The Cisco System

How the company powering the internet avoids paying hundreds of millions of dollars in taxes in Europe, the Middle East and Africa.

Executive Summary

For years newspapers have frequently covered the tax affairs of internet based companies like google and facebook. But what about the companies providing the hardware that runs the internet?

In this report we look at Cisco Systems. The Cisco group of companies headed by Cisco Systems, Inc describes its business as selling the technology that powers the internet. It is one of the largest tech groups in the world and Cisco Systems Incorporated is one of the biggest components of the NASDAQ stock market index. At the time of writing, the company had a market capitalisation of over $200bn dollars. It is a major supplier to governments and corporations around the world.
We have analysed the accounts of the UK subsidiaries of Cisco Systems Inc. and, in particular, Cisco International Limited, Cisco’s UK company which handles the vast majority of European, Middle Eastern and African sales for the Cisco group.

Our research has found strong evidence to suggest that the Cisco group has engineered its business structure to facilitate the artificial shifting of profits from group companies that are taxable in countries in the EMEA region (Europe, Middle East, Africa) to group companies located in secretive tax havens. The effect of this business model is that Cisco Group companies located in the UK and other EMEA countries report very low profits, and pay relatively little in corporation tax. These low reported profit margins do not reflect the real profits made by the group arising from sales in the EMEA region. As a result there is a significant under taxing of profits made by the group.

The fact that Cisco is able to do this reflects a failure of governments around the world to grapple with the issue of international tax avoidance. One of the principles of international taxation is that companies should be taxed where value is created. It is the policy of the OECD to reform the international tax framework “to ensure that profits are taxed where economic activities occur and value created”. However the Cisco case demonstrates that despite numerous proposals to reform the tax system in recent years, companies are still able to move profits out of large consumer markets and into tax havens with relative ease.

In this report we seek to estimate how much in corporation tax the Cisco group would have to pay if the profits reported in group companies located in the EMEA region more accurately reflected the real profits generated from sales in that region.
We compare this estimate to the taxes reported as having been paid by two of the main EMEA companies in the Cisco Group, Cisco International Limited and Cisco International BV.
We estimate that the Cisco group has managed to avoid paying corporation tax of between $53m and $157m in 2017 on profits arising from the UK. Taxes avoided across the Europe Middle East and Africa region are somewhere between $592m and $1.38bn.

In order to arrive at these estimates, we have applied an upper and a lower percentage to the revenues the company reported in the UK and in the EMEA region as a whole. Our lower estimate of profits is the profit margin reported by the Cisco group as a whole for its entire global operations. For the higher estimate we have taken the pre-tax profit margin that Cisco reports on its non-US sales. These estimates are justified as Cisco reports in its global corporate accounts that the EMEA region is the most profitable market for the company.
The findings of our report demonstrate that tax avoidance by the tech industry extends far beyond the well known cases of Google and Amazon, and that governments in the EMEA region have yet to get a grip on corporate tax avoidance, despite the many attempts to do so over the last 8 years.

Over the long term we estimate that the Cisco group has managed to shift $8.5bn in profits out of the UK since it started operating its counter-intuitive business model. If these profits had been taxed at a rate of 20%, the UK would have seen additional tax revenues of $1.7bn from the Cisco group.

Cisco and tax

Cisco’s low tax rates

The United States Federal statutory tax rate was 35% until 2018, and was then reduced to 21% by the Trump administration. Until 2018, US corporations were liable for tax in the US on their entire global profits, with relief available for any taxes paid to foreign governments.1

Cisco Systems Inc has historically managed to pay much less than the US statutory rate of tax on its profits. The effective tax rate – the percentage of its profits it pays out in taxes, is far below the historic US statutory rate. In 2017 the company disclosed a tax liability of 21.8%. In 2016 it was just 16.9% and in 2015 it was 19.8%.

Cisco Systems Inc further declares the amount of non-US taxes it pays, and its non-US earnings. This shows that the effective tax rate for the company on its foreign earnings in 2015 was just 6.3%. In 2016 and 2017 the rate was 13%. Again, well below the tax rate that the Cisco group would have been liable in most of the markets it operates in. According to the US based Tax Foundation, the worldwide average corporate tax rate, weighted by GDP, was 29.41% in 2017.2

How Cisco does it

Multinational tax avoidance

There is no question that the Cisco group’s corporate structure is largely (if not exclusively) tax-driven. Multinational groups like Cisco can lower their non-US tax bill by diverting profits from the business they carry on in large markets such as the UK into low tax regimes and tax havens – and until recently, they could permanently defer any US liability on such profits by the simple device of choosing not to distribute them to the US.

