The taxation of multinational companies garners significant attention in media, research and political spheres. There is no doubt that the system for taxing companies needs updating but many of the contributions on the topic contain one, or on occasion all, of the following shortcomings.
There are statements that can only ever be true so have no meaningful value, claims which are incomplete or just plain wrong that mispresent the actual outcomes and an absence of setting out what the actual outcomes are.
No one sets out to pay more tax than they have to.
If one side of a street has free parking and the other has metered parking, drivers will look for a spot on the side that is free rather than the side that will see revenue flow to the local authority.
I doubt anyone would consider anything unusual or egregious about such behaviour if they bothered to think about it at all. And if the local authority wants to collect parking fees it should charge for parking on both sides of the street.
Multinational companies (MNCs) face similar incentives albeit on a scale that is much more likely to get people to examine and criticise their actions.
MNCs make decisions about where to locate their operations and tax is one factor that influences these decisions. Saying that MNCs make these decisions to avoid tax is pretty much the same as telling us drivers prefer free parking spots.
MNCs were setting up structures that minimised their tax bills in the 1920s when the architecture for taxing cross-border companies was put in place. In the 2020s, they will make decisions to revise their structures with the intention of minimising their tax bills in response to changes arising from the ongoing Base Erosion and Profit Shifting, or Beps project being led by the OECD.
And it’s safe to predict that in a hundred years’ time MNCs will have structures in place that will minimise their tax bills in the face of whatever rules are in place in the 2120s.
Being told that companies have structures that minimise their tax bill is only telling us how companies operate. The rules can change, and they should, but one thing won’t change: Companies will always seek to minimise their tax bill.
In most cases, corporate tax bills are reduced within the law. If we don’t like the outcomes the law gives rise to, it is the law that should be changed.
Obviously, this is easier for a local authority that sets the parking charges on both sides of a street as opposed to the coordination that is required to change the laws within, and international agreements between, the many countries in which MNCs operate.
However, when it comes to the headline-grabbing claims about the taxation of MNCs many of them could be addressed without the need for international coordination.
That is because when it comes to corporate tax headlines, the antagonists are almost invariably American companies.
We could say that this is because American companies are run by exceptionally ruthless executives who are willing to go further than their counterparts in other countries to benefit their shareholders.
But why would the Volkswagen management be hard-nosed enough to set up their cars to deceive emissions tests but unwise to the strategies that could apparently cut billions off their tax bill?
It is not that Volkswagen has a bigger social conscience when it comes to tax but not being a US company means it does not face the same tax rules that underpin the structures of Google, Apple, Facebook, Amazon, Microsoft, and scores of other US companies.
There is a reason that US companies dominate the tax headlines and it is not the tax laws of Ireland and The Netherlands or even the lack of tax in Bermuda or the Cayman Islands. The reason is the tax laws of the US. And the primary tax payments affected are the tax payments to the US.
The US has seen the share of its total tax revenue that comes from corporate income taxes fall but, as with lots of things, what happens in the US should not be taken to be reflective of what happens elsewhere.
If we look at the EU15 group of countries, in 1965 the average share of their total tax revenue that came from corporate taxes was 6.7%; in 2018 it was 8%. This is not to say that this share is 'fair' but it is the case that EU countries are collecting more of their taxes from profit taxes then they were 50 years ago.
The last half century has also seen corporate profits rise as a share of national income. When in terms of the GDP of these countries, the figures show that corporate taxes have risen from an average of 1.8% in 1965 to 3.1% in 2018.
That covers the rise in profits and then some and tells us that the effective tax rate on profits has not fallen.
Cuts to corporate tax rates can easily be condensed into a headline or an eye-catching graph. Technical law changes that broaden the tax base do not lend themselves to pithy one-liners but can be as important in determining how much tax a company pays.
And companies pay lots of tax, even American tech companies. Between them, the five companies listed above made $38bn (€32.6bn) of corporate tax payments which were equivalent to 20% of their pre-tax profits, an outcome that rarely gets reported.
In the 10 years to 2019, Apple reported pre-tax profits of $570bn. In the same period, Apple made $100bn of corporate tax payments to governments around the world. Although often characterised as the archetypal tax avoider, Apple is also likely the largest taxpayer in the world.
Apple’s financial accounts show that the company had actually set aside $130bn of those profits to cover its tax liabilities giving an effective tax rate of 26%. The $30bn difference arose because the US was like a local authority that only had parking charges on one side of the street.
The US tax system facilitates and incentivises US companies to characterise some of their profits as 'offshore' when in reality they are not shifted out of the US at all.
These types of profits were central to the European Commission’s high-profile state-aid case against Ireland. Margrethe Vestager made a ruling that over €100bn of these profits earned by Apple from 2003 to 2014 should have been included in Ireland’s tax base.
Under US rules these profits are considered “stateless” and, up to recently, the tax due wasn’t paid immediately but when the profits were “repatriated”. The profits are in the US but the US system provides spaces that allow companies to park them tax free. We should not be surprised that companies choose these spots that offer free or cheaper parking.
The OECD has published some aggregate statistics from the country-by-county reports that companies have been required to file in recent years.
Unsurprisingly, US companies report large profits in countries like Ireland, the Netherlands, Bermuda, and the Cayman Islands. In 2016, US companies reported $117bn of profits in these jurisdictions. But the data for US companies show the profit attributed to “stateless” entities was $120bn greater than for the four mentioned countries.
The OECD data show that US companies had $31bn of taxable profit in Ireland in 2016 and incurred a 14% effective Irish tax on them. It is possible to calculate significantly lower effective rates for Ireland but this needs chunks of the $120bn of stateless profits to be incorrectly attributed to Ireland.
This is what Ms Vestager did when she incorrectly claimed that Apple had a tax rate of 0.005% in Ireland. This characterisation completely omits the tax that is due to the US and as the EU court has ruled including these profits in Ireland’s tax base is not legally sound. These profits should be included in the tax base of the US. It is the US itself that is the biggest tax haven for US companies.
If the ability of US companies to offshore their profits was reduced, and it should be, then many of the shortcomings that plague the corporate tax debate could be reduced as well. Maybe then we could have an informed discussion of the broader changes that are necessary to update a system that was put in place a hundred years ago.
- Seamus Coffey is a UCC economist and former chair of the Irish Fiscal Advisory Council