Tax avoidance, bailouts and bribery – The UK government’s Corona Corporate Finance Facility

6th June 2020 by George Turner

On 04 June the Bank of England published the names of 53 companies that had outstanding loans under the UK government’s Covid Corporate Financing Facility.

The list contains a number of companies that have had links to tax havens, or have seen controversy regarding their financial affairs.

The publication of the list follows growing calls for the government to place more conditions on companies receiving state support, and the Scottish and Welsh Governments have legislated to prevent companies incorporated in tax havens from accessing funds.

We covered the issue of bailout conditionality in our recent report, Paying in Equally?, in which we suggested that conditions could be based on future tax behaviour. Others have made similar suggestions, including Glyn Fullelove, President of the Chartered Institute of Taxation, who has suggested that support to companies could be predicated on businesses committing to lower their risk rating with HMRC.

HMRC already reviews the “tax risk” of large businesses and includes use of tax avoidance schemes in that assessment. Eligibility for help could be linked to not being judged “high risk” due to such behaviour. 2/11

— Glyn Fullelove (@glyn12gh) May 11, 2020

Dame Margaret Hodge MP, chair of the All Party Group on Responsible Taxation, has taken up this idea and written to the Chancellor suggesting that the government implement it.

Following the publication of the list of companies receiving support under the Covid Corporate Finance Facility, we went through the list to identify companies with links to tax havens, or that have seen other allegations poor financial conduct.

Companies with links to tax havens or tax avoidance

Overall we found 13 companies with links to tax havens, which made up 29% of the loans given.

Company	Value of CCFF (£m)	Domicile	Parent / Owner jurisdiction	Notes
ABB Finance B.V.	£400	Netherlands	Switzerland	Companies house not up to date
Baker Hughes UK Funding Company PLC	£600	UK	Bermuda	Ultimate holding company GE, currently in litigation with HMRC over alleged tax fraud. Immediate parent in Bermuda
Carnival plc	£25	UK	UK	Ships registered in Panama. Carnival is two companies, one British, one Panamian.
Chanel Limited	£600	UK	Cayman Islands	Ultimate parent company is Litor Limited, based in the Cayman Islands
CNH Industrial N.V.	£600	Netherlands		US/Italian corporation, incorporated in Netherlands but resident in the UK for tax purposes
Easyjet PLC	£600	UK	Cayman Islands	Easygroup who are owned by a Cayman Islands based trust, have a 34% stake.
J.C.B. Service	£600	UK	Netherlands	JCB parent company located in the Netherlands.
Johnson Controls International plc	£370	Ireland	Ireland	American multinational domiciled in Ireland. Was subject of second largest corporate inversion in history
PACCAR Financial PLC	£170	UK	Netherlands,USA	Immediate parent is in the Netherlands, and ultimate parent is in the USA
Schlumberger Plc	£150	UK	Netherlands	Parent incorporated in Curacao
Telefónica Europe B.V.	£200	Netherlands	Netherlands	Spanish telephone network company, registered in the Netherlands
Tottenham Hotspur Stadium Limited	£175	UK	Bahamas	Owned by billionaire tax exile
Wizz Air	£300	Hungary	Jersey	Hungarian airline with a holding company in Jersey
Total	£4,790
All 53 companies receiving CCFF	£16,250
Per cent of money going to tax-haven linked companies	29.48%

We have defined companies as having links to tax havens if they are owned by a tax haven company or a tax exile, or are incorporated themselves in a tax haven.
One of the more interesting companies on this list this is Baker Hughes, which is a subsidiary of General Electric (via a Bermuda holding company). GE is embroiled in a £1bn tax dispute with HMRC over unpaid taxes going back to 2004. The case is currently being litigated, and it was recently revealed that HMRC had changed their case to allege fraud on the part of GE. The company denies the allegation.

A number of companies are owned by parent companies in the Netherlands, or are incorporated in the Netherlands themselves. The Netherlands is both a well-known tax haven, and a major economy in itself. We counted the company if the Netherlands was being used as a conduit, with substantial operations or the headquarters of the company elsewhere.

So, for example, ABB Finance, a Dutch subsidiary of a Swiss multi-national and Telefonica, a Spanish company applying for UK government funding via subsidiary in the Netherlands, make the list, whilst AkzoNobel, which is headquartered in the Netherlands, does not.

A number of companies used tax havens as vehicles for personal holdings, or are owned by tax exiles.
For example, Chanel Limited, is owned by Litor Limited, a company based in the Cayman Islands. The Cayman Islands is also used for the vehicle to hold Sir Stelios Haji-Ioannou’s Easygroup, which in turn owns a substantial shareholding in EasyJet.

Tax haven UK costs the taxpayer

The list demonstrates that companies can qualify for UK government support, even though they have relatively little activity in the UK.

