Paradise Papers: Nike’s tax burden so soft it hardly makes a swoosh
Five days before Christmas 2006, Nike CEO Mark Parker was in an upbeat mood on a conference call with Wall Street analysts. "So, how are we doing?" he asked himself out loud, almost a year since his promotion to the executive job. "In a word, I would say ‘good’."
He reeled off a list of recent achievements, including a brief mention of "a more favourable long-term tax agreement in Europe", according to a transcript of the call.
Behind the scenes, authorities in the Netherlands had effectively given Nike the green light for a 10-year tax-avoidance arrangement that would allow the sportswear-maker to shift billions of dollars in profits from Europe to the tax haven of Bermuda.
Nike’s tax burden hasn’t been the same since. In the three years after that conference call, its after-tax profit would jump by an astounding 55% to $1.88bn, thanks in substantial part to a drop in its worldwide effective tax rate from 34.9% to 24.8% — on its way to 13.2% last year.
Nike’s tax planning over the years exemplifies how adept multinationals can be at staying ahead of the game. By building cross-border structures of interconnected companies that trade with one another, global businesses are often able to find ways of unlocking tax savings that no legislator intended them to receive.
Vital to Nike’s new arrangement was a Bermudan subsidiary, Nike International. Through it, the sportswear-maker held ownership of its iconic Swoosh design, together with other prized trademarks, for markets outside the US.
The Bermudan subsidiary was able to charge trademark royalty fees to Nike’s European headquarters, in the Dutch town of Hilversum, which was selling sneakers and other sportswear to thousands of independent wholesalers and retailers as well as directly to customers through Nike’s own stores across Europe.
The royalty fees shifted billions in profits away from Europe, where they would otherwise have been taxed, and salted them away across the ocean in tax-free Bermuda – where, the leaked documents reveal, Nike has no staff or offices but merely a few documents on file at the Bermudan corporate registry and at Appleby, a legal firm.
For years, enormous royalty payments to Bermuda went unmentioned in the accounts of Nike’s Dutch subsidiaries. The first clue as to the scale of money flowing offshore came in 2016 when Nike made limited disclosures in a largely unrelated case in US Tax Court. Court submissions included brief mention of royalty payments to Bermuda in 2010, 2011 and 2012. Together, they totalled $3.86bn.
The flow of trademark royalties had helped Nike build a $6.6bn pile of offshore profit by June 2014. This sum had been taxed at just 3% outside the US. And because it remained offshore, it had yielded no US tax at all.
Presented with questions about this tax arrangement, Nike responded only with this statement: "Nike fully complies with tax regulations."
In 2014, the generous deal that Nike received from Dutch tax authorities in 2005 was about to expire. But Nike and its advisers came up with a solution. With only a few adjustments, they realised, trademark payments could continue to flow out of Nike’s European headquarters with little or no tax. After a reorganisation of Nike’s tax-avoidance structure in 2014, its operations in Hilversum made royalty payments of $982m in 2015 and $1.13bn in 2016.
Under the revised structure, the Swoosh and other trademarks had been transferred from the Bermuda subsidiary to a new Dutch subsidiary, Nike Innovate CV.
The initials "CV" appear repeatedly in the leaked Appleby and Estera records.
The Dutch CV — which stands for "commenditaire vennootschap," or limited partnership — is born out of legislation dating back to the 1830s. In effect, a CV owned by partners outside the Netherlands can be entirely stateless, and therefore taxless.
Under Dutch law, profits made through a CV are regarded as if they were made by the partners. As such, these earnings have been made outside the Netherlands and cannot be taxed there.
The International Consortium of Journalists reviewed stock market filings for the US’s 500 largest publicly traded multinationals, using data available in June 2017 and found 214 subsidiaries that were formed as Dutch CVs.
Nike currently has 11 CV subsidiaries.
The Dutch finance ministry says it expects to publish draft legislation in 2018 with a view to the new rules coming into effect from the start of 2020.
Asked whether Nike Innovate CV files tax returns in any country or whether it is stateless, Nike declined to comment.
Since switching property rights to the Swoosh and other trademarks from the Bermuda subsidiary to the Dutch partnership, Nike’s pile of offshore cash has continued to grow. At the end of May 2017, it had reached $12.2bn. These accumulated earnings have been taxed at less than 2% by foreign tax authorities — and not at all in the US.
Additional reporting by Helena Bengtsson