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Media and entertainment giant Naspers ‘has engaged in the kind of “aggressive” tax planning devised to strategically move such assets into low-tax regions’, writes Khadija Sharife.

Where I come from, South Africa, Naspers is a pretty big deal, handling everything from print (production, publishing and distribution of newspapers, books and magazines), to internet (content, communication and commerce) and television. Of course, it’s not just any television, but, arguably, the finest subscription or pay-television the flat screen (or, in my house, fat screen) has to offer.

Incorporated in Cape Town in May 1915, Naspers created M-Net in 1985, the year of my birth. Thanks to M-Net, many dreary hours that should have been spent on maths were instead invested in series like ‘Boy Meets World’ or ‘Full House’, developing me as a well-rounded mathematically obtuse individual.

By all accounts, Naspers is a world-class entertainer. The company's most significant operations, by its own admission, are emerging markets. This includes not only South Africa and sub-Saharan Africa, but also China, Latin America, Russia, India and central and eastern Europe.

We can draw two conclusions from these locations: first, that Naspers operates in developing economies, i.e. countries that are anxious to source 'development' finance from a sustainable tax base; and second, that the tax rate in said economies would not, by and large, be considered 'tax havens'.

Most do not offer banking secrecy, high-level client confidentiality, low or zero taxation and lack of disclosure concerning crucial details that should be made public, such as company and beneficial ownership.

Yet like most mega-corporate entities, including those deriving considerable income from intangible assets such as intellectual property, Naspers has engaged in the kind of 'aggressive' tax planning devised to strategically move such assets into low-tax regions.

Naspers intangible assets include trademarks, patents, title rights, brand names and intellectual property, as well as software, web and other forms of development. While Naspers, no doubt complies (even if creatively) with South Africa's tax rate, as the company stated, 'international tax rates vary from jurisdiction to jurisdiction.’

Naspers owns 100 per cent of the MIH Group. In 2010, the group’s revenue increased by 5 per cent to R28 billion. The Group's CEO (chief executive officer) and CFO (chief financial officer) are directors of several corporate tentacles such as MIH B.V. (Netherlands) and MIH Limited (Mauritius).

WHY WOULD THEY CHOOSE SUCH LOCATIONS?

As mentioned in a previous post, the Netherlands is a crucial conduit used by corporations to shift profits as a means of reducing taxes due elsewhere, and is a classic holding-company location.

In 2007, a report by SOMO revealed that about one-eighth of financial holding companies registered in the Netherlands (where information on beneficial owners were identified) were 'mail box companies' managed by 'trust' offices, and 43 per cent had a parent corporation registered in a tax haven.

Benefits include little or no taxation on repatriated profits, while profits derived from active foreign branches or subsidiaries that are taxed in foreign locations are exempt from Dutch corporate taxation. But here's the kicker: 'Management' entities located in tax havens may provide internal high interest loans to subsidiaries intentionally allowing heavy charges to be imposed, artificially diminishing profits, even creating losses. The interest payments – as well as profits – are then shifted to any low-tax subsidiary, including Mauritius, providing tax exempt entities through vehicles such as Global Business Category II (GBCII), in addition to banking secrecy and almost zero-disclosure concerning the nature and substance of corporate entities, such as beneficial owners. Known as thin capitalisation, it is a commonly used system.

The Dutch 'patent box' is taxed at 10 per cent or less. By transferring the rights to intangible assets to related entities based in tax havens, the parent company is able to 'legally' minimise taxes.

According to the Organisation for Economic Co-operation and Development (OECD), intangible assets are 'one of the most important commercial developments in recent decades'. But unlike labour and physical assets, the value of intangible assets, especially when determined through opaque transfer pricing between subsidiaries of the same corporation, is difficult to financially evaluate using 'arms length transfer' (market price), thus providing companies with considerable leeway to exploit low tax jurisdictions. The 'relocation' of intangible assets, given that the geographic location itself remains marginal, is thus specifically identified to provide tax benefits.

Respectable multinationals specialising in accounting like KPMG peddle services catering to the transfer of such assets through 'disposal or sale and transfer of IP portfolios', the 'design of appropriate protective measures'. This is the kind of terribly important-sounding wink-wink language that has allowed for Google, Microsoft, Fox and other major media, technology and pharmaceutical corporations to avoid revenue owed to countries like the US and South Africa.

Of course, such activity is not limited to Naspers – openly using the British Virgin Islands (just prior to the first democratic elections), the Netherlands, Cyprus, Greece and Mauritius. This document from KPMG advises clients to 'consider shifting income from India to Israel given that corporate tax is higher than India’, while also emphasising the important possibility of intermediate holding companies in Mauritius, Cyprus and the Netherlands.

BROUGHT TO YOU BY PAMBAZUKA NEWS

* Khadija Sharife is a journalist, visiting scholar at the Center for Civil Society (CCS) based in South Africa, and contributor to the Tax Justice Network.
* Please send comments to [email protected] or comment online at Pambazuka News.