In recent years the UK has increasingly sought to set itself up as a tax haven for multinational companies. The primary attraction for companies becoming tax resident in the UK is that our controlled foreign company rules mean that UK tax resident corporations are not usually liable for UK corporation taxes on profits made outside of the UK.

This can be a particular advantage if the multinational can put profits into more traditional tax havens which don’t charge any corporation tax. Profits end up being taxed nowhere. This is not the case in other countries (such as Italy) where companies can be liable for taxes on their global profits.

CNH Industrial Limited, a US-Italian company formed as a merger between Fiat Industrial, and Case New Holland, appears to be a company that has taken advantage of the UK’s business friendly tax regime. The company is incorporated in the Netherlands but tax resident in the UK, because its Dutch parent locates its office in London.

CNH International BV does own a manufacturing plant in Essex, but it is a relatively small operation in comparison to its global footprint. In total, CNH International BV employs just over 1,000 people in the UK, out of a total of 64,000 worldwide.

According to the annual accounts of CNH International BV, and a number of subsidiary companies it has in the UK, its UK operations are loss making. As a result the company faces no tax liability in the UK on any income from either the UK or abroad.

However, its presence in the UK allows the company to access support from the UK taxpayer, and CNH International BV has borrowed £600m from the UK government, which is more than 50% of the company’s £1.1bn turnover at its Basildon plant.

Financial impropriety

Two companies stuck out as having had serious non-tax related financial issues.

ABB

ABB, a Swiss multi-national, received a £400m loan via a Dutch holding company – ABB Finance B.V.. In the UK, ABB has a company, ABB Holdings, which as of 04 July is 9 months late with filing its latest annual accounts.
ABB Holdings in turn owns ABB Limited in the UK, which reports that it had a turnover of £700m in 2018, the latest accounts that are available. This means that the UK government facility accounts for 57% of the turnover of ABB Limited. Another ABB company in the UK, ABB combined Heat and Power, is in voluntary liquidation.

Chemring Group

Chemring is a UK company operating in the defense sector. According to a press release on its website https://www.chemring.co.uk/media/press-releases/2018/18-01-2018a Chemring referred itself to the Serious Fraud Office in 2018, triggering a criminal investigation into bribery, corruption and money laundering. As confirmed by the SFO website, this is still a live investigation.

This research has been featured in the Financial Times, Daily Mail, Vice, The Telegraph, and The Times among others.

Correction – 06 June 2020

An earlier version of this article included British Airways in table of companies above. British Airways (BA) Limited is owned by a Jersey holding company – British Airways Number Two Limited, which is why we included the company on the list.

However, the entity receiving the government loan was British Airways PLC and not British Airways (BA) Limited. British Airways PLC is directly owned by IAG in Spain.

The proportion of loans going to tax haven linked companies was also updated to reflect this change.

Top five tech companies in the UK avoided an estimated £1.3bn in tax in 2018 – new analysis

10th February 2020 by George Turner

The top five tech companies operating in the UK managed to generate profits estimated at £8.1bn from UK customers in 2018, a new analysis by TaxWatch shows.

However, due to these companies implementing complex financial structures to take these profits offshore, these companies only paid a combined total of £237m in taxes on these profits in the UK, an effective tax rate of just 2.9%. That puts the total amount of tax avoided by the companies in the UK at an estimated £1.3bn in 2018, the latest year where figures exist.

	Google	Cisco	Facebook	Microsoft	Apple	Total
Current UK Tax Charge	£72,895,000	£40,101,583	£30,372,000	£24,729,000	£70,877,000	£238,974,583
UK Estimated Revenues	£9,358,419,600	£1,677,303,280	£2,289,953,250	£2,885,251,840	£12,270,489,000	£28,481,416,970
Estimated Profits on UK Revenues	£2,433,189,096	£443,311,257	£1,030,478,963	£952,133,107	£3,313,032,030	£8,172,144,453
UK Estimated Tax Liability	£462,305,928	£84,229,139	£195,791,003	£180,905,290	£629,476,086	£1,552,707,446
Estimated UK Tax Avoided	£389,410,928	£44,127,556	£165,419,003	£156,176,290	£558,599,086	£1,313,732,863

The latest figures are an update on TaxWatch’s 2018 study, Still Crazy After All These Years, which looked at the activities of Google, Cisco, Facebook, Microsoft and Apple, five of the largest technology companies in the world, over the period 2013-2017. The latest figures use the same methodology applied to the companies’ 2018 financial accounts.

Methodology

Corporation tax is a tax on corporate profits. Under international principles of taxation a country has the right to tax companies on the profits that arise in their jurisdiction, even if the company is headquartered overseas.

However, it has become common practice for many multinational companies to move profits from higher tax countries to lower tax countries via a series of complex financial transactions. For that reason, the accounting profit declared in the UK accounts of many multinational companies is not an accurate reflection of the real economic profit made by the company from its activities in the UK.

