Media and entertainment giant Walt Disney (DIS) didn't need to wish upon a star to reduce its tax burden, thanks to an aggressive yet legal tax-avoidance strategy based in the landlocked European country of Luxembourg. And it's far from a Mickey Mouse operation.
According to information released today by the International Consortium of Investigative Journalists (ICIJ), the Burbank, Calif.-based parent transferred profits around the world to a finance arm called Wedco Participations SCA in Luxembourg, enabling the unit to pay an effective tax rate of 0.3 percent on more than 1 billion euro in profit. The ICIJ said Disney set up its Luxembourg offices so that profits would be funneled away from high-tax countries such as France and Germany.
"The internal bank made loans to many of the subsidiaries at high interest rates, draining profits from those companies that were often in high-tax countries back to Luxembourg in the form of interest payments," ICIJ said. "In addition, a Cayman Islands subsidiary, which legally owns at least 16 Disney companies in Europe and Australia, sent its profits to Luxembourg in the form of annual dividends. ... Further, Disney received so little in interest payments from Wedco that it would have incurred little tax on its U.S. interest income from the transaction. "
Walt Disney disputes ICIJ's claims, which spokesman David J. Jefferson called "deliberately misleading" noting that the media and entertainment giant has paid an average global tax rate of 34 percent over the past five years.
"The ruling [by Luxembourg tax authorities] has not meaningfully affected the taxes we pay in any jurisdiction globally," he said in an email.
Luxembourg, which boasts a population of about 550,000 has long been considered a tax haven. The leak of these tax deals is particularly embarrassing for European Commission head Jean-Claude Jucker, a former prime minister of Luxemburg. He has repeatedly denied wrongdoing.
"It's like an elaborate game, but the consequences are real," said Robert Goulder of Tax Analysts, adding that large corporations rarely get in trouble for tax evasion. "When they get in trouble it's because somebody didn't dot their I's or cross their T's."
Much like beauty, tax avoidance is in the eye of the beholder. Corporations often argue that they have a duty to their shareholders to pay as little as possible to governments where they do business. The problem with these strategies is they move the tax burdens from businesses to individuals, according to Steven Rosenthal, a senior fellow at the Urban Institute who focuses on tax issues,
"When corporations pay less, the rest of us pay more," he said in an interview.
That view is disputed by Tax Foundation economist Will McBride, who told CBS MoneyWatch "economics tells us that workers are better off with a lower business tax burden." He argued that the IRS collects taxes from corporations and businesses wherever they're earned, a policy that most countries don't follow.
Disney was hardly alone in benefiting from Luxembourg's accommodating regulators. The ICIJ estimates that 340 companies have gotten advanced rulings from the country's authorities, a who's who of the Fortune 500 ranging from Koch Industries, the second-largest privately held company, to insurance giant American International Group (AIG) and Coach (COH), a fashion company best known as a maker of high-end handbags.
AIG and Koch said their dealings in Luxembourg were proper. Coach couldn't be reached for comment.
"Luxembourg is a well-established financing location that has an excellent European treaty network, both inside and outside the European Union, and has holding company tax regimes that make it a good location for intermediaries between investors and among diverse investments," said AIG in a statement.
Koch spokesman Rob Tappan told CBS MoneyWatch that the Wichita, Kansas-based company pay taxes "in accordance with applicable laws."