Booking.com should be at or near the top of the Tax Office’s list of grand tax avoiders but the revenue authorities seem blind to the true nature of this giant online travel agency and the governance arrangements of its parent, The Priceline Group. Google, Facebook and Apple have dominated the press coverage of new economy tax dodgers but the online travel agents are even worse offenders. Michael Hibbins exposes the business model .

Booking.com B.V.

Booking.com B.V. (BcBV} is registered in Amsterdam, The Netherlands. It is the parent company of the Booking.com Group and provides an online accommodation reservation service. It is the owner, controller and manager of the website, www.booking.com, internationally.

BcBV has numerous subsidiaries worldwide. It calls these support companies. There are two in Oceania (the Australian company is Booking.com [Australia] Pty Ltd [BcA], Level 11/95 Pitt Street Sydney), 31 subsidiaries in Europe, 14 in Asia, 12 in The Americas and 11 in the Middle East and Africa. Many of these 70 companies are engaged in BcBV’s business in more than one country. However, each of Australia and New Zealand has its own locally incorporated entity.

BcBV was acquired by the American Priceline Group (PG) in 2005. Priceline Group Inc. is incorporated in Delaware USA. It has no relationship with Australian Pharmaceutical Industries which operates Priceline Chemist outlets, for which the name “Priceline” is probably more familiar to most Australians. PG’s financial statements consolidate all its subsidiaries, but they only contain limited information specific to BcBv.

What can we learn about BcBV from PG’s financial statements

PG derives substantially all of its revenues and gross profit from the following sources:

Commissions earned from facilitating reservations of accommodations, rental cars, cruises and other travel services on an agency basis;

Transaction gross profit on a merchant basis and customer processing fees from our accommodation, rental car, airline ticket and vacation package reservation services;

Advertising revenues primarily earned by KAYAK from sending referrals to online travel companies (“OTCs”) and travel service providers, as well as from advertising placements on KAYAK’s websites and mobile apps;

Its financial statements (SEC Form10-K Annual Report 2016) consolidate revenues into categories that do not allow readers to evaluate the separate contribution of Booking.com B.V., let alone the operations of the Australian branch. Regional information is similarly uninformative and the list of subsidiaries excludes anything which its auditors (Deloitte Touche LLP) have concurred is not material.

For example, none of the 70 BcBV subsidiaries, including BcA, are included in the list. Any subsidiaries incorporated in tax havens would have been given the same treatment. Such lack of disclosure seems at odds with the extensive commentary given over by the group to risk associated with its tax filings outside the US and suggests its tax disclosure policy is more focused on concealment than on improved or voluntary disclosure.

The only useful piece of information, from an Australian tax perspective, is the discussion of an audit conducted by the French Taxation Authorities (into BcBV’s relationship with its French subsidiary). The audit covers the years 2003 to 2012 & resulted in assessment of tax & penalties for BcBV. The French have since opened further audits for the years 2013 to 2015.

A quote from the notes to PG’s 2016 accounts :”The French authorities are asserting (correctly in my view) that Booking.com has a permanent establishment in France (emphasis added as BcBV is believed to have the same problem in Australia and many other countries) and are seeking to recover what they claim are unpaid income taxes and value-added taxes (VAT is similar to GST in Australia).

In December 2015, the French tax authorities issued assessments for approximately 356 million Euros, the majority of which represents penalties and interest. We believe that Booking.com has been, and continues to be, in compliance with French tax law, and we intend to contest the assessments.

If we are unable to resolve the matter with the French authorities, we would expect to challenge the assessments in the French courts. We may be required to pay, upfront, the full amount or a significant part of any such assessments, though any such payment would not constitute an admission by us that we owe the taxes. At the end of 2016, the French authorities announced their intent to also audit the tax years 2013 to 2015, which could result in additional assessments”.

It’s not surprising that BcBV intends to take the matter to the French court. The French decision will likely encourage tax authorities in many of the other 70+ countries in which it operates to issue similar assessments to BcBV for taxes evaded.

BcBV can neither afford the adverse impact on its reputation nor the financial impact on its business. It is unfortunate for PG’s investors that neither the directors nor the company’s auditors have provided adequate clarity about the high potential for very expensive flow on implications of the French case.

