Cisco, the world’s biggest data networking products supplier, based in San Jose, California, has managed effectively cut its corporate tax rate and save itself 7 billion US dollars in corporate taxes since 2005. Last year the company in its home country reported effective tax rate of 17,5%. That is half of the U.S. statutory rate.
Since 2008 the company also managed to cut taxes on worldwide income to 5% by moving profits through Netherlands, Switzerland and Bermuda according to Cisco records in those countries.
How Cisco does it?
The company transfers its patent rights to the Dutch unit. The technology itself is developed in the US, but the rights to it are sold to unit based in Netherlands, which in return sells those patent rights back to its American parent for further distribution in the USA.
Most of the income sales in countries with high tax rate over 30% (Germany, Japan, etc…) eventually is transferred to Switzerland. Cisco managed to create a system where the company’s international earnings since 2008 are taxed at about 5%.
As a result of tax planning practices the company managed to accumulate 31,6 billion US dollars from overseas sales. No US taxes have been paid from that sum.
One of the European subsidiaries for the company is Cisco Systems International BV. It is based in Amsterdam, Netherlands and employs about 2% of total Cisco workforce. It gets credit for more than half of Cisco’s worldwide sales, even including part of US business.
Since the middle of 90-ies Cisco Dutch subsidiary paid for the company’s research done in the U.S.A. It was done under a cost-sharing agreement. Being a U.S. technology company, Cisco qualifies for U.S. tax benefit if it does all of its research and development domestically. Cisco Systems International BV pays for some of it and as a consequence, is able to remove a part of subsequent profits in the U.S. and have them offshore.
Cisco’s foreign operations also acquired interest in some of the company’s existing intellectual property. Cisco buys some of the products from the Dutch subsidiary and sells it to an American customer. That transaction includes equipment based on the patents developed in the U.S.A.
Most of the income claimed by Cisco Systems International BV in Netherlands is taken to the Switzerland subsidiary Cisco Systems International Sarl on the grounds of sublicensing for intellectual property.
Tax legislation in Netherlands allows companies to send payments to the units in so called “tax havens” considerably cheaper if compared to the option of sending those payments there directly.
In recent years the Swiss subsidiary tax rate has been less than 5%. The Cisco’s unit is based in Rolle and has about 100 workers. Although this unit is owned by yet another Cisco subsidiary, registered at the offices of Bermuda law firm. This jurisdiction has no corporate income tax.
Bloomberg.com: Biggest Tax Avoiders Win Most Gaming $1 Trillion U.S. Tax Break (Jesse Drucker, June 28 2011).