding company with subsidiaries in Europe, emerging markets and Asia Pacific, to which it provides management services and advice (but no research & development). The company, which has just 31 employees and three directors (total salary: $0), recorded profits of over US$1 billion (US$ 1,088,037,703, to be precise) in the year to July 2009 basically from receiving dividend income from Cisco Systems International B.V.

A skim-read of the following corporate gymastics give a sense of the kinds of artificial games that have gone on:
  • Cisco Acquisition Holding B.V. was incorporated on 5 December 2000, as a wholly owned subsidiary of Cisco Acquisition 111, Inc.
  • On 2 May 2001 the name of the company was changed 10 Cisco Systems Netherlands Holdings B.V.
  • On 11 May 2001, Cisco Acquisition 111, Inc. transferred 100% of its shares in Cisco Systems Netherlands Holdings B.V. to Cisco Technology Inc.
  • On 22 January 2002, Cisco Technology Inc. transferred 100% of its shareholding in the Company to Cisco Systems Bermuda Ltd.
  • On 23 January 2002, Cisco Systems Bermuda Ltd. transferred 100% of its shareholding in the Company to Cisco Systems Luxembourg Intemalional S.a.r.l which then Iransferred its interest to Cisco Syslems Luxembourg S.a.r.l.
  • On March 6, 2009, Cisco Systems Luxembourg Sarl transferred 100% of its shares in Cisco Systems Netherlands Holdings BV to Cisco Systems International Sarl, a company registered in Switzerland."
During the year this Dutch holding company bought a bunch of companies in Norway, South Korea, Malaysia, Japan; and it has branches and subsidiaries in Australia, Azerbaijan, Bahrain, Bosnia, Carmeroon, the Czech Republic, El Salvador, Estonia, Ethiopia, Iceland, Latvia, Lithuania, Kazakhstan Mozambique, Qatar, Russia, Serbia, Tunisia, Uruguay, Albania, the UK and the United Arab Emirates and represenlative offices in Ghana, Bosnia, Quatar, Belarus, Armenla, Georgia and Angola.

Khadija Sharife, writing in Le Monde Diplomatique about ActionAid's recent SABMiller investigation, explains some of the attractions of Dutch holding companies:

"The benefits of Dutch holding companies mean there is no requirement to have local economic substance, little or no taxation on repatriated profits, and full tax exemption on capital gains and dividends received from qualifying subsidiaries. And as ActionAid reports, according to Dutch law, the costs of acquired trademarks can be set against taxable income.

Essentially, Dutch holding companies of the type maintained by SABMiller (initially Niagara 18 BV, later SABMiller International BV) exist for no other reason but to ’own’ and ’manage’ intangible assets in a tax haven. And since the geographic location of brands such Appletiser or Carling Black Label constitute non-rival assets - assets that generate endlessly scalable income without being scarce or finite (as oil, finance or fixed assets such as cars might be) - the location itself can easily be exploited to avoid tax."

You can read more details on page 21 of the ActionAid report. Sharife also brings up a fascinating apartheid angle, both in the Le Monde Diplomatique article and in an excellent article in the Harvard International Review.

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