Gina Chon, Financial Times, January 28, 2016
Moody’s, the rating agency, cut its tax rate by 9 percentage points over eight years, according to documents seen by the Financial Times which spell out the lengths to which international companies will go to pay less to governments around the world.
Successive restructuring plans adopted between the financial crisis and 2014 took advantage of tax codes in different jurisdictions, people familiar with the matter said, cutting Moody’s tax burden from just over 40 per cent to about 31 per cent. Moody’s net income rose more than 31 per cent over the same period.
The plans included one called Project Jubilee, a proposal from PwC to reduce Moody’s US and UK tax bills which the company began implementing in 2012, according to people familiar with its details and documents seen by the FT.
The elaborate structure was entirely legal, but such measures are facing growing scrutiny on both sides of the Atlantic as governments push to close the loopholes companies exploit to reduce their tax bills. Tackling tax avoidance has become a priority for the Group of 20 leading economies and the OECD.
Project Jubilee involved a complex series of steps that led to the formation of two new US limited liability companies, four new UK entities, and billions of dollars moving between them and other subsidiaries.
Such behaviour has attracted scrutiny across major economies as governments work to close loopholes and crack down on methods adopted by companies to reduce their tax bills.
This week alone, US presidential candidates have attacked “inversions” such as Johnson Controls’ $20bn Tyco deal which would move the US group’s tax base to lower-tax Ireland; Apple has defended what Brussels alleges are sweetheart tax deals; and Google has faced a backlash over its deal to pay £130m in back taxes to the UK, ending a 10-year probe into whether it shifted UK profits to Ireland.
Part of Project Jubilee was a $2.3bn loan made from a US company to a UK company limited by guarantee, which was structured as a Quoted Eurobond for UK withholding tax purposes, according to documents seen by the FT. The US component of the transaction was treated as equity but was considered debt in the UK.
Quoted Eurobonds — which bear interest and typically have a stock market listing without being traded — have attracted parliamentary scrutiny in the UK because they can be used to avoid the 20 per cent withholding tax on interest payments to foreign lenders, since the Quoted Eurobonds are exempt from that rule.
The OECD has been cracking down on such structures — known as hybrid instruments — and the “mismatch” in how they are treated in different jurisdictions. Because of that mismatch, the structures often avoid taxes in both jurisdictions, leading to a double non-taxation, including long-term deferrals.
“These types of arrangements are widespread and result in a substantial erosion of the taxable bases of the countries concerned,” the OECD said in an October report. “They have an overall negative impact on competition, efficiency, transparency and fairness.”
“As a global company, Moody’s is careful to ensure that it manages its business in ways that meet local laws and regulations, including in the US and the UK,” the company said. “We pay all of the taxes we are required to pay under current applicable tax codes and will continue to comply fully with our tax obligations.”
As part of the $2.3bn loan, Project Jubilee also called for shares in the rating agency’s Cyprus entity to be continually transferred through at least four different US and UK entities.
For the US, the Moody’s plan assumed that several of the transactions under Project Jubilee would qualify as a “tax-free” exchange as part of a rule that was aimed at removing the tax consequences companies could face as the result of incorporating an unincorporated business. That meant a tax on any gain from the exchange of shares for money would be deferred. Companies argue that global tax codes need to be overhauled and it is their duty to shareholders to find ways to pay the lowest amount of taxes possible.