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 Last July, Paris-based Publicis and New York-headquartered Omnicom
announced plans to create the world's biggest advertising group. The
new company would be registered in the Netherlands and tax resident
in the UK.
However, on Wednesday Omnicom Chief Executive John Wren said the
Dutch and British tax authorities had, "unexpectedly" so far failed
to approve the arrangements, which Omnicom said last year would save
$80 million a year in taxes. Wren added that if the UK and the
Netherlands did not approve the structure, the whole deal was at
risk since "there is no Plan B", though Publicis said on Thursday it
was confident the deal would still proceed.
Securities analysts said they were blindsided by the problems, and
one source close to the deal said that an anti-tax avoidance
strategy being pushed by the Group of 20 most powerful economies was
making it more difficult to get such approvals.
Tax advisers with experience of putting similar deals together said
that historically the Dutch and UK tax authorities had been flexible
in approving such a structure. This is because it would not mean a
loss in tax for either the UK or the Netherlands, given that the two
companies' headquarters are currently in the U.S. and France.
Indeed, the arrangement would traditionally be welcomed by the UK
and the Netherlands because it would likely bring in some tax
revenue and support jobs.
But a second source close to the deal said the two tax authorities
had not reacted as expected.
"Tax authorities are not working together to find a solution. They
are fighting rather than cooperating and lack of cooperation between
the UK and Dutch authorities is endangering the deal," the source
said, adding there was a real risk the deal could collapse as a
result.
And the other source said the G-20's anti-tax avoidance strategy,
known as the "Base Erosion, Profit Shifting" (BEPS) program, which
is being managed by the Organization for Economic Co-operation and
Development(OECD), was having an impact on the deal.
"The entire current BEPS discussion is getting a lot of attention
from the Dutch Ministry of Finance, and in the UK, " the source
said. "Things now take longer," he added.
PUBLIC, PEER PRESSURE
The Dutch and British tax authorities declined to comment on the
Publicis-Omnicom case, citing rules on taxpayer confidentiality.
But a spokesman for Her Majesty's Revenue and Customs, the British
tax authority, added: "The UK is committed to tackling aggressive
tax planning and harmful tax practices and is actively engaged in
the OECD's work to look at the international tax rules, which have
not kept pace with the changing nature of business".
Omnicom and Publicis did not return calls seeking further comment on
the hurdles the deal was facing.
Lawyers who have previously worked with companies moving their
domiciles said tax authorities were beginning to take a less
flexible approach when asked to approve tax-reduction structures.
They said that this was a response to public anger over such moves,
and the resulting political impetus for the authorities to crack
down, as well as the proliferation of tax maneuvers.
Ton Smit, a lawyer with Tax Consultants International in Amsterdam,
said "treaty shopping" through which companies chose to establish
only a nominal presence in a country to receive the tax-reduction
benefits of tax treaties were facing a public backlash.
"The public is quite negative about the Post Office box company
market," he said.
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Peer pressure was also at play, with countries such as the
Netherlands or the UK not wanting to be seen to be helping big
companies avoid taxes in allies such as the United States, said
Dominic Stuttaford, tax partner with Norton Rose Fulbright in
London.
"The UK tax authority is very receptive to inward investment but
they also want to make sure that people are not simply exploiting
the tax regime," he said. "The Dutch tax authority won't want the
U.S. tax authority saying they are not doing their bit to make sure
multinational companies are paying their fair share of tax," he
added.
The UK and Dutch tax authorities declined to comment on whether they
have changed their approach.
EFFICIENT STRUCTURE
The corporate structure planned by Publicis and Omnicom echoes that
used when CNH and Fiat Industrial merged to create CNH Industrial in
2013.
Italian carmaker Fiat and its U.S.-based affiliate Chrysler also
plan to use a similar structure as part of the full integration of
the two companies, due to be completed this year.
The arrangement gives companies the chance to take advantage of
Britain's unusual absence of a withholding tax on dividends,
Stuttaford said.
Being a UK tax resident is better than Dutch residency for companies
with significant U.S. activities because the U.S.-UK tax treaty is
seen as more beneficial than the U.S.-Netherlands tax treaty.
Meanwhile, a Netherlands domicile can be more helpful as Dutch
corporate rules permit anti-takeover provisions not allowed in the
UK and offer more flexible rules on corporate governance matters,
lawyers said.
Normally a company is assumed to be tax resident in the country
where it is registered but bilateral tax treaties often allow a
company with no activities in the country of registration but
activities in another to shift its tax residence to the second
country.
Yet in the case of the UK-Netherlands tax treaty, this is not a
simple box-ticking exercise. Changes in the treaty in recent years,
mean the tax authorities now have to go through a "mutual agreement
procedure" before a Dutch-registered company can be deemed to be tax
resident in Britain, and not the Netherlands.
Tax advisors said they prefer the traditional box-ticking, which is
also known as a "tie-breaker", as the mutual agreement can take more
than six months to negotiate.
"With a tie-breaker, you have your destiny in your hands," said one
lawyer who asked not to be named.
(Additional reporting by Leila Abboud in Paris, Nicola Leske in New
York and Anjuli Davies in London; editing by Martin Howell)
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