They do this by operating business models that artificially divide the group’s business between subsidiaries based in countries, like the UK, where the real business is carried on, specially-designed low tax regimes like Ireland, Switzerland, Luxembourg and the Netherlands and in tax havens like Bermuda, the Cayman Islands and the British Virgin Islands. The artificial business model is designed to minimise the profits that can be said to have been generated in markets like the UK and maximising those that can be argued to have been generated in low tax regimes and tax havens.

Often it will be impossible to see how much money is being generated in tax havens, because tax havens generally have lower standards on the disclosure of corporate accounts.

Once they have got their profits into tax havens, US corporations have historically been able to defer any US tax liability on them by keeping the money offshore and not distributing the profits to the US parent. Indeed, if they “permanently” reinvest those profits overseas, the group’s auditors will treat the US tax as having been avoided altogether (thus avoiding the need to include in the accounts any provision for a potential future tax liability that would otherwise prevent a significant proportion of the profits from being effectively recognised in the group’s consolidated global accounts). What counts as a re-investment for the purposes of the US tax code appears to be broad, with many companies building up huge cash piles, which they have “re-invested” in things like US government bonds.

Cisco’s tax structure

The structure employed by the Cisco group involves companies based in the UK, the Netherlands, Switzerland and Bermuda. It is possible to get the company accounts for companies in the UK and the Netherlands, but not Bermuda and Switzerland. Transactions made between these companies are not published in the accounts of the UK and Dutch companies, as they take advantage of a loophole in the accounting rules which allows multinational companies to not to publish transactions between group companies.3 It is therefore difficult to see the detail of how the Cisco group moves money between the various parts of its corporate empire.

However, through an analysis of the accounts, and the description of the activities of each company contained in those accounts it is possible to get some insights.

The Cisco group’s UK based company, Cisco International Limited, describes its activities as the sale of internet protocol based networking and other products and services related to communications and internet technology.4 The company gets the vast majority of its revenues from Europe, the Middle East and Africa, and has branches in a number of countries around the world.5 Given the extremely large turnover of Cisco International Ltd., it is reasonable to assume that it is the entity which is responsible for billing the majority of the Cisco group’s clients in Europe.

In 2017, Cisco International Limited booked sales of $11.5bn. Of this number, the company made $2.19bn from UK sales, another $7.9bn from customers in other European, Middle Eastern and African countries. A further $1.5bn being generated from the “rest of the world”.6 This accounted for 24% of the Cisco group’s total global revenues of $48bn.

Cisco Systems Inc’s global annual report states that the total revenues the group made from the EMEA region were $12bn in 2017. The $10bn in revenue made by Cisco International Limited from the EMEA region ($2.19bn from the UK + $7.9bn from other EMEA countries) therefore accounts for the vast majority of sales that Cisco reported globally as being generated from that EMEA region.

Cisco International Limited makes little profit. It purchases its goods from another Cisco company and sells them at little more than cost price.

The most likely company supplying Cisco International Limited is a company in the Netherlands, Cisco International BV, which describes itself as a provider of hardware, software and support services as well as a manufacturer of hardware.7 In the accounts of the UK subsidiary, Cisco International Limited, it is also disclosed that the same Dutch company holds the warranties on Cisco products.8

The latest accounts available from the Dutch Corporate registry for Cisco International BV cover the year ending July 29, 2017. In that year the company generated revenues of $27.9bn, substantially more than its UK counterpart, however, Cisco International BV also has a significant amount of revenue ($12.4bn) from the United States. The amount of revenue which Cisco International BV declares as being generated from the EMEA region ($10.6bn) is marginally higher than the EMEA revenues of Cisco International Limited. This reflects the fact that some customers of the Cisco group are billed directly by the Dutch company.

It is worth noting that this structure appears to be relatively new, and in previous years its appears that far more of the Cisco group’s customers were billed by the company’s Dutch subsidiary Cisco International BV.9

Again, little profit is left in the Dutch company. No doubt some of the costs the company incurs will be the genuine costs associated with sourcing and manufacturing hardware. However, the company accounts of the Dutch company also disclose that a proportion of the high costs the company pays take the form a royalty for the use of intellectual property rights. This royalty is paid to another group company, the identity of which is not disclosed.

However, a report from Bloomberg in 2011 from investigative journalist Jesse Drucker identified the recipients of this royalty to be a small company in the Swiss town of Roll, Cisco Systems International Sarl.10 At the time the article was published the company had just 100 employees, but was responsible for taking in billions of dollars of royalties from Cisco’s Dutch operation. Cisco Systems International Sarl is owned by a company in Bermuda, Cisco Systems Worldwide Holdings.11 The result, which is discussed in more detail below, is that the Cisco group pays very little tax on the business it conducts in the UK, the Netherlands and the other countries of the Europe, the Middle East and Africa region where it operates.