A very rough assessment of the Australian impact can be made by comparing the population of France, which was approximately 67 million during that period, with the population of Australia, which was approx. 24 million. eg. (24/67) x 356 million euro = 127.5 million euro (or approx. A$195 million).

The French corporate tax rate at the time would have been approximately 33.3 per cent, which was close enough to the Australian 30 per cent corporate tax rate for the same period. The French VAT rate was 20 per cent, versus Australia’s 10 per cent but the French system has a relatively high transaction minimum which may exempt a large proportion of BcBVs commission transactions.

This suggests that BcBV potentially owes circa A$100-200 million for taxes evaded in Australia during the same period.

With BcBV’s increasing dominance of the Australian market and with Booking.com being PG’s biggest earner, together with consolidated growth rates in excess of 20 per cent, BcBV may, by the end of 2017, have evaded in excess of A$150 million p.a. of Australian tax (including GST).

As a branch operation through a permanent establishment in Australia, BcBV should be collecting GST from its customers for payment to the ATO. Instead it has used its failure to pay GST to unfairly undercut Australian competition.

Unfair competition and unethical competitive behaviour is nothing new to Booking.com as competition authorities around the world have recently taken it to task about its contract parity pricing rules which, authorities claimed, had the effect of blocking other service providers from offering cheaper prices than BcBV. The group has now changed or undertaken to change these terms in most countries, in order to comply with competition law.

BcBV’s Netherlands tax regime

PG’s Form 10-K also includes the following statement in relation to BcBV.

“The Netherlands corporate income tax law provides that income generated from qualifying innovative activities is taxed at the rate of five per cent (“Innovation Box Tax”) rather than the Dutch statutory rate of 25 per cent. A portion of Booking.com’s earnings currently qualifies for Innovation Box Tax treatment.

In the year ended December 31, 2016, the Innovation Box Tax benefit reduced our consolidated income tax expense by approximately $324.6 million. In order to be eligible for Innovation Box Tax treatment, Booking.com must, among other things, apply for and obtain a research and development (“R&D”) certificate from a Dutch governmental agency every six months confirming that the activities that Booking.com intends to be engaged in over the subsequent six-month period are “innovative.”

The R&D certificate is current but should Booking.com fail to secure such a certificate in any future period – for example, because the governmental agency does not view Booking.com’s new or anticipated activities as innovative – or should this agency determine that the activities contemplated to be performed in a prior period were not performed as contemplated or did not comply with the agency’s requirements, Booking.com may lose its certificate and, as a result, the Innovation Box Tax benefit may be reduced or eliminated.

Booking.com intends to apply for continued Innovation Box Tax treatment for future periods. However, Booking.com’s application may not be accepted, or, if accepted, the amount of qualifying earnings may be reduced.”

Note that the US$324.6 million figure quoted above relates only to income tax (i.e. it excludes VAT/GST) and is based on the assumption the Dutch 25 per cent corporate tax rate would otherwise apply. The Netherlands has a population of only 17 million, so the majority of BcBV’s income that qualified for the Innovation box tax rate will be foreign sourced.

As the French have demonstrated, much of this income should have been taxed at source. The tax evaded by BcBV globally is likely to be higher than US$324.6 million quoted as the saving in the Netherlands, but it is impossible to determine by how much & then how much of that should have been paid in Australia in 2016.

The 10-K Income Tax note also states :

“A portion of Booking.com’s earnings during the years ended December 31, 2016 and 2015 qualified for Innovation Box Tax treatment (five per cent vs normal Netherlands corporate rate of 25 per cent), which had a significant beneficial impact on the Company’s effective tax rate for those periods. While we expect Booking.com to continue to qualify for Innovation Box Tax treatment with respect to a portion of its earnings for the foreseeable future, the loss of the Innovation Box Tax benefit , whether due to a change in tax law or a determination by the Dutch government that Booking.com’s activities are not “innovative” or for any other reason (emphasis added), would substantially increase our effective tax rate and adversely impact our results of operations. See Part I Item 1A Risk Factors – “We may not be able to maintain our ‘Innovation Box Tax’ benefit.”

PG talks of a loss of “benefit” from the Innovation box tax treatment and continuing to qualify for that treatment. To date, BcBV has claimed a nexus to qualifying expenditure in relation to foreign sourced income, not just income from the Netherlands.

