IBM tax rate hits 20-year low with help of Dutch haven

IBM has reduced its tax rate to a two-decade low with help from a tax strategy that sends profits through a Dutch subsidiary.

The approach, which involves routing almost all sales in Europe, the Middle East, Africa, Asia and some of the Americas through the Netherlands unit, helped IBM as it gradually reduced its tax rate over 20 years at the same time pre-tax income quadrupled. Then last year, the rate slid to the lowest level since at least 1994, lifting earnings above analysts' estimates.

IBM is aiming for US$20 a share in adjusted earnings by next year, up from US$11.67 in 2010 - a goal made more difficult as the company posted seven straight quarters of declining revenue. To stay on target, IBM has bought back shares, sold assets, and fired and furloughed workers. A less prominent though vital role is played by its subsidiary in the Netherlands, one of the most important havens for multinational firms looking for ways to legally reduce their tax rates.

"They've got a lot of ways to beat earnings and they definitely take advantage of it," said Josh Olson, analyst at Edward Jones. "It's part of how IBM operates."

IBM ended last year with a tax provision US$1.84 billion lower than it initially projected, thanks to a tax rate of 15.6 per cent - compared with its forecast of 25 per cent. Without the lower rate, the company's earnings per share would have fallen from the previous year instead of rising, and net income would have missed analysts' estimates by about 14 per cent instead of 2.9 per cent.

An IBM spokesman declined to comment on its tax structure.