Corporate structure avoided tax on most income

Through a set of affiliated companies and royalty agreements among them, Uber avoided certain corporate taxes for rides in most countries.  Fortune explained the practice:

Whenever a passenger takes an Uber ride anywhere in the world outside the U.S., whether it’s in Beirut or Bangalore, the payment is sent to Uber B.V.  The company typically sends 80% of that ride payment back to the driver via yet another Dutch subsidiary and keeps the remaining 20% as revenue.

Here’s where things get interesting. Uber International C.V. and Uber B.V. have an “intangible property license agreement” in which Uber B.V. must pay a royalty fee to Uber International C.V. for the use of Uber’s intellectual property—basically, the app that matches driver with rider. Under the terms of the agreement, Uber B.V. is to be left with an operating margin of 1%—effectively 1% of revenue—after subtracting the costs of operation. The rest of the profits get sent to Uber International C.V. as a royalty. And under Dutch law, that royalty payment isn’t taxable.

Let’s say that a passenger hails an Uber and takes a $100 ride across Rome (we’ll assume “surge pricing” is in effect). The payment goes to Uber B.V., which sends $80 back to the driver. The driver is responsible for paying his own taxes on that income. Of the $20 that’s left over, let’s say that Uber subtracts half to cover costs, leaving $10. But that’s not its taxable income. Uber B.V. will ultimately book only 1% of that initial $20 in revenue, or 20¢, as income. (The top corporate tax rate in the Netherlands is 25%, so the government will get 5¢ and the company keeps 15¢.) Uber B.V. then sends the balance of $9.80 to Uber International C.V. for the royalty. That’s one scenario. If Uber B.V. subtracts only $5 for costs, then the royalty payment to C.V. would be $14.80. The point is this: No matter what the amount of the royalty income that Uber International C.V. receives, virtually none of it will be taxed. It is what’s known as “ocean income,” because it sits in a gray area between national tax authorities.

Uber denied that these practices were improper. A spokesperson wrote: “Our corporate tax structure is probably the least innovative thing about Uber. It’s the standard approach adopted by most multinational companies.”