IBM Japan tax dodge

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From what I gather based on Asahi’s reporting, the transaction looks something like this.

All three boxes represent a 100% owned IBM corporation. IBM (USA) is the parent company in America. IBM (APH) is IBM Asia-Pacific Holdings, a Japan corporation, and IBM (Japan) is also a Japanese corporation.

What IBM (USA) did was sell some IBM Japan stock to IBM (APH). I don’t know what the sale price was, so I assume $8 billion to put a number on it the sale. IBM (USA) lent IBM (APH) the money to buy this stock, and so a promissory note is involved.

That all may very well be OK.

Sometime later, IBM (APH) sold some of this stock to IBM (Japan). So IBM (Japan) was buying back its own stock. Since they are all really IBM, this buyback was more in the nature of a “change in capitalization” for IBM Japan. Most likely OK as long as IBM Japan has enough capital.

The sale to IBM Japan, for purposes of the example, of these same shares was $4 billion. So IBM (APH) had—at least on paper—a $4 billion loss. (It paid the $8 billion and only got $4 billion from its sister company.)

Probably OK, even at this point, although you’d have to wonder why the big drop-off in price. Keep in mind, there’s really no loss the way we commonly understand it. (That is, you did business with somebody else at arm’s length, and you lost money on it.) [But, t]his is a “loss” that was created among companies where the shareholders of IBM ultimately own all of them. The shareholders did not suffer a loss.

The final maneuver was to say use a tax “combination” rule and say that IBM (APH) and IBM Japan could pay Japanese tax as it they were the same entity. IBM Japan made profits in previous years, so the group said that that paper $4 billion loss offset the profits. And therefore, that no tax was due on the profits.

The Japanese National Tax Agency said “no way”, and demanded 30 billion yen in back taxes.

What do you think? Do you think IBM’s “loss” transaction really had economic substance? Or that it was a game of technicalities and definitions in order to evade taxes?