For example, up until 2019 Google booked sales from UK customers in Ireland. The Irish company which recorded sales of Google products then made large royalty payments for the use of Google intellectual property to a Dutch company, money which then eventually ended up in Bermuda. In 2018, the company moved $22.7bn from its worldwide operations to Bermuda in this way.

The result of this is that Google made a relatively small amount of profit in the UK, Ireland, and other countries, and an enormous profit in Bermuda, which has a zero % tax rate. However, given that Google’s Bermuda subsidiary appears to have no employees, whereas the company employs over 3600 people in the UK, are the vast profits made by its offshore shell company an accurate reflection of the real economic profit of the company? We think not.

In order to get a better understanding of the real profit that the companies in our study made in the UK, TaxWatch estimated the total revenue made by these companies in the UK, and applied the company’s global pre-tax profit margin to that revenue. The pre-tax profit margin is the proportion of revenues that is declared as profit before taxes.

From an economic point of view this assumes that the UK market has an average level of profitability vis-a-vis all of the other markets these companies operate in, including their domestic market, the US.

It also assumes that the costs of the company, from research and development to manufacturing and other functions are allocated equally between different markets.

There are some who argue that the approach we have taken overestimates the real profits that these companies make in markets such as the UK because, under international tax rules, profits should be allocated based on where value is created, which is not the same as the location of customers. The argument goes that as much of the research and development conducted by these companies happens outside of the UK, the UK market should receive less profit.

This is an argument also put forward by the companies themselves. Responding to the 2017 Paradise Papers leaks from the International Consortium of Investigative Journalists Apple made the following statement on their website:

Under the current international tax system, profits are taxed based on where the value is created. The taxes Apple pays to countries around the world are based on that principle. The vast majority of the value in our products is indisputably created in the United States — where we do our design, development, engineering work and much more — so the majority of our taxes are owed to the US.

This could be a reasonable argument for Apple to make if in fact the company allocated most of its profit to its operations in the United States (where it says that the vast majority of its value is created). The fact is that it does not.

Apple’s latest annual financial statements state clearly that the company’s pre-tax profits outside of the United States were $44.3bn in the year until November 2019 and $48bn in 2018. That accounted for 67% and 66% of the company’s entire pre-tax profit. As far as Apple’s financial accounts are concerned, the majority of the company’s profit is made outside of the US.

In fact, according to Apple’s accounts, the distribution of the company’s pre-tax profit is much more closely aligned with the distribution of its net sales. In 2019 the US market accounted for 39% of sales and 33% of the profits made by the company.

Other companies also report that their operations outside of the US are more profitable than their US operations, suggesting that our approach in fact underestimates the amount of profit that these companies really make in countries such as the UK.

For example, the latest Microsoft annual report shows that worldwide the company made revenues of $126bn in 2019. Of this, 51% was received from customers in the USA and 49% from customers in the rest of the world.

Microsoft also declares the pre-tax profit the company makes in its US domestic segment as against its non-domestic segment. This suggests that the pre-tax profit margin of Microsoft is 24.6% in the USA, but 45.2% in the rest of the world.

At no point do we pretend that the figures presented here are an exact answer to how much profit these companies make in the United Kingdom. That would be impossible to determine without access to detailed figures from inside these companies. However, we do argue that our approach gives a much more realistic estimate of the real profits made by these companies in the UK market as opposed to the profits declared in the accounts of their UK based subsidiaries.

Google

Until 2016 Google reported the revenues it made from the UK in its US 10-K filing. On average, around 9% of Google’s global revenues came from the UK between 2014 and 2016. We applied this average figure to Google’s 2018 global revenues to estimate the revenues generated from the UK in 2018.

Over the last five years Google has consistently made a profit margin of over 25% on all of its worldwide sales. In 2018, Alphabet, the parent company of Google reported profits of $34.9bn, on revenues of $136.8bn. The same profit margin applied to the UK revenues of Google would yield a profit of £2.4bn, and a tax bill of £462m.
Google UK had a current tax charge of £72.9m in 2018.

In January 2019 it was revealed that Google had changed its corporate structure, moving its intellectual property from Bermuda back to the United States. This does not impact our study (which only covers 2018) and is unlikely to impact profits declared in the UK in the future. This is because rather than paying royalties to Bermuda, the company will simply make the same payments to the US where under the new FDII rules these payments will be subject to a substantial tax break.

Cisco

Cisco Systems has a subsidiary based in the UK called Cisco International Limited. It is responsible for the majority of Cisco’s sales in the Europe, Middle East, and Africa region. The accounts of Cisco Systems International report separately on the revenues the company makes from UK sales, which were £1.7bn in 2018.

Cisco Systems made a profit margin of 26% in 2018 on all of its global sales. Applied to its UK sales this would yield a profit of £443m, and a tax bill of £84m. However, in 2017, Cisco International Limited and another UK subsidiary, Cisco Systems Limited, were charged £40m in tax between them.

