Dismissed by critics and devoured by fans, “Transformers: Age of Extinction” was the top box office film in 2014, bringing in $1.1 billion, with more than three-quarters of those dollars coming from overseas.
ViacomCBS’s Paramount Pictures, which distributed the computer animated action-fest, saved much of that money by licensing the international rights through a complex strategy designed to avoid paying U.S. taxes, according to a study published on Tuesday by the Centre for Research on Multinational Corporations, a nonprofit group funded in part by the Dutch Ministry of Foreign Affairs.
It is common practice for multinational corporations to take advantage of tax shelters. The report offers a rare look at how one company has pulled it off.
ViacomCBS, a media giant that came into being after the 2019 merger of the sibling companies, has used the same strategy for all its entertainment properties, according to the report.
Since 2002, ViacomCBS and its predecessor companies Viacom and CBS together avoided paying $3.96 billion in U.S. corporate income tax through a system that involved subsidiaries in Barbados, the Bahamas, Luxembourg, the Netherlands and Britain, according to the report.
Much of the $30 billion in non-U.S. royalty revenue brought in by the company’s film and TV franchises, such as “SpongeBob,” “Star Trek” and “Mission: Impossible,” has not been subject to corporate taxes, the study determined.
ViacomCBS disputed the study’s findings, saying in a statement that it was “deeply flawed and misleading” and that it “demonstrates a fundamental misunderstanding of U.S. tax law.”
“It is filled with mis-characterizations, material omissions, and numerous false claims,” the company said in a statement. “ViacomCBS fulfills its tax obligations in all 180+ countries and the territories we operate, and all of our revenues — including those identified in this report — are fully taxed in relevant jurisdictions around the world, including the United States, as required by applicable law.”
ViacomCBS added that its “overall global effective tax rate” was 32.6 percent for Viacom between 2006 and 2019 and 33.8 percent for CBS in that time span.
The study on ViacomCBS’s tax structure has come out weeks after President Biden proposed a 15 percent minimum tax on overseas profits for U.S. companies, an effort designed to keep countries from competing with one another by lowering their tax rates. The suggested global rate is part of a larger plan to overhaul the tax code that would raise corporate income tax in the United States to 28 percent, from 21 percent.
ViacomCBS, which is led by Shari Redstone, has sought to take advantage of ever-changing tax laws in other countries in a “cat and mouse” game, the study said. Before the merger, Viacom and CBS, both of which were controlled by the Redstone family, employed the same strategy of moving foreign intellectual property licensing rights to subsidiaries outside the United States when rates became more favorable, the report said.
The Centre for Research on Multinational Corporations said it chose to focus on ViacomCBS because it had set up a number of Dutch subsidiaries, known as letterbox companies, to take in large amounts of television revenue.
“Most of the entities did not even have a single employee,” Maarten Hietland, one of the study’s authors, said in an interview.
ViacomCBS said in its statement that it had overseas locations “for core, strategic business purposes, and not for any perceived tax benefits.” The statement added that, in the Netherlands, the company has 300 employees and a production studio and generates “$1 billion in annual revenue outside of licensing.”
Licensing, or royalty revenue, has always been a significant part of the business, accounting for about 24 percent of yearly sales since 2018. Media companies are now driven by streaming, a relatively new enterprise that has been losing money as it tries to attract as many subscribers as possible all over the world.
Unlike businesses that produce physical goods, media companies can take advantage of the intangible nature of their products. Moving licensing rights to SpongeBob from one country to another is just a matter of paperwork.
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Jeffery Kadet, an expert on international taxation and an instructor at the University of Washington School of Law, said the moves are akin to self-dealing.
“If you take money or other property like licensing rights and move them from one subsidiary to another subsidiary, have you done anything that changes the group as a whole economically? The answer is that you haven’t,” he said. “It’s like taking a dollar bill from your front left pocket and moving it to your right rear pocket. You still have the dollar.”
ViacomCBS’s tax arrangements, which appear to be legal, take advantage of disparate tax codes across nations, the study said. Income that may be considered taxable in the United States may be deemed free from such levies in the Netherlands, for instance.
Since 2002, tax experts working for Viacom, CBS and ViacomCBS have devised structures to take advantage of these mismatches, thus lowering its taxable income, according to the study. Almost all of these plans involved one country: The Netherlands.
Dutch tax authorities, in an effort to compete with other European nations, have offered favorable rulings to multinational corporations, allowing some companies to pay taxes on just 0.8 percent on revenue from licensing international distribution rights. In other words, for every dollar Viacom collected overseas for a blockbuster like “Transformers” (after converting from reals, lira or renminbi), less than a penny was likely subject to corporate income tax, according to the study.
Dutch authorities have created what tax experts call a “conduit” system where most if not all of a U.S. company’s international income is funneled through a region with friendly tax codes. Alphabet, Starbucks, Dell and other U.S. companies have also had units in the Netherlands.
ViacomCBS — and its predecessor companies — created several subsidiaries in the Netherlands to hold the foreign licensing rights to their TV programs and films, content largely created in the United States. The companies then used the subsidiaries as a springboard to sub-license those rights to other markets. The money from those deals all come back to the Dutch entities, where most of it is not subject to corporate tax.
One Viacom executive objected to the strategy. In 2016, she filed a lawsuit against the company for a “retaliatory firing” after she spoke up about what she considered “an illegal tax avoidance scheme in violation of federal law.” (A few months after the suit was filed, both parties settled, and the terms were not disclosed. “We believed the claims to be without merit and the matter has been resolved,” the company said.)
In the suit, the executive accused Viacom of “hatching a plan to attribute” the revenue from the popular franchise “Teenage Mutant Ninja Turtles” to the Netherlands for tax advantages. While the rights to the franchise are owned by a Dutch entity, “all of the business concerning those rights took place in New York,” the suit read. “The sole purpose of transferring the licensing rights to the Netherlands company was to avoid the U.S. tax burden,” the suit added.
The study noted that Viacom transferred its intellectual property rights to a subsidiary in Britain in 2015 while keeping the Dutch entities (operating as a subbranch of the British unit) as the jumping-off point for selling foreign rights.
The transfer — essentially a sale from one Viacom subsidiary to another — created a tax benefit, the study said. The transaction was worth $1.8 billion, according to company records cited by the study, a sum it can amortize over many years.
From 2015 to 2019, Viacom’s British unit collected $4.5 billion in revenue and gross profits of $1.25 billion, but “the U.K. corporate income tax on their profits during this period was only about $18 million,” according to the report. Since the amortization is considered an expense, the company was able to lower the amount of profit it recorded.
President Biden’s proposed tax overhaul could prevent ViacomCBS and other large corporations from exploiting these mismatches. Even so, U.S. companies could still move much of their business abroad, since tax rates in other countries are likely to remain low, according to Mr. Kadet.
“As a country,” he said, “we’d be better off overall with the same rate everywhere.”
Susan Beachy contributed research.