Once the cash has reached its offshore haven, the Cisco group needs to reinvest that cash in order to ensure the full value of the diverted profits can be recognised in the consolidated group accounts. In its 2017 annual report, the company disclosed that it had $71.1bn of undistributed profits in its foreign subsidiaries that it intended to reinvest permanently.12

The vast majority of this money is not reinvested in the company itself, but has been loaned to either the US government or other companies. Cisco Systems, Inc reported in 2017 that the group owned $19.89bn in US government securities, and $31.6 in corporate debt. A further $2bn was invested in mortgage backed securities, and $1.1bn in the shares of other stock market listed companies. In total Cisco Systems, Inc declared $58.2bn in investments in 2017.13

Profits at Cisco International Limited and Cisco International BV

Even though the Cisco group books the majority of its UK and European revenue in its UK subsidiary, Cisco International Ltd, and much of that revenue then appears to flow to its Dutch subsidiary, Cisco International BV, the profits of both companies make up just a small part of the profits the Cisco group makes in the EMEA region.

According to their annual accounts, Cisco International Limited had a gross profit margin of 18.07% in 2017, and an operating margin of 1.85% (operating margin is the profit after shared costs, like administration and marketing that isn’t chargeable against any particular sale, but are necessary to facilitate all sales). That means that taking into account the revenue Cisco generates from external customers and from other Cisco companies, Cisco International Limited is making a profit of less than 2p on every pound of revenue the company earns.

If we look back at previous years we see that 2017 was one of Cisco International Limited’s better years. In 2016 the company made an operating margin of 0.5%, in 2015 it was 0.69% and in 2014 and 2013 the company lost money. These thin profits led to UK corporation tax payments of $53m in 2017, $45m in 2016 and $38m in 2015.

Cisco International BV, the Dutch company, fared little better. After recording revenues of $27.9bn, the company had a cost of sales of $23.4bn, leaving it with a gross profit of $4.5bn (16% of revenues). The company had operating expenditure of $4.1bn, leaving it with an operating profit of $358m (1.28% of revenues). The tax bill for the year was $141m.

The Cisco group operates other company in the UK and the Netherlands, however the profits, and taxes paid by these companies, appear to be insignificant. For example, Cisco Systems Management BV is an intermediate holding company that owns many of the other Cisco group companies outside of the US. In 2017 it had a tax bill of $5.3m on a profit of $902m. The majority of the profit came from a capital gain on a subsidiary the company sold to another part of the Cisco Group and was not liable for tax in the Netherlands. The group has a company called Cisco Systems Limited in the UK, it reported a profit of just £3m in 2017 and taxes of £1.2m. In 2016 it had a tax bill of just £83,000.

Cisco’s global profits

Data published by Cisco in the United States present significant evidence that the accounts of Cisco International Limited and Cisco International BV, present an artificially low picture of the profits the company makes in Europe.

Currently companies are not compelled to publish a country by country breakdown of their sales, costs and profits. Cisco publishes its group consolidated accounts on the New York Stock Exchange. The consolidated accounts look at the entire global operations of Cisco, reporting figures for the company’s revenues and profits from their entire global operations. The Cisco company which is responsible for the consolidation, and therefore reports its figures on a consolidated basis, is Cisco Systems Incorporated.

The consolidated global accounts of Cisco Systems Incorporated also break down the group’s sales and gross profit margin by geographic region. These segmental figures are not generated by simply adding up the accounts of its European subsidiaries, but by looking at the sales generated from customers located in Europe, the Middle East and Africa. A comparison of the consolidated accounts with the accounts of Cisco International Ltd reveal a significant gap between reported profit levels.

If we look at the consolidated accounts of the Cisco group we see that it made global revenues of $48bn. From that the group made a gross profit margin of 63% ($30.2bn) and an operating profit margin of 25% ($12bn). So, in 2017 the Cisco group was 13.5 times more profitable on a global level than Cisco International Limited, and 19.5 times more profitable than Cisco International BV. In 2016 the Cisco group was 50 times more profitable on a global level than Cisco International Limited.

So why is there this huge disparity between the amount of profit being made by Cisco International Limited and the Cisco group?

It is not a regional issue as the consolidated accounts of the Cisco group show the EMEA region to be the most profitable region for the company on a gross margin basis.

The gross profit for the EMEA region is noted in the Cisco Systems, Inc global accounts as being $7.9bn – a margin of 65%, higher than every other region. However, only a fraction of this profit appears in the accounts of the two main EMEA subsidiaries of the Cisco group (the British Cisco International Ltd and the Dutch Cisco International BV), through which the vast majority of EMEA sales flow. As a result only a fraction of the profits are taxed in the UK and the Netherlands . Most of the profits legally belong to Cisco subsidiaries based somewhere else. Eventually these profits will be added to the $71bn of non-US profits which Cisco has kept offshore and invested in stocks and bonds to enable the group to demonstrate to its auditors that it has completely avoided rather than merely deferred US tax.

