Stricty confidential – copy prohibitedInternational Comparative Study of telecom operators taxation and taxoptimization sc...
2Greenwich Consulting © 2013I – Specific taxation: The assessment of tax arrangements applied to telecomoperators in the 6...
3Greenwich Consulting © 2013Reminder of the tax system specific to the telecom sector in FranceIn 2011, French telecom ope...
4Greenwich Consulting © 2013The specific telecom taxes range from 0.07% to 2.98% of operators revenues,funding the telecom...
5Greenwich Consulting © 2013France is the largest contributor to the funding of the cultural sector through thecompensatio...
6Greenwich Consulting © 2013In France, specific telecom taxes account for 20% of total CAPEX oftelecom operators in 2011 a...
7Greenwich Consulting © 2013In addition to the € 6/7-billion annual, recurring investment, French operatorsacquired their ...
8Greenwich Consulting © 2013II – Fiscal optimization of “OTT players”*: An analysis of the main "Over-The-Top" players hig...
9Greenwich Consulting © 2013Corporate income taxes: Google optimizes its taxes by funneling profits throughHolland and Ber...
10Greenwich Consulting © 2013To achieve this tax optimization scheme, Google benefits from several specificrequirements an...
11Greenwich Consulting © 2013Ireland upholds that the indirect benefits to its economy are more importantthan the shortfal...
12Greenwich Consulting © 2013In 2011, the OTT players paid € 37.5 M in corporate taxes in France, 22 times lessthan what t...
13Greenwich Consulting © 2013The Luxembourg-based iTunes service enables Apple to benefit from a reducedVAT rate on its sa...
14Greenwich Consulting © 2013In 2011, the shortfall in VAT due to optimizations in the e-business in Franceis estimated be...
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International Comparative Study of telecom operators' taxation and tax optimization schemes of Over-The-Top players

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International Comparative Study of telecom operators' taxation and tax optimization schemes of Over-The-Top players

  1. 1. Stricty confidential – copy prohibitedInternational Comparative Study of telecom operators taxation and taxoptimization schemes of Over-The-Top playersSummary presentation
  2. 2. 2Greenwich Consulting © 2013I – Specific taxation: The assessment of tax arrangements applied to telecomoperators in the 6 studied countries showed 4 key learnings for France1France has the highest level of taxes in the telecom sector, reaching 2.98% of the total turnover ofoperators in 2011 (x40 vs. UK)3 Telecom taxes account for 20% of the French telecom operators investments in 20114The Telecom taxation combined with the deterioration in operators cash flows may causean increase of the tax burden in the coming yearsThe telecom sector in France and Spain is taxed in favor of cultural industries (film industry, TV)and local authorities2
  3. 3. 3Greenwich Consulting © 2013Reminder of the tax system specific to the telecom sector in FranceIn 2011, French telecom operators paid € 1.2 billion of specific telecom taxes,which represents 2.98% of operators revenues*• French telecom operators paid €1.2 billion of specific telecom taxesin 2011• This level of taxation accounts for2.98% of the total revenue oftelecom operators*• These taxes do not benefit thetelecom sector:- 80% of taxes fund other industriesor local authorities- 20% fund the telecom industry(ARCEP)• 45% of taxes (IFER antennas andcopper) are fixed and do not takeinto account the economic situation ofthe operatorsAnalysisMain taxes, royalties and fees specific to telecomoperatorsType of tax2351271 21125341150405 IFER copperIFER antennasPrivate copying, VODTST / COSIPManagement fees (spectrum)Tax to fund public broadcastingcalled "Cope’s tax"Funding the cessation ofadvertising on public TVbroadcasterFunding TV and cinemavia the CNCFunding rights holdersand cinemaGovernment / ARCEPDepartments andmunicipalitiesRegionsSource: FFTélécoms, Reuters, Durieux Report, Upnext Research survey, press, ADL analysis * Members of the FFTélécomsm€
