The UK Financial Times on June 21 reported on the results of an extensive investigation into the use of complex tax avoidance schemes by Cadbury [1] prior to its 2010 takeover by the then Kraft Foods Inc., now the "global snacks powerhouse" Mondelez. The investigation uncovered a variety of schemes beyond the now familiar use of tax havens.
Operations with code names like "Martini" were concocted in which shell companies traded improvised financial instruments disguised as loans to generate fictitious interest charges. The result of this engineering left Cadbury paying a mere GBP 6.4 million in taxes on UK operations with GBP 100 million in profit on turnover of over a billion pounds.
Not long after the Cadbury acquisition, the new owners transferred the Cadbury headquarters to low-tax Switzerland, where the parent company can book the sale of products as low-tax 'royalties' deriving from ownership of intellectual property rather than the sale of manufactured products. The Financial Times suggests that the feared public revenue loss from this move was overrated because the company had already shrunk its tax payments. Has anyone actually looked at the records and done the math?
This is, admittedly, not a simple task, as the complexities of the schemes uncovered by the FT investigation show. Against the background of the recent G8 meeting on fiscal evasion, however, it would be an instructive exercise.
Shell companies in the Caymans and elsewhere are only part of the story. The FT investigation clearly shows how Cadbury's expansion as well as their minimal tax bill was fueled by tax-deductible debt. Like Cadbury, Kraft also grew by borrowing, allowing the company to buy back its shares, increase dividends, inflate executive compensation and minimize taxes without raising new equity. Debt took on a whole new dimension however, when the much larger and already heavily indebted Kraft borrowed still more to swallow Cadbury. The first regulatory filing from Mondelez [2] following the spinoff of the now purely North American Kraft showed a balance sheet of long term debt of USD 22.09 billion with total equity of USD 25.29 billion - a debt-to-equity ratio of 87.3%! Mondelez workers around the world are paying the interest on this debt (www.screamdelez.org [3])
A tax regime which favors debt over equity has unlocked the gates of fiscal paradise and is starving public revenue. Governments and conclaves like the G8 should end this absurd regulatory subsidy if they are serious about rescuing public finance from corporate predators.