If any of its foreign sourced income is found to be taxable at source, as income derived through a permanent establishment, it will be taxed at the applicable rate in the source country. The income may still meet the nexus test for the Netherlands Innovation box tax , but if the source country tax rate is higher than the Innovation box tax rate, the tax credit available from tax paid at source would wipe out any Netherlands tax obligation at the five per cent rate.

In the case of France, the tax rate would jump to the normal corporate rate of 33 per cent for all income derived through the permanent establishment. In the case of Australia, it would jump to 30 per cent. Any benefit from the Innovation box tax is therefore wiped out.

By remaining silent and not challenging the legitimacy of BcBV’s tax filings, the Netherlands government has substantially benefited from BcBV’s deception.

The government has been collecting five per cent tax on income that should have been declared as income derived through permanent establishments in other countries. By so doing, the Netherlands has shown itself to be no better than well-known tax haven countries like Singapore and the Bahamas, among others. It has been happy to clip the ticket on BcBV’s advantage gained through tax evaded in source countries.

BcBV’s problem now is that it may be exposed to double taxation in relation to prior years, if the Netherlands tax authorities fail to recognise its entitlement to tax credits for foreign taxes paid or otherwise fail to refund the tax it has so far collected on these branch profits belatedly taxed at source.

The OECD has accepted Netherlands Innovation box tax as not creating an unfair tax advantage, but that has not stopped BcBV and the Netherlands Government from manipulating the system to effectively create a tax haven advantage.

Unfortunately for PG investors, PG’s acquisition due diligence either:

failed to recognise that BcBV was actually running branch operations through permanent establishments in other countries or it had identified such risk but thought it could continue to get away with BcBV’s folly.

It would be interesting to review the transaction documents for the PG’s acquisition deal in order to understand how pre-acquisition tax risk was to be managed. Those documents will no doubt be deemed “commercial in confidence” to members of the public or journalist seeking to expose the truth, but that is no barrier to taxation authorities.

I would encourage the ATO to review these documents. One suspects the French tax authorities may have already done so. Given the Netherlands Innovation box tax regime only started in 2007 and the acquisition occurred in 2005, it seems likely that PG saw an opportunity to capitalise on BcBV’s more modest level of evasion through failing to acknowledge it had created permanent establishments.

Put questions to @bookingcom @Airbnb @Expedia @trivago (Expedia) abt their aggro tax avoidance, get nothing https://t.co/9EFhqzVB7N. Meanwhile, they exploit MSM to shine their reputations with glowing puff-pieces like this https://t.co/aBbxAfoYMQ — ?Michael West (@MichaelWestBiz) October 10, 2018

Why the ATO should treat BcBV’s activities in Australia as branch operations through a permanent establishment subject to corporate income tax (e.g. as French authorities are currently doing)

BcBV/PG’s corporate structure is simple. Its intentions seem to be tax driven, but its execution of the arrangement renders its related party contracts ineffective.

While there is insufficient information in the public domain to determine the full extent of BcBV’s corporate structure, it is clear is that BcBV’s ability to dominate the Australian market has to date been subsidised by its non-payment of GST and Australian income tax while claiming its income sourced in Australia is only exposed to tax in the Netherlands.

This claim has so far provided Booking.com with advantages through the Dutch “Innovation box tax” regime. It has unfairly used these advantages & its evasion of legitimate tax costs to unfairly compete against its rivals.

Given the nominal five per cent rate that has so far applied to much of BcBV’s earnings, it seems unlikely that BcBV would think it necessary to resort to the Dutch/Irish sandwich or similar techniques of tax evasion, as used by Google and others to undermine their rivals, but in the absence of more reasonable levels of disclosure by PG it is impossible to tell. Despite BcBVs claims of compliance with tax laws in countries outside the Netherlands, it can be demonstrated that such claims contain a number of inexactitudes.

BcBV’s Australian subsidiary, Booking.com (Australia) Pty Ltd (BcA) has an office Level 11/95 Pitt Street Sydney. While BcA is a validly registered legal entity in Australia which maintains its separate legal entity status, its role as an undisclosed agent of the Parent company can be clearly demonstrated, thus providing indisputable grounds for lifting the corporate veil.

