MAGIC MATH

The Dutch legal trick Nike used to pay less tax, revealed by the Paradise Papers

Obsession
Fashion
Obsession
Fashion

Nike, the world’s biggest seller of sneakers and sportswear, has managed to slash its foreign tax rate thanks to a Bermudan tax haven and a Dutch legal structure stemming from legislation dating back to the 1830s.

The details of the US-based company’s tricky accounting are among the many revelations in the Paradise Papers, a leak of several million documents from Appleby, a leading offshore law firm, carefully pored over by the International Consortium of Investigative Journalists (ICIJ) and 95 media partners.

Nike’s European headquarters is located in the Dutch town of Hilversum. Nike uses it to sell its sneakers and clothes to thousands of wholesalers and retailers across Europe, and to its own European stores. When a Nike retail partner in, say, the UK sells a Nike shoe, the money flows to that headquarters in the Netherlands.

Nike has good reason to keep its headquarters there. According to the leaked documents, years ago the Netherlands approved a new tax structure for Nike that let it move billions of dollars in profits from Europe to Bermuda, a well-known tax haven. Nike did this by using a Bermudan subsidiary, Nike International Ltd., to hold ownership of its valuable trademarks, including its Swoosh logo, for markets outside the US. The royalty fees Nike earned from those trademarks went to that Bermudan subsidiary, rather than remaining in Europe.

“The flow of trademark royalties had helped Nike build a $6.6 billion pile of offshore profits by June 2014,” the ICIJ revealed. “This sum had been taxed at just 3 percent outside the United States. And because it remained offshore, it had yielded no U.S. tax at all.”

But in 2014, that deal with the Netherlands was set to expire. Faced with the prospect of a massive rise in its tax rate, Nike and its advisers devised a solution. Nike transferred ownership of the trademarks from Bermuda to a new Dutch subsidiary, Nike Innovate CV.

CV stands for commanditaire vennootschap or limited partnership, and it stems from Dutch legislation going back to the 1830s. It also helps multinational companies minimize taxes. As the ICIJ explains:

In effect, a CV that is owned by partners outside the Netherlands can be entirely stateless, and as a result taxless. Many U.S. multinationals, therefore, set up non-Dutch holding companies that agree to form Dutch CVs.

This is how it works: Under the Dutch law, profits made through a CV are regarded as if they were made by the partners. As such, these earnings have been made outside the Netherlands and cannot be taxed there. Other countries, meanwhile, see the picture differently. They see Dutch CVs as much like regular companies and regard the taxing rights as belonging to the Dutch.

In a statement to the ICIJ, Nike said it “fully complies with tax regulations.” It declined to comment on whether Nike Innovate CV files tax returns. We’ve reached out to Nike for comment and will update this story with any reply.

Since transferring the trademarks to Nike Innovate CV, Nike’s stash of offshore earnings has grown, reaching $12.2 billion by May 2017, while its worldwide tax rate has continued to fall. The ICIJ says those profits “have been taxed at less than 2 percent by foreign tax authorities—and not at all in the United States.”

Nike is hardly the only multinational using obscure Dutch subsidiaries to reduce its tax bill. The ICIJ found that America’s 500 largest publicly traded multinationals collectively held 214 subsidiaries formed as Dutch CVs. Nike alone had 11 of them. Other big companies like Apple, Google, and Starbucks benefit from convoluted arrangements that feature Dutch companies, in some cases known as the “Dutch Sandwich” strategy, which is often combined with the “Double Irish.” (Here’s a video that attempts to explain how this all works.)

These tax structures are all legal. Whether they’re fair, and contribute to the problem of growing wealth inequality, is another matter entirely.

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