  4. 4. 4Greenwich Consulting © 2013The specific telecom taxes range from 0.07% to 2.98% of operators revenues,funding the telecom industry as well as the government budget and other industries4.0%3.0%2.0%1.0%Telecomindustry• Supply of local or public telecomservices (USA)Culturalindustries• Funding of public broadcasting,following the cessation ofadvertising (France and Spain)• Funding Cinema and culture(France, Spain)Tax rates and destinations of taxesBenchmark FR, UK, SP, IT, USA, GER - 2011CulturalindustriesSpecific telecom taxes ratesNote: Greenwich analysis on the basis of FFTélécoms members in FranceSource: Redtel, ADL-FFTélécoms survey, CMT, AETA, CTIA, Wireless Association,USAC Annual report, IRS, Census Bureau, Ofcom, IE Market Research,Bundesnetzagentur AGCOM2.98%1 211m€2.43%813m€0.07%32m€0.08%44m€0.8%2263m€2%826m€Beneficiaries of specific telecom taxesNationaland localauthoritiesTelecomRegulatorTelecomsindustryTelecomRegulator• Operating costs of telecomsregulators (all countries exceptthe USA)Nationaland localauthorities• Funding of communities’ budgets(France, Spain)• State funding during crisis(Greece, Hungary) outside thescope of this benchmarkMajorbeneficiariesOff telecoms telecomsMultiple funding Simple funding
  5. 5. 5Greenwich Consulting © 2013France is the largest contributor to the funding of the cultural sector through thecompensation for private copying levy and telecom taxes ("Cope’s tax" and TST -COSIP for CNC as well as levy to compensate for private copying)International comparative study of the funding of the cultural sector1000UK0.0USA2.3Germany30.3Italy84.0Spain280.6600500400300200218.7France577.8385.0192.8Including41 fromFFTélécomsoperators 61.9Telecom taxes (in France:« Cope’s tax » for TV + TST/COSIP for the CNC) Private copying levySources: International Survey on Private Copying, Wipo 2012, FFTélécoms, Reuters, Redtel, Spain mediaNotes: Telecom taxes calculated onthe basis of FTTélécoms members in FranceNotes: British law does not recognize the exception for private copying, additional copies are part of the exclusive right of exploitationM€
  6. 6. 6Greenwich Consulting © 2013In France, specific telecom taxes account for 20% of total CAPEX oftelecom operators in 2011 and therefore limit their investment capacitiesSources: Thomson Reuters, annual reports, Redtel, Yankee Group, IE Market Research – onthe basis of FFTélécoms members in FranceSpecific taxes as a percentage of the total amountof investments0%5%10%15%20%25%SpainItaly13.70%France13.80%20.00%UK1.33%Germany2.00%% of investments
  7. 7. 7Greenwich Consulting © 2013In addition to the € 6/7-billion annual, recurring investment, French operatorsacquired their 4G licenses at a high cost per inhabitant*$/€ conversion rate on 01/01/2008Source: GSMA, European Mobile Industry Observatory 2011 - November 2011, Bernstein 2013 (UK), 2011 census for UK populationSums raised for the awarding of 4G licenses in the USA and Europe0102030405060708090100Total Costs(€M)14,00012,00010,0008,0006,0004,0002,0000Spain1,65036UK3,11437France3,57555Italy3,95066Germany4,38054USA13,52444Cost perinhabitant (€)Cost per inhabitant (€)Total cost (€M)
  8. 8. 8Greenwich Consulting © 2013II – Fiscal optimization of “OTT players”*: An analysis of the main "Over-The-Top" players highlighted six key learnings*OTT = Over-The-Top (Google, Apple, Facebook, Amazon, Microsoft,…)The optimization schemes of OTT players rely on tax distortions of national and Europeanlegislations as well as transfer prices between subsidiaries1These optimizations are ​​interesting for OTT players thanks to the historic permissiveness of theU.S. federal government, particularly to encourage the international success of these champions(Homeland Investment Act of 2005)4OTT players are neither the only economic players, nor the most important onesusing tax optimization schemes in Europe (e.g. General Electric, Starbucks, Tesco,…)6In 2011, OTT players would have paid more than € 800m of taxes and between € 400m and € 700mof VAT in France, if their production activities had been subject to the local market rules (withoutany optimization) – compared to tens of millions euros actually paid in taxes5On intangible products such as online music or digital books, Apple and Amazon pay back theirentire VAT to Luxembourg, another European tax heaven3Ireland, hosting many OTT headquarters in Europe, compensates the shortfall, due to itsattractive tax policy regarding royalties and its low corporate taxes, by direct and indirecteconomic earnings (added value, employment & growth, economy expenditures, foreign direct investments)2
