How a German tech giant trims its US tax bill

How a German tech giant trims its US tax bill
SAP's customers and programmers are largely based in the United States, Canada, France, Japan, the UK and Germany.

LONDON - In July 2012, then-US Treasury Secretary Tim Geithner travelled to an island off the German coast to meet Wolfgang Schaeuble, Germany's finance minister. Schaeuble was on vacation, but Geithner visited to discuss the euro zone crisis.

Talk also turned to a long-running bugbear of Schaeuble's: corporate tax avoidance.

According to a letter Schaeuble later wrote to Geithner, the Treasury Secretary had explained in their conversation that the most aggressive forms of avoidance often involved technology companies parking valuable know-how in low-tax countries and making other parts of the company pay high rates to use it.

In Schaeuble's letter he sought Geithner's support for international action against legal tax dodging. Profit shifting, the finance minister said, was largely a problem involving US companies. Tax rules in Germany made it more difficult there.

This "could explain why we do not know of German companies with comparable tax arrangements to the US companies," the letter, seen by Reuters, said.

But an examination of the accounts of one of Germany's largest firms shows it uses similar techniques. Without them, it would pay more than 100 million euros ($133.53 million) in additional tax each year, some of it to the United States.

SAP AG provides software for businesses to process and analyse transactions, counts 80 per cent of the Fortune 500 as customers and has a market capitalisation of $90 billion, making it the fourth biggest firm in Germany.

Its accounts show that it - like US tech firms such as Google and Microsoft - channels profit to subsidiaries in Ireland, where the corporate tax rate is 12.5 per cent. The comparable rate in Germany is 30 per cent and in the United States, SAP's largest market, 39 per cent, according to the Organisation for Economic Cooperation and Development (OECD), an international think tank.

SAP, which is headquartered in Walldorf, Germany, has paid a global annual tax rate in the last three years averaging 26 per cent. That's nearly 20 percentage points less than the company paid a decade earlier.

Like other German companies, SAP has benefited from significant German tax cuts over that time, but it is only taxed on part of its profits in Germany. The company is structured so that Ireland, which accounts for less than 1 per cent of its sales and employees, is the home base for 20 per cent of its profits.

SAP uses Dublin as a base for know-how and other intellectual property generated by staff around the world, and has an Irish subsidiary lend billions of dollars to a US affiliate for much higher interest rates than the group pays on the open market.

There is nothing illegal about this; the company said profits reported in Ireland reflect genuine economic activity and risks borne by Irish subsidiaries, and the structure was driven by operational rather than tax motives.

"SAP didn't come to Ireland for taxes," Liam Ryan, who heads SAP's Irish operation, told Reuters at the group's campus in the leafy Citywest office park on the outskirts of Dublin. "The reason SAP invests here is because we deliver."

Tax authorities in Germany and the United States declined comment, citing rules on taxpayer confidentiality. A spokesman for Finance Minister Schaeuble said he would not comment on specific companies.

Sven Giegold, a German member of the European Parliament and spokesman on economic affairs with the Green Party, said, "This shows US companies are not alone in engaging in clever tax planning." He said the arrangements were clearly "contrived... It is obvious that these arrangements are tax motivated. It is not convincing to say otherwise."

Sahra Wagenknecht, a member of the German parliament and a spokeswoman on economic and tax matters for Die Linke, a left-wing party which calls for higher taxation, said SAP's case highlighted inadequacies in current tax rules that the government should address.

Corporate tax is an increasingly touchy topic as indebted governments cut budgets. Last year, Schaeuble worked with colleagues from France and Britain to launch a major review of international tax rules aimed at ensuring multinationals pay their fair share and at reducing what has become known as "base erosion and profit shifting" (BEPS).

Governments aim to agree new rules in a couple of years.

Edward Kleinbard, Professor of Law at the University of Southern California, says US business lobbyists have depicted these efforts at tax reform as anti-competitive, a bid to weaken US firms by having them pay more tax to overseas governments.

"US firms have designed a good deal of their domestic lobbying on BEPS along the lines that BEPS is all about bashing American success," said Kleinbard, who was formerly Chief of Staff of the US Congress's Joint Committee on Taxation.

But he said the case of SAP shows the United States is also a victim of tax avoidance by foreign companies; the US treasury, too, could benefit from tax reform.

Like all companies, SAP has a responsibility to investors to maximize returns by minimizing costs, including taxes. "Clearly, if I was an investor looking at two identical companies, I would choose the one with the lower tax rate," said Robert Jakobsen, senior equity analyst at Jyske Bank in Denmark, who covers SAP.

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