How much tax has Cisco avoided?

So what would have been the taxable profit in the UK, and the wider EMEA region, if the profits declared in the local accounts of the Cisco Group matched the level of profit that Cisco themselves say they generate in from those markets?
The group does not report operating profit margins by geographical segment in its global accounts, however, as a starting point we can assume an operating margin of 25%, which is the same as the Cisco’s worldwide operating margin. As we have already noted from the Cisco Systems Inc. accounts, the gross profit margin of the Cisco group in Europe is broadly in line with the global gross profit margin, so it is a reasonable assumption that the operating profits would also be similar.
If we apply an operating margin of 25% to the $2.19bn in sales reported by Cisco International Limited as being generated in the UK, we get an operating profit of $538m. This is compared to an operating profit of $214m that Cisco International Limited reports on all of its global sales.

Before a company is liable for corporation tax, the costs of financing the company is deducted from the operating profit. In Cisco’s case the company has no external finance costs. Indeed the company has so much cash than rather than borrow money finance its operations, it loans money to others.

So in order to arrive at an estimate of the pre-tax profits made by Cisco International Limited from its sales in the UK, we can simply assume that the pre-tax profit is the same as the operating profit.

To understand how much the lower profits being expressed on Cisco International Limited’s accounts lead to lower tax revenues, we take the new figure for our operating profit (which for our purposes, is the same as the pre-tax profit) and apply the statutory corporation tax rate. For the UK this would make the corporation tax payable $104m, almost twice the amount paid by Cisco in 2017 in the UK.

If we are to go through the same exercise for sales from the rest of the EMEA region, we can take the total sales from the EMEA region as reported in the Cisco Inc accounts, and apply a margin of 25% in order to get a figure for pre-tax profit. This gives us an pre-tax profit of $3bn.

Working out a tax bill for EMEA countries is slightly more difficult, as we are dealing with several different tax rates from different countries. However, a study from the US based Tax Foundation found that in 2017, the EU’s weighted average tax rate was 26.25%.

If we take the EU figure of 26.25%, and apply it to the EMEA adjusted profit we get a tax bill of $787.5m. This is far more than the combined tax bills of both the UK and Dutch versions of Cisco International, which between them paid $195m in 2017.

These figures would suggest that Cisco Systems avoided $51m of corporation tax in the UK, in 2017 and $592m in the rest of the Europe Middle East and Africa region. These figures form the lower range of our estimates for profit shifting by Cisco Systems.

These figures are based on the generous assumption that Cisco in Europe is no more or less profitable than Cisco as a whole. That the profit margin in Europe is the same as the average profit margin Cisco makes in all regions in the world.
However, there is evidence from the Cisco group accounts that suggests that the profits of the company are significantly higher in the UK and Europe than in the US.

Cisco Systems Incorporated publishes a figure for the amount of tax it pays, and the profit it makes in all of its US and non-US businesses. 14 In 2017, the company made $9.89bn in its non-US business, and paid foreign taxes of just $1.23bn, achieving a tax rate of just 12.4%.


If we take the figure of $9.89bn as the company’s non-US pre tax profit, and divide it into $19.65bn, which is the company’s non-US revenue, we see that Cisco is making a 50.3% pre-tax profit margin on its non-US business. Put another way, Cisco is making 50p in profit for every pound of sales the company makes outside the USA.

If we apply this profit level to the UK revenue of $2.19bn, we get a profit of $1.1bn, which suggests that Cisco’s tax bill in the UK should be in the order of $209m, almost four times the tax bill declared in the UK accounts of Cisco International Limited.


On a regional basis, a pre-tax profit margin of 50.3% would imply pre-tax profits of $6.04bn in the EMEA region and a tax bill of $1.58bn. This would suggest that the scale of tax avoidance being practised by Cisco is $1.39bn a year in the EMEA region, and $157m in the UK in 2017 alone if we use the pre-tax profit margin Cisco publishes on their international sales.

Finally, by looking at the non-US profits that Cisco has managed to accumulate overseas, we can get some idea of the historic impact of tax avoidance by this one company on the the finances of the UK government.

Over the last 5 years, the UK revenue as reported in the Cisco International Limited accounts as a proportion of all of Cisco’s non-US revenue was 12.8%.

Cisco Systems has $71bn in foreign profits that it has not distributed, and which it has accumulated offshore over many years. If we assume that 12.8% of these profits came from the UK, this suggests that Cisco has managed to move $8.5bn in profits from the UK over the time it has been operating its tax avoidance strategy. If this was taxed at a rate of 20%, it would have led to additional tax revenues of $1.7bn over the long term.


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