SCOTUS Blocks Intel Cayman Islands Tax Scheme


Intel is a major manufacturer of CPU chips in the United States that employs over 100,000 people. It’s headquartered in the Silicon Valley area of California; and is the largest non-government employer in New Mexico, Oregon, and in Costa Rica, and has thousands of employees in many other places.  

It does not, however, have many employees in The Cayman Islands, a tiny chain of islands owned by the UK about four hundred miles south of Key West, Florida.

However, some intellectual property — the designs for some of its important chips — are owned by its affiliate there. The Cayman Islands have very low corporate tax rates, so Intel has done a lot of work to claim that a significant portion of its profits were earned not by Intel US, where most of its work actually takes place, but instead by Intel Cayman Islands, where those profits are taxed at a much lower rate.

Back in 2003 Intel created a corporation, registered it in the Cayman Islands, and wrote up an agreement specifying that the costs of the development of the intellectual property would be shared between the main company in California, and the affiliate incorporated in the Cayman Islands. By saying that the Cayman Islands corporation was paying a significant portion of the costs of inventing a chip (by paying the engineers who designed it, etc), they could then transfer money years later from the main Intel bank account to their Cayman Islands affiliate, and all of those transfers would be tax deductible.

However, they had a dispute with the United States government, because much of the pay of the engineers was in stock, and they thought that they should be allowed to count that stock as worth zero for the purposes of their cost sharing agreement (which would allow them to shift much more of their profits to the Cayman Islands, and therefore not have to pay US income taxes). Seventeen years later, the Supreme Court just announced (Monday, 22 June 2020) that they are refusing Intel’s final appeal (mostly claiming that the Bush administration did not follow correct procedures to create the rule at the time) and Intel will now apparently be paying some taxes on a small part of their profit that they were trying to shelter in some little Caribbean Island.

This is a small victory for tax fairness, but it’s just that – small. The tactic that Intel used to shift profits to a lower-tax country, in which they created a new corporation that owns their intellectual property, is still broadly in use by dozens of major corporations today, allowing them to get out of paying billions of dollars in taxes.

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