  9. 9. 9Greenwich Consulting © 2013Corporate income taxes: Google optimizes its taxes by funneling profits throughHolland and Bermuda in the form of royalties for the use of intellectual propertyFiscal optimization scheme: “Double Irish” & “Dutch Sandwich”Google IrelandLimitedIntellectual PropertydealerEMEA headquarterand billingSales activities,marketing, R & DGoogle FranceSARLMarketing servicesbilled to GoogleIreland Limited32Services payment (10%)Bringing business(to be proven by theFrench tax authorities)GoogleNetherlandsB.VIntellectual PropertyDealer4Royalties(72% of theturnover)Google IrelandHoldingsIntellectual PropertyDealerIncorporated underthe Irish law butmanaged fromBermuda5Registration in thetrade registerRoyalties(99% of royalties perceived)GoogleBermudaLimitedConcentration ofprofits awaiting forrepatriation to theUSA6Main managementRoyalties(100% royaltiesperceived)Google Inc.Holds the intellectualproperty rights andconcedes them toGoogle Ireland Holdingsfor its activities outsidethe U.S.Sending of profits(pending law in USA)7End customerPurchasesadvertising for adisplay on theFrench and globalweb1Payment for advertisingspace (100%)BusinessrelationshipSource: New York Times, Bloomberg, The Guardian, DueDil.com, Dublin’s courts
  10. 10. 10Greenwich Consulting © 2013To achieve this tax optimization scheme, Google benefits from several specificrequirements and tax treaties implemented by the various countries involvedand allowed by the OECD or the EUBasic conditions making both the “Double Irish” and the “Dutch Sandwich” possibleGoogle IrelandLimitedFiscalsovereignty: corporatetax at 12,5%Google FranceSARLSubsidiary operatingon behalf of GoogleIreland Limited32GoogleNetherlandsB.VDispensatorybilateral taxtreaty:tax exemption onroyalties paid to theNetherlands byIreland4Google IrelandHoldingsDispensatorybilateral taxtreatywith Bermuda onthe absence ofwithholding tax onroyalties leaving theNetherlands5GoogleBermudaLimitedTax heaven:No coporateincome taxuntil 20166Google Inc.Double taxationtreaty with the UnitedStates consideringGoogle IrelandHoldings Ireland asan Irish companywith a subsidiary inBermuda.7End customerPurchasesadvertising for adisplay on theFrench and globalweb1Bringing business(to be proven by theFrench taxauthorities)Registration in thetrade registerMain managementPayment for advertisingspace (100%)BusinessrelationshipTransfer pricingmechanism allowedby the OECD10% of revenuesOver-valuation oftrademarks and patents72% of revenues99% of royalties perceived100% ofroyaltiesperceivedSending of profits(pending law in the USAlike 2005 HomelandInvestment Act)Source: New York Times, Bloomberg, The Guardian, DueDil.com, Dublin’s courts
  11. 11. 11Greenwich Consulting © 2013Ireland upholds that the indirect benefits to its economy are more importantthan the shortfall due to its attractive taxation systemThe Google case study2001000-100-200-300-400Shortfall dueto the law onroyalties545.7Total184.8Employeesexpenses(VAT)75.1Incometaxes71.2Socialcontributions16.3Corporatetaxes22.2Comparison of direct accounting gains for the Irish Stateand the shortfall due to the taxation on royaltiesSources: Deloitte study “Measuring Facebook’s economic impact in Europe”, Eurostat 2009, PWC 2011, The Household Budget Survey 2009, BusinessandFinance.ieNotes: This chart does not include indirect impacts created by B2B trade between Google and its subcontractors (spending in the economy, added value created by employees of subcontractors).Standard gross margin reported by the group in their global income statement applied to the turnover declared by Google Ireland Limited and submitted to the corporate tax at 12.5%Analysis• Ireland, by the presence of Google on itssoil, has a significant shortfall in terms oftax revenue:- 545 m€ due to the exemption from thepayment of royalties- 1,453 m€ due to the corporate tax at12.5% ​​(Vs. 33.3% in France)• However, Ireland upholds that the followingindirect gains compensate this shortfall:- Added value created by employees- Indirect jobs related to the presence ofGoogle in Ireland- Created value and spending in the economygenerated by the indirect jobs (taxes andspending in the economy)- Real estate investments• Indirect gains compensating the shortfallare still to be demonstrated• Ireland has an attractive fiscal andeconomic policy that enables taxoptimization: corporate tax rate at 12.5% andtax exemption on royalties paid to EU countriesm€