BcA appears incapable of functioning as a body corporate in its own right. It lacks the staff functions to do so. It also lacks an effective internal governance structure that would allow it to function as a separate legal entity. BcBV is relying on the separate entity doctrine to claim BcA can enter into related party contracts with BcBV, but as the evidence confirms BcA is acting as undisclosed agent for BcBV, the net result of such documents is a contract that purports BcBV can do business with itself.

In plain English language terms, such contracts are nonsense. Here’s why.

BcBV’s website states that its subsidiaries are “support companies” providing “in-country support” and “customer care support”. It further states that subsidiaries do not own, control, host, manage or maintain the Booking.com website (or any other website) and adds that its subsidiaries are not authorised to act as BcBV’s process or service agents. These are specific types of agency which impose limitations. BcBV stops short of stating that BcA is not a general agent.

Exposing the agency sham

BcBV’s statements suggest it would like the reader to believe there is no agency arrangement whatsoever between the parent and its subsidiaries and that their relationship is purely one of a contractual nature for the provision of services. However, despite the united front from the company, its auditors and legal advisors, the absence of agency does not withstand detailed examination.

Just like Google Australia (although this situation changed slightly during 2017), BcA earns no income from sources outside the group. BcBV covers its subsidiary company costs with periodic cash transfers. Using its related party contracts (which purport to be service level agreements) as its source of authority, BcBV subsequently processes accounting entries against these cash advances in the books of the BcBV Group and BcA for so called support fees.

The fact that these fees contain little or no profit margin is demonstrated by the failure of Booking.com to pay any tax in Australia. In fact, BcBV does not expect BcA to be profitable or act as a profit centre in its own right. It has the level of control needed over BcA directors and staff to engineer all its related party service contracts for its own advantage.

In an arms-length situation, directors of a separate legal entity are obliged to act in the best interests of their company, however it is clear that BcA Directors (both formally appointed & shadow directors) are acting in the best interest of BcBV and not the entity of which they are directors. BcA’s directors rely on the provisions of the CLERP amendments to Corporations Law to avoid what would otherwise likely be regarded as prosecutable offences for breach of director’s duties.

BcA directors appear to have signed service level agreements that are purely cost recovery. Even if the fees payable under those agreements are comparable with arms-length contracts, the arrangements are still uncommercial as the lack of profit for BcA indicates a lack of authority, capacity or ability to manage down costs in a way that would make the contract a commercial or arms-length arrangement which delivers a profit to BcA. BcA is prevented from doing so by the level of control exercised by BcBV over its operations.

It seems evident that BcBV has engineered its arrangements with BcA so that the group’s “tax leakage” in Australia is minimised.

BcA is controlled directly by the parent company board through global authority delegations that have been set to operate with total disregard for corporate, legal and sovereign boundaries or borders.

Employees and other Australian resident persons appointed as directors of BcA are obliged to report under this structure. It is possible that some may even report directly to persons in the Priceline Group. These Australian employees may be legally employed by BcA, but as a result of authorities delegated to them and the source of that authority, they are, in fact, officers of BcBV.

Shadow directors, shadowy directors

They have accepted the fact that their tenure as employees relies on them accepting that they owe allegiance to and are obliged to act as instructed by BcBV’s senior executives. Persons resident outside Australia to whom the Australian resident employees report, including members of the board of BcBV have, at law, allowed themselves to become shadow directors of BcA.

The desire for direct control of subsidiaries has thus undermined the effectiveness of their related party contracts. Contracts that purport to made between related parties are ineffective because BcBV is on both sides of those contracts, firstly as principal and then on the other side as undisclosed principal through BcA as its agent.

BcBV claims to be “domiciled” only at its registered office in Amsterdam and not at the offices of any support companies around the world. While that appears to be a correct statement, the facts are that BcBV contracts with property owners in Australia, that it is doing business in Australia and that it is carrying on that business through staff who, as officers of BcBV, are engaged in the business of BcBV and report directly to its senior executive as fellow officers of BcBV.

PG has 18,500 employees of which 3600 are based in the US. The remaining 14,900 are based outside the US, including in Australia. The number working for the Booking.com Group is not known, but given BcBV accounts for approximately two thirds of PG’s revenue, it is reasonable to assume that circa two thirds of those outside the US (approx. 9,800) are employed by the Booking.com Group.

