Globalising a brand or saving on the tax bill?

Shell’s decision to set up a holding company in Switzerland to oversee its brands and trademarks has been lauded by some and criticised as a cynical ‘tax saver’ by others. David Benady reports

Oil giant Shell is the latest global corporation to discover the advantages of licensing its brands back to itself. It is setting up a new company, Shell Brands International (SBI), which will be based in Switzerland and become legal owner of the corporation’s brands and trademarks. This holding company will then license the brands back to Shell’s global divisions in countries around the world, which will pay royalties for these rights to SBI.

The oil giant is transferring some of its top marketing personnel to the Swiss town of Baar, where the business will be based (MW last week). Heading the team is vice-president of global marketing and communications Raoul Pinnell, who becomes SBI chairman. He will oversee a board made up of senior executives from Shell.

Some see Shell’s move as driven mainly by tax savings. Shell’s operating companies will pay a share of their sales in royalties to SBI for using the trademarks. These sums will be taxed at the lower Swiss business rate rather than higher rates of the countries in which Shell’s operations are based. Royalties may be only a sliver of those companies’ sales, but even three per cent of turnover taxed at the Swiss ten per cent rather than the UK’s thirty per cent could save the oil giant millions of pounds.

Other observers argue that lower tax is an advantageous by-product of a real necessity for brands. Putting control of trademarks into a single holding company is done mainly to give a corporation greater control over the way its brand is used, they argue. It helps establish ownership of the brands and ensures that logos are employed properly across the corporation’s sprawling operations. So, for example, marketers in far-off countries don’t start putting pink tinges on blue logos.

However, some sources express surprise that an industrial giant dealing in a commodity is pursuing this course, which is usually the terrain of consumer brand owners.

Pinnell says: “We have more than 45,000 outlets worldwide, double the size of McDonald’s, so we have a significant consumer focus. The Shell brand is one of the company’s highest assets.” Pinnell has been a keen globaliser since he was hired by Shell in 1997, overseeing the reduction from 35 advertising agencies to a single agency (J Walter Thompson) producing global work. For Pinnell, the new company is merely the final, logical step towards globalisation marketing.

Vodafone made a similar move last year, setting up a brand- holding company based in Ireland, from where it controls its worldwide network of brands and trademarks. The telecoms company refuses to explain why it has done this, but it is thought Ireland’s attractive 12.5 per cent corporate tax rate spurred the move.

Meanwhile, oil company BP has licensed out its brand to its own divisions and other companies (through joint ventures) for the past ten years, but hasn’t separated the company to do this. A BP spokesman says that this is “a pretty standard practice for large corporations”.

A close look at the packaging of most Nestlé products reveals the words Societé des Produits Nestlé, the name of the Swiss giant’s brand-holding company. But Nestlé spokesman François-Xavier Perroud denies that brand licensing is done mainly for tax savings. Having a holding company for brands helps to ensure control and transparency of trademarks, he says. “Trademarks are very important for Nestlé, we must ensure that legally we own them and ownership must be clear so we can make use of them,” he adds.

Consultants involved in setting up brand-holding companies, such as accountants and brand finance specialists, believe that more corporations will take this path. “We see a lot of global businesses creating holding companies for their brands,” says FutureBrand director of brand analytics Lauren Henderson. “It is a trend that has started and we will see more of it,” she adds.

Interbrand chairman Rita Clifton says the issue of trademark control becomes central for global corporations with tentacles across the world: “There are certain markets that prefer to go it alone and if they own the trademark they feel they can do what they like with it. This can cause quite a bit of tension.” She says country-based marketers are more likely to consider the value of a brand and give it due respect if they have to pay royalties for its use from their own bottom line.

The reasons for setting up brand-holding companies are critical when the corporation’s finance team explain the move to national tax authorities. “Quite a bit of tax is saved by doing this,” says Ted Keen, partner in charge of the economics division of KPMG. He believes corporations can find it difficult to convince tax authorities that the holding companies are legitimate. “You might put the holding company in Switzerland, but if the UK is spending money on developing the brands, you could struggle with the authorities because they are paying royalties into the Swiss company where it has a tax advantage.”

He adds that the holding company must be seen as an effective entity, “otherwise it starts to smell funny”. The Swiss company would have to spend substantial sums to promote the brand globally, which could mean that if the UK arm wanted to sponsor a football team, the decision would have to come from Switzerland.

Shell reckons it has been planning to set up SBI for quite some time. Pinnell says he could see how cynical motives could be imputed if Shell was operating only in one country, rather than as a multi-national company. He says: “Switzerland is a place that is fiscally attractive, but this is not just a cynical move. SBI is an active company responsible for global strategy for advertising and sponsorship and makes a profit.”

By having a structure where local Shell companies pay royalties to use the Shell brands, Pinnell believes transparency is enhanced. “It actually moves us into having easier conversations with tax authorities.”

The oil giant is following in the footsteps of consumer brand owners with this move and it seems likely many more brand-owning corporations will do the same. True, it may be tax efficient and Switzerland may have a strong local marketing community together with excellent transport and political links with most of the world’s markets, but centralising global control over brands could mean marketing at a local level becomes a duller job as a result.

Additional reporting by John Stones


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