The International Consortium of Investigative Journalists has published a trove of new documents showing how Koch Industries and other large corporations (think Disney, Skype, Microsoft and more) move money offshore to shelter it from corporate taxes.
The Disney and Koch files show that both companies, advised by Ernst & Young, engineered complex restructurings that reorder the ownership of many subsidiaries and centralize them under Luxembourg companies that are all served by internal corporate finance companies, akin to a company’s own bank. These internal lenders received interest from affiliated companies channeling hundreds of millions of dollars in profits through Luxembourg between 2009 and 2013 and paid little tax. In some years, the two parent companies’ Luxembourg subsidiaries enjoyed tax rates of less than 1 percent.
“Professional standards, as well as privacy laws, require that EY safeguards confidential client information. We take these obligations very seriously and are therefore unable to comment on individual cases,” Brewster, of Ernst & Young, said in the statement.
“When the money arrives in Luxembourg, taking advantage of an agreement between countries that assumes it will be taxed in Luxembourg, it goes in one of these unusual structures … and it's not taxed very much at all,” Richard Brooks, a former tax inspector in the U.K. and author of The Great Tax Robbery, said about these types of arrangements. Brooks was not speaking about Disney and Koch specifically.
I saw this in action when I was going through Mitt Romney's various Bain Capital investments in 2012. Between 2009 and 2010, Bain moved the corporate headquarters for many of the companies they offer for investment to Luxembourg to minimize taxes. When you hear the term "repatriate funds," this is the money they're talking about. But wait, there's more.
Koch’s Luxembourg transactions revealed by the new documents involved its chemicals and polymers subsidiary Invista BV, which makes Lycra-brand fiber and Stainmaster-brand carpets.
The Koch documents, also prepared by Ernst & Young, describe “Project Snow,” a 26-step restructuring of Invista designed, they say, to simplify the company’s structure, centralize its cash flow into Luxembourg, and pay down debt.
The restructuring was worked out in a series of four meetings in late 2008 and early 2009 between Ernst & Young employees and Marius Kohl, head of the Bureau d’imposition Sociétés VI, part of Luxembourg’s revenue authority, according to the tax ruling. Kohl, now retired, approved thousands of tax deals over 22 years that helped save companies billions of dollars.
The documents show that in the restructuring, which took place starting in September 2008, the subsidiaries of Invista passed hundreds of millions of dollars back and forth, converting shares to debt and occasionally dissolving firms. Tax-free “hidden distributions” among subsidiaries are just one type of head-spinning transaction included in the confidential tax ruling approved by Luxembourg authorities. Another section describes a $736 million loan that gets passed from company to company until a U.S.-based subsidiary becomes “both the debtor and creditor of the same debt,” and the debt is canceled.
So to be clear, while the economy was melting down and U.S. banks were going broke, Koch Industries was moving corporate money out of the country and into the Luxembourg jurisdiction in order to dodge taxes and move nearly $1 billion around a Byzantine maze in order to ultimately cancel the debt and not impact balance sheets.
In his book Oligarchy, author Jeffrey Winters attributes actions like this to the Income Defense Industry, and specifically identifies oligarchs by their ability to "hire the armies of professionals in the Income Defense Industry." He goes on to say "[N]ot just any rich person is an oligarch. "Oligarchs are those rich enough to convert their money into the professional firepower needed to defend their wealth and incomes."
In another section, Winters quotes David Cay Johnston, who says "this can sometimes be an outlay of $10 million to avoid $30 million in taxes, and other times spending only $1 million to save the same amount."
When you consider the $736 million transaction, it fits neatly into this category. For me, the difference between what Disney and Koch Industries is doing is striking. Disney is a publicly traded company with shareholders as diverse as pension funds and individuals with 401k plans. At least the income they're "preserving" is redistributed to those shareholders. In the case of Koch Industries, that income falls into the Koch family's pockets and no others. That's it. It's all passed through under the "small corporation" Subchapter S rules which gives them even more tax benefits.
Cycle of Koch: Make money, shelter it from taxes via complex wealth preservation schemes, pour even more money into think tanks and elections in order to create even more wealth preservation schemes while gutting the middle class.
[Photo Credit: DonkeyHotey]