It was something I discovered last night while casually searching about the Sprint acquisition
April 2, 2016
(Source: https://zuuonline.com/archives/93815)

Last night, while casually searching for information about the Sprint acquisition, I stumbled upon the following.

It was reported in a major domestic newspaper that SoftBank Group Corp. had considered relocating its headquarters to the United Kingdom. This was originally reported once in October 2015 by The Wall Street Journal, and the domestic newspaper reported it again after being able to verify the information independently.

While various initiatives exist among Japanese companies to promote globalization—such as Rakuten adopting English as the company’s official language—cases of Japanese companies considering relocating their headquarters overseas are extremely rare. Let’s explore why such a move was considered in the broader context of global trends.

Why did SoftBank consider relocating its headquarters to the UK?

SoftBank Group Corp. is a holding company that oversees the entire SoftBank Group. There were reportedly two main reasons for considering the move.

The first was to lower corporate tax rates. Japan’s corporate tax rate currently stands at around 32%, while the UK’s is about 20%. By relocating its headquarters from Japan to the UK, SoftBank could enjoy a nearly 10 percentage point reduction in corporate tax. If one considers taxes as part of business costs, this is a substantial difference.

The second reason was to improve convenience in international investments. SoftBank Group has been making large-scale investments in Indian IT companies and solar power generation. India was once part of the British Empire, and the UK is its former colonial ruler. In various business transactions, it was thought that approaching India as a British company rather than a Japanese one might provide advantages.

In the end, it was said that the plan was abandoned, at least for the time being, due to uncertainties regarding how the Japanese tax authorities would respond even if the relocation occurred. There was also ambiguity about the actual effectiveness of any corporate tax savings, and profits from investments in places like India were still some way off. Thus, it was deemed premature to move the headquarters in the immediate future.

Tax avoidance strategies by Western companies like Starbucks and Apple

In Japan, relocating headquarters overseas to reduce corporate tax is extremely rare. However, among Western companies—especially large global corporations—it’s quite common.

For example, Starbucks’ UK subsidiary purchased coffee beans from a Swiss affiliate at above-market prices to inflate procurement costs. It also paid high brand licensing and patent fees to an affiliate in the Netherlands, further increasing expenses. These funds were borrowed from a U.S.-based affiliate, and interest payments were used to intentionally put the UK subsidiary into the red, thus minimizing corporate tax owed in the UK.

Apple, on the other hand, employed a tax strategy known as the “Double Irish” to reduce its corporate taxes. Similar to Starbucks, profits were funneled to Ireland, where the effective corporate tax rate is 12.5%. Leveraging Ireland’s tax system, Apple was able to position itself as a non-resident in both Ireland and the U.S., effectively avoiding taxes in both countries.

Specifically, Irish law treats companies with real headquarters abroad as non-residents, while U.S. law allows companies to designate their place of incorporation as their country of residence. As a result, a company can be established that is not a tax resident of either country, creating a structure in which no corporate tax is paid.

What’s the problem?

From an investor’s standpoint, reducing tax liability through tax strategies is a major form of cost-cutting, and effective tax rate is often seen as a metric of managerial performance.

However, from the viewpoint of a nation and its citizens, companies making huge profits through domestic operations yet avoiding taxes in that country or region draw criticism. Even if a company is legally a non-resident for tax purposes, it’s still using infrastructure and public services to run its business. Funds that should have been collected as tax revenue and used for public services are instead being funneled overseas.

In the case of SoftBank Group, one of the reasons cited for abandoning the relocation plan was that it would be difficult to gain the understanding of the public and government.

Currently, SoftBank Group is involved in various public-private projects and businesses. Relocating its headquarters could negatively impact these administrative relationships. Furthermore, in Japan’s tightly contested mobile phone market, such a move would pose a major reputational risk.

Even in the West, where there is relatively more leniency toward tax reduction strategies, these issues have sparked public debate. In a more conservative country like Japan, the balance of pros and cons likely led to the decision not to proceed with the relocation.

Although SoftBank Group’s plan to move its headquarters to the UK has been suspended for now, the use of the phrase “premature” in the reasoning suggests that they may still desire to relocate in the future, should the timing and circumstances become more favorable.

(Excerpt ends)