Facebook

Facebook’s global accounts do not break down their revenues by geography at all, whilst the accounts of the company’s UK subsidiary do not reflect the real UK revenues.
Until 2016, Facebook booked all of its UK revenue in a subsidiary in Ireland. Following public pressure about the company’s tax affairs, it started booking revenue from its largest customers through Facebook UK rather than an Irish subsidiary. However, smaller customers would still receive invoices from Ireland, meaning that Facebook UK’s accounts are not a true reflection of the revenue the company makes from UK customers.

In order to estimate Facebook’s real revenues in the UK, we looked at Facebook’s average revenue per user (APRU), which is published in a chart, broken down by region, appended to the company’s US stock market filings. We then took the mid-point between the US APRU and European APRU basing this calculation on the assumption that the UK would be at the top end of the European APRU range, but less than the US. Recent market research puts Facebook’s userbase in the UK at 39 million users, an increase on previous estimates of 32 million. To get an estimate for UK revenue we then multiplied the APRU by 32 million.

In 2018, the company had a tax charge of £30.3m – substantially more than the £16m tax charge they recorded in 2017.

Our estimate based on how much Facebook makes per user puts revenues in the region of £2.29bn in 2018 from UK customers.

In 2018, Facebook globally had a profit margin of 45%. If we assume that the UK market is no less profitable than any other market the company operates in, then the company should have generated a profit of around £1bn in 2018.

A profit of £1.03bn would yield a tax charge of £195.8m.

Microsoft

Microsoft UK appears to have made a significant accounting change since 2017, with significantly more revenue from customers from the UK being recorded in its UK accounts. Between 2017 to 2018 Microsoft UK’s sales to 3rd parties increased by more than £1bn.

However, this increase in sales to 3rd parties does not seem to have been at the expense of Microsoft’s Irish subsidiary, Microsoft Ireland Operations Limited, which saw its revenues increase from $22.8bn in 2017 to $27.5bn in 2018. Microsoft Ireland Operations Limited makes sales to customers throughout the EMEA region.

Previous editions of Microsoft Ireland Operation’s accounts provided a figure for revenues earned from the UK. Between 2013 and 2015 the proportion of the company’s global revenues that came from the UK ranged between 3.12% and 3.6%.

To estimate revenues that Microsoft gained from the UK in 2018 we applied an average of 3.44% to the global revenue of Microsoft in that year.
Overall, Microsoft made a pre-tax profit of 33% on its revenues in 2018.

In total, we estimate that Microsoft generated revenues of £2.9bn in 2018 from UK customers. This would yield an estimated profit of £952m and a tax bill of £181m in 2018. Microsoft Limited in the UK had a tax bill of £24.7m in 2018.

Apple

Apple is one of the most opaque of all of the companies we looked at, and so most difficult to analyse.

In order to estimate how much revenue Apple makes from the UK market, we looked at the amount of money spent by UK customers on iPhones in the UK which was constructed from data on smart-phone penetration and market research. This shows that £6.3bn was spent on iPhones in the UK in 2017. This accounts for 6% of Apple’s global iPhone sales. We were not able to obtain updated figures for 2018, and so to estimate Apple’s 2018 revenue in the UK, we applied the same figure, 6% to the company’s global revenues.

Assuming that Apple makes 6% of its revenues in the UK, it would have generated £12.3bn from UK customers in 2018.

Applying Apple’s global pre-tax profit margin of 27% to these revenues implies an estimated profit of £3.3bn and a tax bill of £629m in 2018. Apple’s three UK subsidiaries had a UK tax charge of £70.8m in 2018.

This research was featured in the Daily Mirror, The Telegraph, and the Mail on Sunday among others.

World of Taxcraft – how Activision Blizzard moves billions to tax havens

4th August 2019 by George Turner

How Activision Blizzard has moved billions of dollars of profit into tax havens

4th August 2019

Activision Blizzard, publisher of hit games Call of Duty, World of Warcraft and Candy Crush moved €5bn to companies in Bermuda and Barbados between 2013-2017, documents reveal.
The company is currently under investigation by tax authorities in the UK, Sweden and France over alleged transfer pricing irregularities and is is facing a potential bill of over $1.1bn in back taxes and penalties.
In the United States, Activision Blizzard has recently settled a transfer pricing dispute with tax authorities for $345m.
The multinational company has a complex structure with subsidiaries in a number of tax havens including Malta, the Netherlands, Barbados and Bermuda.

A PDF version of this report is available here.

Activision Blizzard is one of the most successful video games companies in the world. Headquartered in Santa Monica, California, the company’s hit titles include the World of Warcraft, Guitar Hero and Call of Duty, along with the massively popular mobile phone game Candy Crush Saga. The company is listed on the New York Stock Exchange and has a market cap of $37bn as of August 2019, making it significantly larger than rivals Electronic Arts, Take-Two Interactive and Ubisoft.

