Wednesday, August 14, 2013

Strategic Forum Shopping

Ever since your childhood realization that you can get Daddy to permit what Mommy prohibits (or vice-versa), you have learned the skill of forum shopping.  Getting what you want in business is no different. Artful “forum shopping” is a key business strategy for gaining competitive advantage and avoiding domination, as evidenced by some recent deals and litigation.

What do you want to optimize?  While we can look at governmental incentives and regulations, let’s consider optimizing for low tax rates.  That means a search for a “tax haven” from the storm of normal high tax rates. We’re not talking about tax fraud (hiding income), but simply about tax avoidance (navigating and complying with rules to minimize taxes owed).

What kind of income do you want to optimize?  By identifying the type of operations, you identify the type of income, and thus can have a shopping list according to local tax treatment of that kind of income.  You might want a different home forum for different purposes, such as R&D in one forum, manufacturing in another, distribution and sales in a third.  A typical tech company will generate intellectual property from R&D, resulting in licensing royalties or income from selling products.  Manufacturing is a tool of R&D.  Distribution means local sales in each country.

How to you limit each class of income to a specific jurisdiction?   You can set up your operations yet limit your exposure to a hostile legal environment by setting up an avatar (oops, a new company) to do business only there.   And then you just need to have all the avatars charge reasonable intercompany transfer pricing.

In lawful international tax avoidance or tax deferral, forum shopping is alive but under challenge.  In May 2013, a Senate Panel’s investigation revealed Apple Inc.’s set-up of a research and development center in Ireland in the 1980’s to get access to its low 12.5% corporate tax rate and its even lower dividend withholding rates.  U.S. anti-abuse rules (“Subpart F”) currently don’t require immediate repatriation.  So Apple Inc. is sitting on about $1.0 billion in undistributed untaxed offshore profits from licensing of software and sales of computers and telecom devices.  Like the US, other European Union countries are envious and hostile to Ireland’s competitive tax regime.

Did you forget to do your tax forum shopping plan before you grew into a big company?  No worries.  Like U.S. pharmaceutical, company like Perrigo Co., you can just buy an Irish biotech company like Elan Corp. for $8.6 billion.  That tax-favored strategic acquisition was announced last week.  Perrigo will lower its effective tax rate from roughly 30% to roughly 16-18%, saving about $150 million per year in taxes and operating costs, by creating a holding company in (yep!) Ireland.

What would kill forum shopping?  Think of equality in competitive tax and regulatory regimes and harmonization of laws across borders.  This is a stated objective in the Transatlantic Trade and Investment Partnership (TTIP) talks between the USA and the European Union), begun in July 2013, and the G-20 industrial nations 15-point action plan presented by the OECD, also this past July.  That’s optimism.  

Businesses hire professionals as “concierge forum shoppers.”   Maybe there will be a “forum shopper’s club” in the future.  The world’s a virtual mall for forum shopping.  When will there be an app for that?

1 comment:

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