Multinationals exploit loopholes and tax patience of governments

AS THE Government ratchets up the pressure on struggling families by introducing an array of new taxes, the question of whether multinational companies are paying their fair share is timely.

On Saturday, a meeting of G20 finance ministers and central bank governors vowed to tackle what Britain’s prime minister David Cameron has called “aggressive tax avoidance” schemes by international firms.

“There has been a problem in this debate in the past in that people have said: ‘Well, of course there is a difference between tax evasion, which is illegal and should be pursued by the full force of the law, and then there is tax avoidance, which is perfectly legal and OK’,” he said.

“The problem with that is that there are some forms of tax avoidance that have become so aggressive, that I think there are moral questions we have to answer about whether we want to encourage, or allow, that sort of behaviour.”

While appealing to multinationals’ morality to coax them to pay more tax is as useful as appealing to the tooth fairy, Cameron’s frustration is understandable.

Amazon.co.uk, the UK’s largest online retailer, had sales of £7.6bn (€8.8bn) between 2009 and 2011, yet paid no corporation tax in that country.

Amazon.co.uk legitimately avoids tax because ownership was transferred to a Luxembourg company in 2006, and the payments go there, with the UK operation classified as an order-fulfilment service.

So, for example, in 2010 the Luxembourg headquarters, which employs 134 people, generated a turnover of €7.5bn, while the UK operation, which employs 2,265, had a relatively small turnover of £147m.

Coffee chain Starbucks contended with angry public protests for having paid just £8.6m in taxes on UK sales of £3bn since 1998.

The company has promised to pay £20m in taxes over the next two years — fearful that a mass boycott could cost it much more.

While Starbucks bowed to picketing protestors, Google chairman, Eric Schmidt, is more reflective of intransigent business sentiment. Asked about Google’s £2.5bn in UK sales in 2011 and just £6m in corporation tax, Mr Schmidt said he was proud of the company’s tiny tax bill.

“It’s called capitalism. We are proudly capitalistic. I’m not confused about this … to go back to shareholders and say, ‘we looked at 200 countries, but felt sorry for those British people, so we want to [pay them more]’, there is probably some law against doing that,” said Mr Schmidt.

Google avoided billions in taxes via accounting techniques called the “Double Irish” and the “Dutch sandwich”, which allow the company to channel revenue through subsidiaries in Ireland and the Netherlands, and then on to Bermuda.

In 2011, Google Ireland reported a taxable profit of just €24m on turnover of a staggering e12.5bn.

Facebook Ireland also employs this legal accounting measure to great effect. In 2011, its revenue was more than e1bn, yet it recorded a pre-tax loss of e18.7m, because most of that money was transferred to the Cayman Islands, and its US parent company, in licensing and royalty payments.

While companies have long been laughing all the way to the bank, thanks to these very lucrative tax loopholes, Western countries, which have seen tax revenues plummet after the financial crisis, have now belatedly decided enough is enough.

The OECD, in a report published last week on the issue, warned that democracy was at stake.

“Companies have a responsibility to pay corporation tax in the jurisdictions where they operate. Citizens are already losing faith in their banks and the financial system,” said OECD chairman Angel Gurria.

“If big corporations fail to pay tax and leave it to SMEs and middle-income groups, it will undermine democracy. This is about the survival of democracy.”

Meanwhile, the G20 has said it is preparing a plan of action detailing how best to tackle the problem, and this will be published in July — meaning Ireland could soon come under considerable pressure to change contentious elements of its tax code.

To date, the Government has withstood pressure from powerful countries and has maintained our 12.5% corporate tax rate — and with very good reason.

Despite all the bluster from France when Nicholas Sarkozy was president, that country has an effective corporate tax rate of just 8.2% — even lower than Ireland’s, although its headline rate is much higher.

Similarly, other countries that criticise Ireland’s low corporate tax rate have their own incentives, built into their tax codes, to entice businesses.

For example, France, Spain, the Netherlands, Belgium, and the UK have all introduced “patent boxes”, which offer companies tax rates of between 1% and 5% for profits linked to intellectual property.

“Even if the patented element of a product is minor, 100% of income arising from the product falls into the regime,” was KPMG’s verdict of the UK scheme.

So, while Ireland can easily defend its corporate tax rate on the basis that it is upfront about the low level, while other countries mask the rates being paid by multinationals, it’s much harder to proffer any credible defence for schemes like the Double Irish, which seem to exist to allow profits disappear.

WORRYINGLY, the EU Commission has latterly signalled that it will use this issue as a pretext to introduce a common European corporate tax rate, if nothing is done to remedy the situation.

EU tax commissioner Algirdas Semeta, responding to last week’s OECD report, said the problem of profit shifting could be solved by a common corporate tax rate, and said there was now renewed momentum for such a plan — a nightmare scenario for Ireland.

For its part, the Government has denied any concerted effort to facilitate wholesale tax avoidance, and said the roots of the problem lie in the ability of international companies to exploit legal and tax systems, in the countries in which they operate, to bolster profits.

“The only way to combat such arrangements is for countries to work together to examine these structures and to consider how international rules can be amended to ensure fair levels of taxation,” said a Department of Finance spokesperson.

While this is undoubtedly true, idiosyncrasies specific to the Irish tax code are being employed by companies to vastly reduce their tax bills — idiosyncrasies that can only be amended by this country.

Ultimately, only time will tell if the Government’s determination to tackle tax avoidance by multinationals will match the zeal it has shown in imposing a plethora of new taxes on citizens, who don’t have the resources to hire a phalanx of highly paid accountants to help them avoid these charges.

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