The company is the product of several mergers and acquisitions, and is divided into three groups, Activision, Blizzard, and King. Activision developed Guitar Hero and Call of Duty. Blizzard was merged with Activision in 2009 and is responsible for the development of World of Warcraft. King, originally a Swedish company but now headquartered out of London, is responsible for mobile games such as Candy Crush.

Whereas Activision and Blizzard seem to have integrated much of their structure and operations, King still forms a separate group of companies under the Activision Blizzard umbrella.

The company has had a controversial tax history in recent years. Activision Blizzard recently settled with the IRS following an examination of the company’s 2009-2011 tax returns. This saw the company having to make an additional tax payment of $345m in relation to transfer pricing issues.

In 2018, the French tax authority handed Activision a bill of $652m following a transfer pricing investigation into one of the company’s French subsidiaries for the tax years 2011-2013. The company says it vigorously disputes the claim.

The Swedish tax authority handed the company a $400m dollar bill in 2018 following an audit of their 2016 tax year. The company also says it will vigorously contest the claim.¹

The company is also subject to other ongoing tax investigations and demands.

Responding to these tax controversies, Activision Blizzard have suggested that the company is now seeking to mend its ways. The company told the Sunday Times:

“We have proactively engaged with, and continue to fully collaborate with, both HMRC and other tax administrations globally to agree to the proper amount of tax due in each jurisdiction during a period of changing policies and rules.

For King, since the acquisition we have been reviewing the structures in place and we are seeking multilateral conversations among the UK, Sweden, Malta and US tax authorities by which those respective administrations would allocate our income among their respective jurisdictions.

We are a committed employer in the UK and look forward to reaching a final conclusion on the allocation of our taxable income around the world.”

In this report we explore the different structures of Activision Blizzard and King group companies and demonstrate how Activision Blizzard moves billions of dollars from its non-US operations into tax havens.

Activision and Blizzard

Activision – Revenues 2018 $2.7bn ($897 EMEA)

Blizzard – Revenues 2018 $2.3bn ($692 EMEA)

Selected companies in the Activision Blizzard group

Activision Blizzard formed when Activision merged with Blizzard from Vivendi Games in 2009. The new company was majority owned by Vivendi, the French media giant, until 2013 when it became independent.

The company has a highly complex corporate structure which appears to work as follows: Activision and Blizzard companies in the US sell intellectual property rights (IP) to a Dutch partnership which is resident in Bermuda, ATVI C.V., and a subsidiary of ATVI, ATVI International SRL in Barbados. These entities then sublicense the IP to a Dutch company, Activision Blizzard International BV.²

Activision Blizzard International BV

Activision Blizzard International BV is responsible for the exploitation of these rights and managing the distribution of the products outside the US. This includes running the World of Warcraft servers, sub-licensing games to third party distributors, and distributing the game to local subsidiaries of Activision Blizzard for sale in their markets. The company earned €1.66bn from these activities in 2017.

Activision Blizzard International barely makes a profit, because much of the revenue it earns it needs to pay out as a royalty to the two offshore companies ATVI C.V. and ATVI International SRL. In 2017 Activision Blizzard International made profits before tax of just €55.6m, on which it paid just €7.2m in taxes. It paid €1.3bn in royalties to ATVI C.V. and ATVI International SRL.

In the five years between 2013 and 2017, Activision Blizzard International BV paid out €5bn in royalties. The vast majority of these royalties went to ATVI C.V., the Dutch partnership based in Bermuda. However, in 2017 ATVI C.V. transferred some of their IP to ATVI International SRL in Barbados. The result of this is that in 2017 about 50% of the royalties paid by Activision Blizzard International B.V. went to ATVI C.V.. We assume that the other 50% went to ATVI International SRL, however, the accounts of that entity are not publicly available.

The accounts of ATVI C.V. showed that that company generated profits of $476m in 2017 and $1.1bn in 2016 on which it paid $0 in taxes.

ATVI C.V. has 0 employees. The company’s costs are the cost of buying the intellectual property from Activision Publishing Inc and Blizzard Entertainment Inc in the US, who are responsible for developing the games.

It is this relationship that was the focus of an IRS transfer pricing investigation, with the IRS apparently taking the view that ATVI C.V. should have been paying more to the US for the IP rights. As a result ATVI C.V. had to make an additional payment of $1.4bn to Activision Publishing Inc and Blizzard Entertainment Inc, for the period covering 2009-2016. This settlement resulted in an increased tax bill of $345m.

The 2017 Profit and Loss account for ATVI C.V.

Activision Blizzard UK

In the UK, the main Activision Blizzard company is Activision Blizzard UK. This company describes its activities as a publisher and distributor of video games. The company makes significant revenues. However, the accounts show that it makes little profit in the UK.

In 2017 the company had an income of £75m, on which it made a profit before tax of just £516,000. In 2009, the company recorded sales of £455m, on which it made a profit before tax of just £22m – a profit margin of just 3.6%. In that year the company had a tax liability of £4m.

