Dell restructuring--all for a tax advantage?

David Cay Johnston writes for Tax Analysts, in  Dell’s Multiple Restructurings Aid It in Tax Avoidance (2013), about a global reorganization disclosed by Dell in its January 2007 Form 8-K filed with the SEC:  “just before the end of 2006, [Dell] issued more than 475 million shares worth $12 billion to invest in a subsidiary.”  In the Form 8-k, Dell notes that “Dell has modified the corporate structure of certain of its subsidiaries to achieve more integrated global operations and to provide various financial, operational and tax efficiencies”  (as quoted in the Johnston article). 

What Dell did was remake itself in a way that lets it escape taxes on profits earned in the United States by running them through a Netherlands entity and newly formed subsidiaries in Singapore and the Cayman Islands.

Dell later quietly dropped the Singapore and Cayman Islands entities in what appears to be a pattern of remaking its corporate structure every few years. This nuanced timing pattern may have great significance as a tool for tax avoidance because IRS corporate audit practices were established on the assumption that companies tend to have stable structures. The IRS rarely audits newly formed entities.

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The documents suggest that Dell created companies with no apparent purpose except to funnel profits into jurisdictions where they would be untaxed. In some cases, subsidiary names existed for a day or so and then were changed to the names of existing entities. The company shuffled its subsidiaries like a deck of cards — a deck stacked against shareholders and the IRS.

Sometimes the deals used companies with identical addresses, suggesting circular flows in which what would be taxable profits in the United States were run through offshore entities with no discernible purpose except escaping tax.  Id.

Describing the work of a copule who sleuthed through Dell’s state filings and court papers to examine its tax compliance, Johnston reports:

Before one restructuring, Dell Inc. sold products to domestic customers through Dell Catalog Sales Corp., which shared the same address in Texas.

The couple distilled from annual corporate ownership and sales tax filings with state governments, as well as stipulations in various civil lawsuits, that Dell then replaced this simple organizational structure with a hierarchy of tax haven holding companies.

In all, Dell inserted four new companies between the parent and operating entities, which use the same Texas street address.

The result was that a Texas company reported to a Netherlands company that reported to a Singapore company that reported to a Caymans company that reported to what appears to be another Netherlands company that then reported back to the Texas headquarters.

This makes business sense? I cannot fathom how — except to escape taxes.

And because Dell publicly discloses its untaxed offshore profits and the expected tax rate upon repatriation of those profits, those numbers support the suggestion that the elaborate creation (and killing) of subsidiaries has one primary purpose–the reduction of taxes owed to the US.

Citizens for Tax Justice, in a report last year (Doc 2012-21457 , 2012 TNT 202-22), noted that Dell is one of the few multinationals that discloses how much untaxed profits it holds offshore and the expected tax rate if it brought the money back to the United States.

Dell said it had $15.9 billion of untaxed profits offshore on which it would owe a tax of $5.2 billion, or 33 percent. Since that is almost equal to the 35 percent corporate tax rate, it suggests Dell paid virtually no tax anywhere in the world on those profits, because Congress gives a dollar-for-dollar tax credit on corporate income taxes imposed by other countries.

So what, Johnston asks, is the public benefit of allowing this kind of corporate shell game?  He suggests tht for shareholders, the question is whether they are being told enought to evaluate the risks and rewards of holding Dell securities.  And he concludes probably not.  For the IRS, it is whether regular audit techniques will miss what they should catch. And again, he wonders if the IRS policy of letting companies know what will be audited, sticking to those points, and completing audits in fixed time periods isn’t just a giveway to those who are manipulating their tax rates.  Dell’s tax counsel, he notes, would undoubtedly advise that they have reviewed each reorganization step and that they are perfectly legal.  But Johnston wants an audit, and one that looks at the whay sophisticated companies are adept at working around audit policies.  Dell’s reorganizations, he says, are apparently timed at two-year intervals, injecting considerable complexity into the work of any IRS auditor trying to track their impact. And ”the business purpose for this management structure is elusive”, he notes, on one set of slides showing a shuffle of entities that ultimately lands a company still located in Texas under a foreign sandwich of companies and ultimately avoiding US tax on the operating company income. He surmises that Dell owes a billion or more in US corporate income taxes that have escaped capture because of this endless restructuring.