US Ride-Hailing Company Creates a $6.1 Billion Dutch Tax Deduction to Reduce Paying Taxes

; posted on
August 13th, 2019

Uber Technologies Inc. created a $6.1 billion Dutch tax deduction that will help the company reduce its global tax bill for years to come. Uber generated the outsized deduction by moving some of its offshore subsidiaries to different countries as a result of new European Union rules governing multinational companies.

Tax scheme

The strategy begins with Uber International C.V., the subsidiary that Uber created in May 2013. Uber International C.V. has no employees and, though it is chartered in the Netherlands, lists the address of a law firm in Bermuda as its headquarters. It is important to note that under such legal entity in Netherland, Uber Established so many subsidiaries under it. Most of these companies, including Uber International C.V., have zero employees. The biggest subsidiaries is called Uber BV.

On May 31, 2013, Uber International C.V. agreed to pay Uber Technologies a one-time fee of $1,010,735 plus a royalty of 1.45% of future net revenue for the right to use Uber’s intellectual property outside the U.S.  The two companies also agreed to share the costs and benefits of IP developed in the future. This cost-sharing agreement effectively allows Uber to keep most of its non-U.S. profits beyond the reach of American tax authorities.

Moreover, Uber International C.V. and Uber B.V. have an “intangible property license agreement” in which Uber B.V. must pay a royalty fee to Uber International C.V. for the use of Uber’s intellectual property - basically, the app that matches driver with rider. Under the terms of the agreement, Uber B.V. is to be left with an operating margin of 1% - effectively 1% of revenue - after subtracting the costs of operation. The rest of the profits get sent to Uber International C.V. as a royalty. And under Dutch law, that royalty payment isn’t taxable. As a result the revenue was not taxable in the hands of US and Netherland.

Tax deduction

Uber’s windfall was created last March when it pulled intellectual property out of a paper entity in Bermuda with no employees and put it into a Dutch entity that’s ultimately controlled by a holding company in Singapore. The Dutch entity itself has dozens of other Uber entities under it.

As consequence of relocating the intellectual property, Uber creates $6.1 billion deduction. The deduction came through an increase in the value of intellectual property that Uber transferred between its offshore subsidiaries. When an intangible asset increases in value, so do the tax deductions that come with its use over time.

The deduction is only applicable to the company’s tax bill in the Netherlands, a tax-reducing hub favored by multinational corporations. Uber uses the similar scheme as laid out in the previous section. Such scheme, will certainly lower the company’s overall global tax bill if it becomes profitable. Meanwhile, the company can use its U.S. losses to lower its U.S. tax bill.

In the U.S., Uber has tallied operating losses of more than $10 billion over the last three years. Those losses will allow it to cut down its future U.S. tax bills. As of the end of last year, it reported U.S. net operating losses for future use of $5.1 billion for federal purposes and $4.4 billion for taxes in the states in which it operates.

In its second-quarter report filed Thursday, Uber posted a $5.2 billion net loss amid sales that fell short of estimates and costs for stock-based compensation during its public offering. Those losses, which reduce taxable income, would allow it to save around $1 billion in federal tax and around $220 million in state taxes, or a total of around $1.2 billion. They’re in addition to the $6.1 billion Dutch buffer.

Source: Bloomberg , TPA Global

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