It should be noted that the revenues that appear in the Activision Blizzard UK are not all of the revenues generated by the company from UK customers.

In the latest annual accounts of the US parent company, Activision Blizzard Inc, it is stated that the UK market comprises of 12% of the total revenues of the company. If we apply that to just the revenues for Activision and Blizzard ($4.8bn in 2017), we get total estimated UK revenues of $572m in 2017. The large difference between the amount generated from UK sales, and the amount of revenue in the accounts of Activision Blizzard UK, will be accounted for by the fact that Activision Blizzard International BV in the Netherlands will generate its own income from UK customers via sales of games to third party distributors and subscriptions to the World of Warcraft servers.

With regard to revenues that are made in the UK, the profit margin on those revenues is small because Activision Blizzard UK is described as a “limited risk distributor”.³HMRC describes a limited risk distributor as a distributor which buys goods and sells them like any other, but where risks and functions are transferred back to the principal company (in this case Activision International BV). An example of how a company could limit risk is by agreeing to buy back any unsold stock so that the distributor only ends up selling stock it knows it can get rid of.⁴

Activision Blizzard UK LTD
	2009	2010	2011	2012	2013	2014	2015	2016	2017	Totals
Turnover	£455,452,472	£342,359,000	£248,463,000	£220,704,000	£150,839,000	£149,540,000	£98,094,000	£62,085,000	£75,192,000	£1,802,728,472
Cost of Sales	-£395,558,263	-£300,389,000	-£206,905,000	-£185,300,000	-£114,641,000	-£107,295,000	-£56,730,000	-£33,222,000	-£47,156,000	-£1,447,196,263
Gross Profit	£59,894,209	£41,970,000	£41,558,000	£35,404,000	£36,198,000	£42,245,000	£41,364,000	£28,863,000	£28,036,000	£355,532,209
Gross Margin	13.15%	12.26%	16.73%	16.04%	24.00%	28.25%	42.17%	46.49%	37.29%	19.72%
Admin Expenses	-£31,614,781	-£30,026,000	-£33,769,000	-£28,117,000	-£29,998,000	-£36,206,000	-£36,585,000	-£26,255,000	-£26,305,000	-£278,875,781
Distribution Costs	-£11,868,685	-£6,450,000	-£2,529,000	-£3,292,000	-£2,648,000	-£2,490,000	-£1,915,000	-£1,052,000	-£1,010,000	-£33,254,685
Other Expenses	n/a	n/a	n/a	n/a	n/a	n/a	-£11,000	-£7,000	-£156,000	-£174,000
Operating Profit	£16,410,743	£5,494,000	£5,260,000	£3,995,000	£3,552,000	£3,549,000	£2,853,000	£1,549,000	£565,000	£43,227,743
Operating Margin	3.60%	1.60%	2.12%	1.81%	2.35%	2.37%	2.91%	2.49%	0.75%	2.40%
Profit before Tax	£22,302,191	£4,321,000	£4,497,000	£3,789,000	£3,185,000	£3,086,000	£2,685,000	£1,734,000	£516,000	£46,115,191
Tax	-£4,139,071	-£984,000	-£1,362,000	-£1,788,000	-£977,000	-£2,438,000	-£355,000	-£88,000	-£7,984,000	-£20,115,071
Profit for the year	£18,163,120	£3,337,000	£3,135,000	£2,001,000	£2,208,000	£648,000	£2,330,000	£1,646,000	-£7,468,000	£26,000,120

The fact that Activision Blizzard is a limited risk distributor allows the corporation to argue that less profit should be allocated to the UK. This profit is instead allocated to the “risk taker” – Activision Blizzard International BV, which sees its profits eliminated with their royalty costs.

According to the accounts of Activision Blizzard UK Limited, the company is currently in discussions with HMRC over its ‘international business model’. It has set aside £8.5m as a provision in relation to tax investigations currently underway dating back to 2013. This provision is equal to 43% of the total tax liability of the company in the UK over the last ten years. The investigation is likely to be focusing on whether the allocation of profit to the UK company is fair.

Activision France

The UK is not the only authority currently in a dispute with Activision Blizzard. In December 2017 the French Tax Authority issued a re-assessment of the company’s tax bill between 2011 and 2013 due to transfer pricing issues they found at one of the company’s French subsidiaries. The total tax bill demanded including penalties and interest was €571 million.

The company says they dispute the claim and will vigorously defend it through the courts if necessary.

UK taxation of royalties

As TaxWatch has written about previously, the UK government has introduced a new tax on royalties shifted to some tax havens, including Bermuda (but not Barbados) where those royalties originate from a UK source.

If this charge was effective and was to apply to all of the royalty payments of Activision Blizzard made to offshore jurisdictions, then we estimate that €325m of royalty payments would be subject to the charge, raising tax revenues of €65m (£57.2m) a year.

