Uber is now driving Tax Avoidance Vehicles
Updated: Sep 4, 2019
Today, several of my contacts and friends enthusiastically approached me, mentioning that Uber was moving to the Netherlands. When I didn’t share their enthusiasm, it felt like an explanation would be useful. To me, it feels like another step in a world economy where the effective tax rate for corporates has declined from 50% in the 1950s to 15% in the 2010s.
Unlike some of my friends indicated, this does not create new jobs, significant additional taxes or anything else that would be accelerating the Dutch economy. In fact, physical changes are unlikely to occur with the creation of the newly developed entity, as the only thing that is moving is intellectual property and other intellectual assets.
First a recap. Uber is creating a new Dutch entity, that should help them to be more tax efficient – a whopping $6.1B more efficient to be exact.
Until recently, many internationals would send their revenue through a conduit Offshore Financial Centre, or OFC (in which the Netherlands is the biggest in the world) to an exotic destination like Bermuda or the Cayman Islands, which are known as sink OFCs. With recent developments from the OECD, specifically their BEPS (Base Erosion and Profit Shifting) program, this is becoming harder. OECD BEPS aims to make it more challenging for multinationals to shift profits to countries where commercial activity is limited.
CORPNET’s overview of the world’s largest OFCs. Greens are conduits, reds are sink OFCs.
Uber used to operate with Bermuda as a sink OFC and the Netherlands as a conduit. As the OECD is now making it more challenging to use the Bermudan entity, the Netherlands, where Uber does have significant commercial activity becomes more important. This is likely to be the key motivator for their move to the Netherlands.
What does this new tax vehicle entail? Mainly a lot of intellectual property (IP), such as trademarks and patents. The Dutch entity will hold IP for 63 countries where Uber is active. That means that all those 63 countries will have to pay the Dutch entity for using that IP, ensuring those countries make less profit and are therefore not required to pay tax over those profits. This process is called profit shifting.
"Intellectual Property has become the leading tax-avoidance vehicle" - University of California
The Dutch entity will have to pay tax on its profits, but only 7 percent on profits generated through IP licenses, far lower than the 21% in the US or the normal 25% corporate tax rate in the Netherlands. Additional deals and regulations ensure that this 7% tax only applies for profits over $6.1B. Uber’s trademarks and other IP will become more valuable over time, allowing for more incoming licensing fees from other countries, making Uber even more tax efficient.
In the introduction I mentioned that Uber’s new creation would not create jobs, tax income or anything else benefitting the Dutch economy. As Uber can regulate their own license fees and profits are only taxed above $6.1B, Uber can influence whether they cross the limit of their benefit. This is probably where I should remind you that as of now, Uber has never made any profit, let alone $6.1B. In fact, it has just recorded its highest ever loss at $5.2B
It is unlikely that Uber will be paying any taxes on its profits in the near future.