PG has a stock-based compensation scheme which is based on the performance of the group. It is likely that senior BcBV employees participate in this scheme, but it is unclear whether or not any Australian employees also participate.

If senior Australian based staff do participate, it supports the reality that their performance and structure of their jobs contribute “directly” to the profitability of both BcBV and the wider PG Group and clearly not to BcA which appears to have been engineered to make no profit.

Booking.com B.V. charges hotels and rental property owners a commission. Renters pay rent direct to property owners (whether in Australia or elsewhere) and pay nothing to Booking.com B.V. or Booking.com Australia Pty. Ltd. BcBV also transacts with its Australian customers in Australian dollars.

The Booking.com website, controlled solely by BcBV according to its own propaganda, manages all jobs on offer within the group. A review those jobs enables comparison of positions available in the Netherlands vs positions in operating countries. Local companies have a marketing function for each country, structured along account management lines.

These positions require the applicant to undertake the marketing of BcBV’s services and the management of that function, including performance statistics such as cancellations, disputes between owners and renters etc. They are hands on roles for managing activities that BcBV insists are entirely the subject of its prerogative.

The subsidiary employment roles also have a Finance function for the management of BcBV’s credit arrangements and accounts receivable. Finance applicants must have a knowledge of SAP so they can access and operate the centralised financial management and reporting system.

The fact that servers which house the finance engine operated by these people in Sydney actually sits in Amsterdam does not change the fact that the business activities that the applicant is obliged to undertake with customers is conducted in Australia by officers of BcBV who reside in Australia and are based in offices controlled by BcBV through BcA as its undisclosed agent.

The job descriptions for senior jobs in the local companies also tell you that they report directly to managers in the Netherlands and not to senior executives in Australia or the board of the Australian company. The fact that they are legally employed by a company incorporated in Australia does not make them officers of that company.

It is likely that most Australian employees don’t even know who the legally appointed directors of BcA are. That is because they report in functional lines to more senior people offshore who instruct them on their roles and obligations and assess them in relation to their agreed performance criteria. Due to their allegiance to BcBV, employees of BcA are in fact conflicted if they act in the best interests of BcA.

The Australian company is in fact a non-functioning empty shell that acts as agent for BcBV and lends its name to BcBV so the parent can conduct its business as an undisclosed principal.

Perhaps BcBV, its auditors and legal advisors could explain the commercial reasons for having service contracts with its subsidiaries. If all the staff of those companies report directly to someone in your organisation and they are in effect officers of your organisation, why do you need a contract with BcA which has no governance structure that would allow directors of BcA to control them?

You simply don’t need such a contract if you already have direct control. In practice, the contract is ignored. BcBV does not need the contract and most of the Australian staff probably have no idea it exists. The staff of BcA see themselves as members of the Booking.com global team, not employees of a little subcontractor company that makes no profit.

The only obvious purpose of the contract is tax evasion. It is no more than a conman’s ruse designed to fool the ATO into not looking behind the opaque veil of apparent respectability. However, turning the light on behind the veil renders it transparent.

The evidence supports the reality that BcA is an agent of BcBV and that BcBV is carrying on business in Australia through a permanent establishment.

Conclusion

I believe the French authorities have little doubt they are on the right track. The ATO would do well to place more pressure on BcBV/PG and encourage other tax administrations in its network to do the same.

It is time to pressure all multinationals. Uncoordinated attacks on a wide range of companies across multiple jurisdictions only results in each tax authority spreading resources too thinly, thus allowing each multinational to throw money at the problem until each tax authorities is forced to either give up or negotiate a highly unsatisfactory and unethical resolution.

If tax authorities can consolidate their efforts with concurrent action across multiple jurisdictions against just one multinational, e.g. BcBV/PG, then BcBV will be the one with resources spread too thinly. It will be forced to admit that its tax schemes are ineffective and the authorities will have established a precedent in each country.

This allows each country to then attack other multinationals from a position of strength. With the support of legal precedent, other multinationals will be forced to fall in line.

List of top internet based companies globally

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Michael Hibbins is a retired company executive. Mike has long argued multinational subsidiaries such as Booking.com Australia should be treated as agencies, puppet regimes of their foreign parents (as laid down in the article below) and taxed as such.

Such an approach to enforcement would deliver tax authorities billions of dollars in extra revenue annually.