This is on the basis that Activision Blizzard’s revenue from the UK comprises about 25% of its non-UK revenues, and so the charge should be applied to 25% of the royalties being moved from the Netherlands company to Bermuda and Barbados.⁵

However, at the moment, we believe that the tax would only apply to royalties paid to the Dutch C.V. with an address in Bermuda, ATVI C.V.. This would result in a bill of approximately €32.5m (£26.1m).⁶

ATVI International SRL in Bermuda will not be subject to the charge because, as we noted in our report on the royalties tax, the UK government will only apply the charge to royalties shifted to countries where the UK does not have a full tax treaty. This excludes Barbados, and other tax havens such as Ireland, Switzerland and others from the charge.

The UK government is also expecting large multinational companies to restructure their activities into tax havens which have a tax treaty with the UK in order to avoid the charge, and have given them a long run-in to allow them to do this. It is our expectation therefore that when the charge becomes effective in the 2020/21 tax year the internal royalty payments of Activision Blizzard will not be taxed in the UK.

King – Revenues in 2018 $2bn ($599 EMEA)

Selected companies from the King group

King was established in Sweden in 2003 by an Italian, Riccardo Zacconi, and a group of British and Swedish investors and games designers.⁷The company makes games for mobile phones, including the hugely popular Candy Crush.

In 2005 the company attracted investment from Apax Partners, the private equity firm, and was floated on the New York Stock Exchange in 2014. Activision Blizzard bought the company in 2016 for $5.9bn.

When the company was floated on the stock exchange it used a holding company based in Ireland, King Digital Entertainment PLC.⁸This appears to have had no substantial operations. The address of the company is a lawyer’s office in Dublin which also houses several other companies.

King Digital Entertainment PLC is owned by a Dutch partnership, ABS Partners C.V.. This partnership is registered to an address in Bermuda, and is controlled by two partners, a general partner, ABS Partners I LLC, located in Delaware, and AB Holdings C.V., another Dutch partnership with a Bermudan address.

The accounts of King Digital Entertainment state that the records of the company are held in London, and several directors give addresses in London, which suggest that London is where the management of the company takes place.

King operates from a large office building in Soho, Ampersand House, where the company employs over 450 staff. Ampersand House is the home of a number of companies that are subsidiaries of King group, including midasplayer.com Limited, which describes its activities as providing “management services” to the King group. This would further confirm that the group is managed from Ampersand House in London.

Terms and Conditions of Candy Crush

Midasplayer.com Limited is a substantial operation, it earned revenues of $283m (£259m) in 2017 and made a profit before tax of $112 (£82), on which it paid taxes of $17.7m (£19m) (the company, although based in the UK states its accounts in US $). However, as described below, it does not make its money from customers, but from fees charged to other group companies for its management services.

King has further development studios in Sweden, Romania, Singapore, and Spain. It also has sales and marketing operations around the world.

When you download Candy Crush onto your phone outside of the US, the terms and conditions state that you are contracting with King.com Limited in Malta. Users inside the US are contracting with a Delaware LLC.

This would suggest that the revenues of the company are earned by these two subsidiaries.

The development companies, sales companies and head office in London act as contractors to other companies in the group, presumably King.com in Malta and the Delaware LLC.

As disclosed in the Activision Inc accounts in the US, the King group is currently under investigation for its transfer pricing structure by numerous tax authorities including the UK and Swedish tax authorities.

The transfer pricing issue is likely to be about whether the services provided by King group companies in the UK and Sweden were being adequately compensated by the revenue generating parts of the business. If they were underpaying for services, then this would depress revenues in these units and taxable profits in the UK and Sweden.

The transfer pricing issue is a long running issue and dates back to before the purchase of the King Group by Activision Blizzard Inc. Note 18 of the latest Activision Blizzard 10-K states that the company had assumed an uncertain tax position of $74m relating to transfer pricing matters. It states that it is in discussions regarding both its pre and post-acquisition transfer pricing structure.

In the 2015 accounts of the Irish holding company, the last year before the company transferred to Activision Blizzard, the company discloses that it is in discussions with various tax authorities about its transfer pricing position and estimates its “transfer pricing exposure” to have been $62.1m in 2015.⁹

The disclosure in the Activision Blizzard Inc 10-K confirms that the discussions are still ongoing and that the potential liability is still increasing.

In addition to the transfer pricing issue, the Activision Blizzard 10-K discloses that the Swedish tax authority has also landed King with a $400m tax bill concerning an “alleged intercompany asset transfer”. This is likely to concern transactions made when the company was sold to Activision Blizzard. Activision Blizzard state that they intend to vigorously contest the claim.

Conclusions and recommendations

Activision Blizzard has a highly complex corporate structure, which involves subsidiaries in Malta, the Netherlands, Ireland, Bermuda and Barbados. When analysing the money flows around these companies, it seems clear that these structures are designed to minimise taxation on the profits made by Activision Blizzard outside of the United States.

