A funny thing happened between 2011 and 2017 in the glitzy offices that house Nike’s small army of accountants and tax lawyers.
Even as the company’s sales and profits went on an unprecedented rampage, its taxes declined. It paid less in 2017 than it did six years before, even though its profits doubled to $4.2 billion.
Nike’s tax rate declined over those six years, from 24.1 percent to 13.2 percent.
To accomplish that extraordinary decrease, Nike funneled $12.2 billion in earnings offshore and out of the reach of the U.S. tax man. It did sophisticated deals with subsidiaries in Bermuda and elsewhere that levy minuscule income taxes or none at all.
The multibillion-dollar question is: Are these strategies legal?
The European Union has its doubts.
On Thursday, the EU revealed it has opened an investigation into Nike’s tax avoidance strategies. The EU is looking specifically at two Nike subsidiaries in the Netherlands, where the company has its European headquarters.
“The Netherlands may have granted a selective advantage to the Nike group by allowing it to pay less tax than other stand-alone or group companies whose transactions are priced in accordance with market terms,” the EU said in a statement. “If confirmed, this would amount to illegal state aid.”
Nike said it complied with the tax law in the Netherlands and that the EU investigation is without merit.
“Nike’s corporate effective tax rate (ETR) is determined by a number of factors and varies from year to year,” the company said in a statement. “ Tax laws regularly change and impact tax rates including in 2018 when the adoption of U.S. tax reform resulted in Nike’s ETR being 55.3 percent. Beginning in 2018, there was a change in an accounting standard which also had the effect of reducing our tax rate by 5.3 percent.
“Nike has paid corporate income tax on all its global earnings and pays significant other taxes including duties, tariffs, property taxes, sales taxes and payroll taxes in markets where it operates around the world.”
Nike’s aggressive tax strategies have saved it millions, perhaps billions, of dollars and are a boon for shareholders but not so great for the treasuries of state and federal governments. While using overseas investments to lower its global tax obligations, Nike has won some important tax concessions at the state level.
In 2012, it got a guarantee from the state that the so-called single-sales factor method of assessment, which is highly beneficial to Nike, would remain in place for 30 years.
The EU is not the only public entity to question Nike’s tax strategies. The company has tangled with the IRS as well, most recently in 2015 and 2016. The IRS issued “statutory notices of deficiency” to the company for its 2011 and 2012 fiscal years and demanded that Nike fork over another $254 million. The beef had to do with a foreign tax credit matter.
Nike fought back in U.S. Tax Court and apparently prevailed. According to company SEC filings, Nike paid none of the $254 million demanded by the IRS.
But the IRS is not going away. The agency is auditing Nike’s 2015 and 2016 taxes, the company revealed.
In its most simplified form, offshore tax shelters work like this: The U.S. corporate tax rate, until recently, was 35 percent, one of the highest rates in the world. To avoid that rate, some large corporations commonly engage in paper transactions with subsidiaries in tax havens. They effectively shift profits to these countries, avoiding the 35 percent domestic rate.
By 2017, American companies had put at least $2.6 trillion into offshore tax shelters. President Donald Trump, when arguing for his sweeping tax reform bill, claimed the actual number is $5 trillion.
If the companies ever decide to move the money back onshore, the IRS can levy taxes on it. But until recently, most companies had no intention of doing so. The offshore investments became known as “permanently reinvested earnings.”
By the end of 2017, Nike had $12.2 billion in permanently reinvested earnings. The company estimates that if its $12.2 billion was repatriated to the U.S., it would owe $4.1 billion in U.S. taxes, according to its SEC filings.
“Designating its profits this way allows the company to avoid paying even a dime of U.S. income taxes on these profits until they are repatriated to the U.S.,” said Matt Gardner, a senior fellow at the Institute on Taxation and Economic Policy.
The clear implication of that disclosure is that the company paid an extremely low foreign tax rate -- perhaps 1 or 2 percent - on this $12.2 billion, Gardner said. He considers this clear evidence that the massive investment was made for just one reason: Reducing the company’s tax bill.
The entire tax landscape has changed since passage of the Trump tax bill.
The measure reduced the federal corporate tax rate from 35 percent to 21 percent. It also offered a temporary tax holiday to multinationals that bring back their billions of dollars back to the U.S.
Instead of 35 percent, the tax reform bill reduced the rate on repatriated earnings to 15 percent on cash and 8 percent on illiquid assets.
Trump predicted a massive flood of repatriated money. “We expect to have in excess of $4 trillion brought back very shortly,” he told a group of business leaders in August 2017, and in all likelihood something “close to $5 trillion.”
The flood has been more like a steady trickle. As of September 2018, estimates of newly returned corporate money ranged from $195 billion to $465 billion.
It’s unclear whether Nike has been among the companies bringing money back onshore. It declined to say.
The Trump tax bill imposed one-time transition taxes on corporations. As a result, Nike paid more in taxes in 2018 – $2.3 billion – than it did in the prior three years combined. Its tax rate ballooned to 55 percent of earnings.
But Nike executives made it clear in a conference call last May that the tax rate will return to normal – “in the mid-teens range or slightly higher” – in its current fiscal year. That’s significantly lower than the 21 percent rate charged under the new Trump tax reform.
– Jeff Manning | firstname.lastname@example.org | 503-294-7606
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