Dismissed by critics and devoured by fans, “Transformers: Age of Extinction” was the most successful feature film in 2014 with $ 1.1 billion, of which more than three quarters came from abroad.
ViacomCBS’s Paramount Pictures, which distributed the computer-animated action festival, saved much of that money by licensing international rights through a complex strategy aimed at avoiding U.S. taxes, according to a study by the Center for Research on released Tuesday Multinational Corporations, a non-profit group partially funded by the Dutch Ministry of Foreign Affairs.
It is common practice for multinational corporations to take advantage of tax breaks. The report offers a rare glimpse of how one company did it.
ViacomCBS, a media giant formed after the sibling companies merged in 2019, has used the same strategy for all of its entertainment properties, according to the report.
Since 2002, ViacomCBS and its predecessor companies Viacom and CBS have together avoided paying $ 3.96 billion in U.S. corporate taxes through a system that involved subsidiaries in Barbados, the Bahamas, Luxembourg, the Netherlands and the UK, the report said .
Much of the $ 30 billion in licensing revenues outside the United States generated by the company’s film and television franchises such as SpongeBob, Star Trek and Mission: Impossible is not subject to corporate taxes, the company said Study notes.
ViacomCBS denied the results, saying in a statement that the study was “deeply flawed and misleading” and “shows a fundamental misunderstanding of US tax law”.
“It is full of mischaracterizations, material omissions and numerous false claims,” the company said in a statement. “ViacomCBS performs its tax obligations in all of the 180+ countries and territories in which we operate, and all of our income – including those listed in this report – is collected in relevant jurisdictions around the world, including the United States, in accordance with applicable regulations fully taxed. Law.”
ViacomCBS added that its “global total tax rate” between 2006 and 2019 was 32.6 percent for Viacom and 33.8 percent for CBS during that period.
ViacomCBS’s study of the tax structure is weeks after President Biden proposed a 15 percent minimum tax on foreign profits for US companies in an attempt to deter countries from competing by lowering their tax rates. The proposed global tax rate is part of a broader plan to revise the tax law that would raise corporate tax in the United States from 21 percent to 28 percent.
ViacomCBS, headed by Shari Redstone, has tried to use the ever-changing tax laws in other countries in a “cat and mouse game,” the study says. Prior to the merger, Viacom and CBS, both controlled by the Redstone family, were pursuing the same strategy of moving foreign intellectual property licensing rights to subsidiaries outside of the United States when prices became cheaper, the report said.
The Center for Research on Multinational Corporations said it focused on ViacomCBS because the company set up a number of Dutch subsidiaries called letterbox companies to generate large amounts of television revenue.
“Most companies didn’t even have a single employee,” said Maarten Hietland, one of the study’s authors, in an interview.
ViacomCBS said in its statement that it has overseas locations “for central, strategic business purposes, not for perceived tax benefits.” The statement added that the company has 300 employees in the Netherlands, a production studio and “$ 1 billion in annual non-licensing sales”.
Royalty income, or royalty income, has always been a significant part of the business and has accounted for around 24 percent of annual sales since 2018. Media companies are now being driven by streaming, a relatively new company that is losing money trying to attract as many subscribers as possible around the world.
Unlike companies that manufacture physical goods, media companies can leverage the intangible nature of their products. Transferring license rights to SpongeBob from one country to another is just a matter of paperwork.
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June 1, 2021 at 4:52 p.m. ET
Jeffery Kadet, an international taxation expert and lecturer at the University of Washington School of Law, said the steps are similar to self-trafficking.
“If you take money or other property like licensing rights and move it from one subsidiary to another, have you done something that economically changes the company as a whole? The answer is you didn’t, ”he said. “It’s like taking a dollar bill out of your left front pocket and putting it in your right back pocket. You still have the dollar. “
ViacomCBS’s seemingly legal tax regimes use different tax laws in individual countries, according to the study. Income that can be considered taxable in the United States can, for example, be considered tax exempt in the Netherlands.
Since 2002, tax professionals who work for Viacom, CBS and ViacomCBS have developed structures to take advantage of these mismatches and thus reduce taxable income, the study says. Almost all of these plans concerned one country: the Netherlands.
In order to compete with other European nations, the Dutch tax authorities have offered multinational companies cheap schemes that allow some companies to tax only 0.8 percent of the income from licensing international distribution rights. In other words, for every dollar Viacom raised abroad for a blockbuster like “Transformers” (after converting real, lira or renminbi), the study found that less than a cent was subject to corporate tax.
The Dutch authorities have created what is known as a “conduit” system, whereby most, if not all, of the international income of a US company is channeled through a tax-friendly region. Alphabet, Starbucks, Dell, and other US companies also had units in the Netherlands.
ViacomCBS – and its predecessor companies – set up several subsidiaries in the Netherlands to hold the foreign licensing rights to television programs and films, most of which were produced in the United States. The companies then used the subsidiaries as a springboard for sub-licensing these rights to other markets. The money from these deals all go back to the Dutch companies, where most of it is not subject to corporation tax.
A Viacom executive disagreed with the strategy. In 2016, she sued the company for “retaliation” after speaking of what she believed to be an “illegal tax avoidance program in violation of federal law”. (A few months after the lawsuit was filed, the two parties had reached an agreement and the terms were not disclosed. “We believed the claims were unfounded and the matter was resolved,” the company said.)
In the lawsuit, the executive accused Viacom of “devising a plan to attribute the proceeds from the popular” Teenage Mutant Ninja Turtles “franchise to the Netherlands for tax reasons. While the rights to the franchise are owned by a Dutch company, “all business relating to those rights was conducted in New York,” the lawsuit states. “The sole purpose of transferring the license rights to the Dutch company was to avoid the US tax burden,” the lawsuit said.
The study found that Viacom had transferred its intellectual property rights to a subsidiary in the UK in 2015, while the Dutch units (which operated as a sub-branch of the UK unit) served as the starting point for selling foreign rights.
The transfer – essentially a sale from one Viacom subsidiary to another – resulted in a tax benefit, the study says. According to the company documents cited in the study, the transaction was valued at $ 1.8 billion, a sum that can be amortized over many years.
From 2015 to 2019, Viacom’s UK unit had sales of $ 4.5 billion and gross profits of $ 1.25 billion, but “UK corporate income tax on its profits was only about $ 18 million over that period. Dollars, “the report said. Because depreciation is considered an expense, the company was able to reduce its reported profit.
The tax reform proposed by Mr Biden could prevent ViacomCBS and other large corporations from taking advantage of these mismatches. Even so, US companies could move much of their business overseas as tax rates in other countries are likely to remain low, according to Kadet.
“As a country,” he said, “we are better off overall with the same tariff everywhere.”
Susan Beachy contributed to the research.