The company says it is now seeking to engage with tax authorities to see what the appropriate amount of profit and tax is in the countries where they operate. However, given that the company has told investors that it will “vigorously defend” large claims for back taxes being made by the Swedish and French tax authorities, it would suggest that what Activision sees as appropriate may not match the expectations of those working in various tax authorities.

Whatever new structures and policies the company may put in place in the future, their accounts demonstrate that up until now billions of dollars were moved into a company with an address in Bermuda which appear to be entirely untaxed. It is possible that if we were able to access the accounts of the company in Barbados and Malta, billions more going untaxed would also be revealed.

It seems that revenue authorities around the world are finally taking action over the tax avoidance activities of Activision Blizzard. However, the relatively small amounts of taxes being sought by the UK tax authority highlights the difficulties of administrative action. To end these practices will also require a more robust policy response.

The use of royalty payments to move billions in profits to offshore tax havens is common in the digital sector. The UK government has tried to introduce rules to deal with these schemes, however, these new rules are known to be ineffective because of the way in which a number of tax haven jurisdictions are exempt from them.

The case of Activision Blizzard is just another example demonstrating the need for governments to introduce more effective measures to deal with royalty-based tax avoidance schemes. In the UK this means changing legislation to make sure that royalty payments made to companies in jurisdictions where the UK has a tax treaty are included in the charge to income tax.

1The various tax issues are set out in Activision Blizzard’s 10-K form, available from the company’s website. https://investor.activision.com/annual-reports

2The licensing arrangement between the various Activision Blizzard companies are described in note 3 of the ATVI CV annual accounts 2017

3See Activision Blizzard UK “Business Review”, part of the Strategic Report to the 2015 Activision Blizzard annual accounts.

4HMRC Internal Manual, Limited Risk Distributor, available from https://www.gov.uk/hmrc-internal-manuals/international-manual/intm441080

5The Activision Blizzard 10-K form states that the UK comprises 12% of total revenues, compared against the stated revenues from the non-US parts of the business this makes up 25% of non-US revenue.

6The UK government has said it will not apply the charge to income tax on royalties to companies in jurisdictions with which the UK has a full tax treaty. In order to gain treaty benefits a company must be subject to taxation in that jurisdiction. The Dutch CV is a tax exempt entity in the Netherlands, so we assume the tax would apply to that entity.

7Juliette Garside, Who are the Candy Crush millionaires?, Guardian, 25 March 2014 https://www.theguardian.com/business/2014/mar/25/candy-crush-king-flotation-king-entertainment-shareholder-windfalls

8Prior to King’s floatation on the stockmarket, its holding company was in Malta. In order to facilitate the listing the company established a new holding company in Ireland. Details are on the company’s registration form at the Securities Exchange Commission website – https://www.sec.gov/Archives/edgar/data/1580732/000119312514056089/d564433df1.htm

9See note 10 of the 2015 annual report of King Digital Entertainment PLC

European Commission responds to TaxWatch call to investigate Google

5th June 2019 by George Turner

The European Commission has replied to TaxWatch’s call to launch an investigation into the tax structure of Google. The Commission has said it will consider the information provided by TaxWatch as part of its ongoing investigation into tax agreements in Ireland and the Netherlands.

TaxWatch wrote to the European Commission on 26 April to highlight the structure that Google has put in place to avoid paying taxes in Europe. Google charges all of its European customers via a subsidiary in Ireland, Google Ireland Limited. That company pays out large royalty payments for the use of Google’s intellectual property to a company in the Netherlands, which in turn pays out almost all of the revenue it receives as a royalty to a company registered in Ireland but tax resident in Bermuda.

The royalty payments are substantial, comprising 46% of Google Ireland’s revenues in 2017, the last year where accounts are available. The structure minimises profits and tax liabilities in Europe, whilst making sure that profits appear in Bermuda, which has a 0% corporation tax rate.

TaxWatch questioned whether the scale of royalty payments made by Google to its Bermuda subsidiary was in line with the arms-length principle. This principle is used by tax authorities to establish whether a company is artificially shifting profits to tax havens, and whether the government of the Netherlands and Ireland had come to any special arrangements with Google to allow them to make such payments.

Responding to TaxWatch’s letter, Max Lienemeyer, Head of the State Aid: General Enforcement and Scrutiny Unit of the European Commission’s Competition DG, told TaxWatch that the Commission had an ongoing investigation into tax rulings granted by Ireland and the Netherlands, and was seeking to establish whether certain tax agreements had resulted in a selective advantage being given to particular companies.

Mr Lienemeyer thanked TaxWatch for the information provided, and said it would be considered as market information in the light of their ongoing investigation into transfer pricing deals.

In addition to raising this issue with the commission, TaxWatch has put forward a proposal on how countries could change domestic legislation to ensure that royalty payments made by large multinational companies to tax haven subsidiaries are subject to income tax.

Photo by Sara Kurfeß on Unsplash

Bermuda