Thursday, May 23, 2013

Tax evaders or convenient scapegoats

In recent months Google, in particular, has come under criticism for not paying its 'fair share' of taxes. But in a world driven by the fact that companies, both big and small, have a duty to their shareholders, as alluded to by Eric Schmidt in an interview with the BBC [MP3 audio right click and save as.. / BBC / Guardian], it is far from surprising that legal tax avoidance is rife.

"We have a fiduciary responsibility to our shareholders to account for things properly, so if we were, for example, to just arbitrarily decide to pay a different tax rate than we were required to, a more favourable one for example to a particular country, how would we account for that?" Schmidt says in defence of the way Google conducts its tax affairs. "How would we file the necessary paperwork, what would be the legal consequences in other countries?"

Google takes advantage of complicated, but oft used, legal structures to save billions of dollars every year. Of course governments lose out. And in a deficit torn country like Britain who can blame the government for not trying to divert attention by pointing fingers at tax evaders. However, there is an irony in that many of the tax havens used by multinationals, and even individuals, were set up by Britain herself.

Tax havens

Bermuda, the Cayman Islands and Gibraltar, all British dependencies, have been used by companies for decades because they either do not charge corporation tax or set it very low. There are dozens of tax havens dotted around the world, though Bermuda is often cited as being the location of choice for those wishing to avoid tax. Google uses what is known as  the "Double Irish" or "Dutch Sandwich" tax avoidance strategies, well known to tax experts.

Complicated route

In general such strategies would work by way of funnelling money through different countries. For instance, should a company in Europe, the Middle East, or Africa purchase a search advertisement - such as Adwords or Adsense - through Google, it would send the money to Google Ireland. The Irish government taxes corporate profits at 12.5%, but Google can mostly escape that tax because its earnings don't remain in the Dublin office, which reported a pretax profit of less than 1% of revenues in 2008, a percentage that has risen little since.

Irish law makes it difficult for Google to send the money directly to Bermuda, where there is no corporation tax, without incurring a large tax hit. So payments make a brief detour through the Netherlands, since Ireland does not tax certain payments to companies in other European Union states. Once money is in the Netherlands, Google can take advantage of generous Dutch tax laws. Its subsidiary there, Google Netherlands Holdings, a small office on the 34th floor of a modern tower block in the south of the city, is believed to pass about 99.8% of what it collects to Bermuda. The subsidiary managed in Bermuda is technically an Irish company, hence the "Double Irish" nickname.

Cutting tax bills

By sending its money to Bermuda, Google effectively cuts its tax bill in half, according to a 2012 report [Bloomberg / Owni / Daily Mail / Business Week]. Google insists it complies with all tax rules, and its investment in various European countries and other countries around the world, helps their economies. In the UK, "we also employ over 2,000 people, help hundreds of thousands of businesses to grow online, and invest millions supporting new tech businesses in East London," the Mountain View, California-based company said in late 2012.

Indeed, it cannot be argued that the company's products have done nothing but to improve productivity, whether it be in schools, small businesses or large corporations. While some British MPs may think Google's tax avoidance is 'evil', by boosting their profits, the company has more money to invest in its products which in turn provides more tools for business, lowers costs of cloud storage, increases the size of the company and thus the size of its workforce.

The same argument could be applied to other multi-nationals which avoid tax, though in the case of companies like Starbucks it is hard to see how having more coffee shops is going to help, other than to boost productivity with an extra hit of caffeine.

Looking for scapegoats

But with cash-strapped governments, and with economies in the West failing, there will be those looking for scapegoats. This week the charity Oxfam International published a report in which it claimed that tax havens under European Union jurisdiction hold €9.5 trillion [$12 trillion] in global offshore wealth, a figure which translates into $100 billion in lost government revenue each year. And, according to the study, it was the UK and its dependencies, such as the Cayman Islands and Bermuda, which accounted for about half of the total.

No-one is going to pass up on a free lunch, and companies like Google, Microsoft, Apple, Amazon, Starbucks, Dell, Vodafone, Cisco, Intel et al, cannot really be blamed for taking advantage of the legal tax loopholes. It is not just corporations that are taking advantage, however. Oxfam estimates that at least $18.5 trillion is hidden by wealthy individuals in worldwide tax havens, based on its analysis of data from the Bank of International Settlements, the International Monetary Fund and national authorities.

However certain governments, some of which have shouted the loudest in complaint, are themselves to blame for creating such tax havens. "European leaders have absolutely no excuse not to act when you see what proportion of this money is stashed right under their noses in tax havens for which they are responsible," head of Oxfam's EU office Natalia Alonso told Bloomberg in a statement.


Meanwhile some politicians have already found themselves in hot water, and been accused of hypocrisy, for taking advantage of offshore tax havens. Last week it was revealed that US Commerce Secretary nominee Penny Pritzker received $54 million last year from an offshore trust in the Bahamas, according to a disclosure report that describes an empire of casinos, hotels, energy companies and family trusts that may be worth more than $2 billion [Bloomberg].

By pointing accusatory fingers at the multinationals, that actually help drive the economy, politicians may have opened a can of worms that may eat away at their own credibility.

Perhaps its worth a thought how much more we rely upon the accused multinationals every day rather than our politicians - grabbing a coffee on the way to work while checking Gmail on an Apple iPhone before dropping into the office and begin tapping away on a Dell computer running Microsoft Windows with Intel inside... Oh and wait before you grab that sandwich at lunchtime from a well known High Street store. Last weekend the Guardian claimed even Marks & Spencer were playing the tax avoidance game.

Whilst one ponders that thought, cast one's mind back to the expenses scandal of 2009 when MPs were found to have frivolously wasted taxpayers money on duck houses, claims for food and second homes. Some were even accused of tax evasion! The amounts were perhaps derisory compared to the amounts of tax being lost from large corporations. At least the multinationals are staying within the law.

tvnewswatch, Yunnan, China

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