Tax authorities swooped in on Walt Disney Co.’s Paris premises last year hunting for evidence to determine whether the entertainment giant improperly shifted revenue abroad, according to a series of court rulings from this month that tossed out claims the raids were illegal.
Officials arrived on Oct. 5, 2017 — suspecting Disney had misled tax authorities on the level of revenue actually generated in the country, according to the rulings. They considered a French subsidiary may have been overcharged via an opaque calculation method by another Disney unit in the U.K. for intellectual property royalties and other services provided.
Disney lost four lawsuits this month seeking to invalidate the order that authorized the raids. The Paris court of appeals rulings detail the suspicions that led authorities to seek permission for the site inspections, which came on the back of an audit looking at the French unit’s taxes between 2012 and 2015. It wasn’t made clear, however, what amounts are at stake, simply that more than 90 percent of the French unit’s operating profit was being sent to the U.K. in the first half of this decade.
Walt Disney representatives declined to immediately make a statement on the French case and tax authorities in France declined to comment, in line with official rules.
Over the last decade, crisis-stricken authorities across Europe have become increasingly wary of these types of transactions among corporate subsidiaries which are sometimes seen as ways to shift income to low-tax jurisdictions.
The European Union has been the most strident in leading the charge against abuses of such transfer-pricing arrangements, issuing an eye-watering order for Apple Inc. to repay about 13 billion euros ($14.8 billion) in back taxes. Apple is contesting the order. France, for its part, hasn’t had quite the same success in similar tax fights against big companies.
The tax affairs of Disney in Europe already hit the headlines about four years ago when a group of investigative reporters published thousands of pages from secret arrangements between Luxembourg and companies including the Burbank, California-based firm.
Companies with valuable intellectual property such as Disney typically use tax-reducing strategies that involve setting up licensing payments between units in different countries. But authorities insist that such fees have to be in line with the so-called arm’s-length principle and thus correspond to the price an unrelated company would agree to pay.
Much of the tax investigation revolves around an operating fee paid by the Paris-based subsidiary for using the group’s IP and to pay for services rendered by the U.K. unit in charge of managing and coordinating Disney activities in Europe, the Middle East and Africa since 2011, according to one of the rulings. But, authorities say, the lumping of these two costs makes it impossible to verify whether the transaction between the two Disney entities was correctly priced. Tax officials see it as a possible way to “create opacity,” according to the rulings.
Authorities also outlined that they suspected executives at the French unit of doing licensing work with global partners such as Carrefour SA that should have earned the entity in France a greater slice of revenue. Lastly, tax officials considered that the French unit might not be receiving an appropriate remuneration for its work in dubbing Disney content.
The French court rulings specify that the British subsidiary sending the bills was ultimately owned by two Delaware companies belonging to Disney, but it’s unclear where the profits landed in the end.
In court, the arguments put forward by Disney’s defense team failed to hit home most of the time. The company was only able to convince the Paris court of appeals to scrap a few documents — some of which were covered by attorney-client privilege — from the stash of evidence tax officials can draw from in their probe.
The judge wasn’t swayed, for example, by a claim that tax officials breached professional secrecy duties in providing the IT chief at the Disney unit with a list of staff whose computers they planned to inspect that mentioned also their gross salaries. While this disclosure on colleagues’ pay is “regrettable,” it was limited and doesn’t justify invalidating the entire raids, according to one of the rulings. An appeal over the raids at France’s top court is still possible.
One of the rulings details how tax investigators used Microsoft Corp.’s LinkedIn to build their case and have a better idea about the work staff members at the French unit might be doing.
While Disney found it questionable to use such evidence to back the raid request, judges at the court of appeals said analysis of seven profiles of employees at the French unit provided useful clues that they were involved in licensing work.
–With assistance from Christopher Palmeri and Christopher Elser.
©2018 Bloomberg L.P.