  12. 12. 12Greenwich Consulting © 2013In 2011, the OTT players paid € 37.5 M in corporate taxes in France, 22 times lessthan what they would have paid, if their production activities were located andtaxed in FranceSources: Paris commercial court, Income statement of companies - 2011Notes: Estimates based on Facebook UK data. Apple data based on the assumption that the majority of Apple physical products sold by third-party distribution networks are in fact sold by AppleSales International, domiciled in Ireland and not paying corporate tax in FranceAssumptions: activities charged in France with standard gross margin reported by the group in their global income statement and submitted to a corporate tax of 33.3%Corporateincome taxespaid by the OTTin FranceCorporateincome taxesthat OTTplayers wouldhave paid inFranceTOTAL5.5 M€ 162 M€6.7 M€ 317.5 M€50 k€ 21.2 M€3.3 M€ 10.9 M€37.5 M€ 828.7 M€x22Average annualgrowth rate ofworldwide income42%38%123%32%22 M€ 317 M€ 8%Reportedrevenues inFrance138 M€257 M€ND110 M€1.09 bn€584 M€Estimated maderevenues inFrance1.4 bn€3.2 bn€140 M€890 M€8.13 bn€2.5 bn€
  13. 13. 13Greenwich Consulting © 2013The Luxembourg-based iTunes service enables Apple to benefit from a reducedVAT rate on its sales and to avoid paying VAT in France1• Sale and download of music,videos, movies, eBooks, gamesand applications• Dematerialized products sold byiTunes SARL• A Luxembourg-based company,subsidiary of Apple Inc. (based inUSA)• Employs an average of 15.7employees• Centralizes sales of Europe, Africaand Middle East2S.A.R.L• Company based in California, USA• Parent company of iTunes SARL3Payment for the purchase of dematerialized productsFiliale à 100% d’Apple InciTunes optimization scheme Decomposition of the value for the digital distribution (song)0,16 €0,70 €0,04 €1,00 €Distributioncosts (**)AD-editorsremuneration(*)0,07 €VAT SACEM0,03 €Selling price DistributionmarginFor a France-based player0,70 €0,13 €1,00 €Selling price VAT0,07 €SACEM0,06 €DistributionmarginDistributioncosts (**)0,04 €AD-editorsremuneration(*)For a Luxembourg-based player (iTunes)• The real benefit of being in Luxembourg is based on the deduction of80% of the profits from intellectual property in the calculation of thecorporate taxes• iTunes has a VAT rate of 6% in Luxembourg against 19.6% in France• 75% of the price consists of copyright, with a VAT rate at 3%• 25% of the price is taxed at the standard VAT rate of 15%Notes: Luxembourg price reported to 1€Sources: French Senate Report « Impact of the Internet growth on French State’spublic finances », Greenwich Consulting – October 2009
  14. 14. 14Greenwich Consulting © 2013In 2011, the shortfall in VAT due to optimizations in the e-business in Franceis estimated between 5% and 10% of the at-risk tax base and reached between€ 377 M and € 754 MEstimated shortfalls in VAT revenues on B2C e-business• The e-business market in France is €37.7 billion in 2011, according to theFrench professional organisation ofthe sector (FEVAD)• The at-risk VAT base only includes:- Dematerialized cultural products(digital music, digital video, digitalbooks, etc.)- Some travel services*• The share of this tax base at riskrepresents approximately 20% of theFrench e-business, or € 7.5 billion• In 2011, the shortfall is estimatedbetween € 377 M and € 745 M(because tax optimization in the e-business would account for 5% to 10%loss of VAT for European economies, onthis at-risk tax base of € 7.5 billion)CommentsMaximum shortfall36.000Minimun shortfall7.54030.000 377VAT base at risk34.00032.000038.000B2C e-businessmarket37.700754M€Sources: FEVAD annual report 2012, French Senate Report « Impact of the Internet growth on French State’s public finances », Greenwich Consulting – October 2009* intangible travel services such as e-ticketing

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