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Infographic: They Profit, We Pay: The Shameful Truth of Corporate Tax Avoidance

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  • While the uses you cite as the destination of additional UK tax dollars are laudable, this does not excuse some basic mistakes that you make in your calculations to justify your call for additional taxation.

    First tax is paid on “net profits”, not on “gross revenues”. IOW, You don’t pay tax on the amount you sell the coffee or book for. You have to pay all the costs in order to present that coffee or book to the customer. You pay corporate tax on the PROFIT after expenses. All of these companies did just this and paid every pound of corporate tax that they owed.

    One point that you do not really make well is the questioning of some of those “expenses”, such as the use of intellectual property rights. This is the “transfer pricing issue”, that is occasionally brought up but rarely understood. This is part of the international corporate tax planning that is again criticized without understanding.

    When looking at this whole issue, its worth understanding some history and background. The current system of tax treaties and international structuring arose from a desire by many national governments to try and maximize the tax revenue they collect. They did this by recognizing that there are constantly situations where an international corporation may be obligated to pay tax to several jurisdictions on the same revenue (aka double taxation). Of course, this would result in no net revenue and the corporation going bankrupt.

    Therefore in order to attract the good or service to their jurisdiction; try to get as much tax revenue as possible; and try to encourage the corporation to set up some of its physical structure and work force in their jurisdictions, countries like the US, UK and Ireland set up tax treaties between themselves and other countries. It is key to understanding this underlying motivation for the current system. This system arose not out of some noble desire to relieve taxpayers of the “unfairness” of double taxation or even at the bequest of the lobbyists of those taxpayers. It came out of a logical self-interest of various governments.

    With this background in mind, let’s look at Twitter, Apple, Google and Starbucks (which are all under fire in the international media for their tax planning).

    Many US politicians and citizens want these companies to pay US tax on its WORLDWIDE income, including income earned from foreign customers. They argue that while this may not be legally correct, it is MORALLY correct because all three companies were a) Founded, IPOed (or will in the case of Twitter) and has their headquarters in the US; AND b) The citizens of the US are suffering in a financial downturn and “deserve” this money;

    -Many foreign politicians and citizens (like the UK) want these companies to pay more tax on the revenue generated from customers in their country. They argue that while this may not be legally correct, it is MORALLY correct because a) The company is deriving income from tax resident individuals and corporations; AND b) The citizens of these countries are suffering in a financial downturn and “deserve” this money;

    All four companies want to maximize their net revenues (“gross revenues” minus “expenses including tax” equals “net revenue”). Each company used the tax treaty network and international structuring regime to minimize their global tax burden. As part of this structure they may have to set up operations in places like Ireland; or assigned intellectual property rights to places like the Netherlands. However there are important differences between these companies;

    Starbucks needs to respond to this “Moral but not legal” obligation demand because a) It has physical facilities in the foreign country which could be picketed or damaged reducing sales; and b) There are many competitors in these countries who could easily service customer needs and decrease gross revenues. As a result, it was logical that Starbucks decided to may pay more tax in the UK than legally obligated in order to maintain gross revenues and thereby maximize net revenue (http://www.ft.com/intl/cms/s/0/73fae3b4-f56f-11e2-94e9-00144feabdc0.html#axzz2bs7OeIND);

    Twitter and Google are different in that a) They do not have or need physical facilities in a given country to deliver its service; b) You can’t picket everyone’s smartphone, tablet and computer to ensure that everyone is boycotting their services; and c) With all due respect to other search engines, Google is not really realistically worried today about losing customers to its competitors. Same thing with Twitter’s lock on “tweets”. Therefore, the current controversy is unlikely to significantly reduce people from using their products and services. As a result, it is logical that they will not consider paying more tax anywhere than legally obligated;

    Apple derives gross revenues from various products (hardware and software) which has competitors. Some of the sales of their products and services derive from physical retail outlets and some does not. The big question is whether Apple products (with their hardware and software integrated) is unique enough to avoid a drop in revenues;

    In summary, Starbucks sells a standard physical commodity which is readily available from other competitors and is clearly subject to pressure. “Search” and “Tweeting” are not a standard physical commodities today and whether through perception or reality, both are far and away market leaders. As a result, neither Twitter or Google are motivated by self interest to pay more tax to maintain gross revenues. Where Apple considers itself (closer to a standard replaceable commodity or a unique product) will determine where they will respond and volunteer to pay more tax anywhere than they are legally obligated.

    It is also worth understanding that revising the current international legal tax planning regime for individuals and corporations is not simple. First it requires that each country think about all of the possible/ probable reactions of corporations and individuals to any changes that come into being. Increasing a tax rate or taxable amount could result in the individual or corporation moving all or part of its operations/holdings outside of that jurisdiction. This means that not only is the anticipated additional tax revenue never materializing but jobs, VAT, and other economic activity associated with that taxpayer also disappear;

    Second, as explained above, the current matrix of tax treaties and domestic laws was developed over the better part of a century. Domestic tax policy was put in place by local politicians acting in what they thought was the best interest of that country. Tax treaties were negotiated, signed, updated when both countries perceived a win-win for each of their countries;

    The major problem in trying to achieve achieve changes that will increase tax revenue (that groups like you, Oxfam, Tax Justice Network and ActionAid are calling for) is that you need to change not only domestic rules but also the intertwining tax treaty network for each and every country in the world. Given the “Prisoner’s Dilemma”, it is HIGHLY unlikely that we will ever see a global “tax level playing field”. Each country will continually claim special circumstances or financial emergencies as to why they are not immediately changing current policies.

    Finally, as explained above taxing regimes do not have the same “leverage” over all corporations or individuals. With “global citizens” (i.e. Golden Geese who do not need to be in the country of their birth to make and maintain their wealth/income), cloud computing, and the pending revolution in 3D printers (which will turn more current tangible goods into intangible services/programs delivered on-line direct to the consumer), you will see more and more taxpayers who are more like Google than Starbucks.

    • Hannah

      Thanks for your comment, David. As someone who worked on researching and creating this piece, I can certainly say that it’s a very complicated issue, and as you point out there’s a whole lot more to it than we were able to present above.

      My main hope is that we were able to highlight the issue and put the figures into some tangible context.

  • Andyvan

    Or alternatively the money could be left with it’s rightful owners, the shareholders and not stolen by government to fund it’s grossly inefficient and counterproductive vote buying policies.

    • Come now Andyvan; I’m not really sold on this article either but I think we all know Tax avoidance does not solve anything and neither do your ‘rightful owners, the shareholders’.

      I should add though that Tax avoidance of multinationals stealing from developing countries is probably a more convincing rant than Western Europe whining about Amazon….A whole ton of hypocrisy going on there.

  • Tom

    British army.

  • DeathFromAbove

    Yes, it could be used for most of those things, but most of the tax money will be spent on corporate welfare vanity “private sector” projects like A4E, ATOS, various wars (the Iraq war was just an excuse to pump billions into the coffers of private sector “defence” companies)propping up the middle- and upper-classes’ property portfolios & over-inflated savings via bank bailouts and mortgage guarantees (i.e. vote-buying) etc. What’s the point in these companies paying tax when they’ll just get it back in welfare payments? Most businesses are so inefficient that their staff needs taxpayer money to prop up their meagre wages.

    Anyway, nobody earns punds. Pounds are sovereign and owned by the government. There’s nothing wrong with the state taking back its own money. The only way to prevent the state from taking “your” money is by rejecting payment in the state’s money. Make your own currency and see how well it does on the market – this is the wave of the future.

  • DeathFromAbove

    Tax, like capitalism, is amoral. There is nothing inherently “right” or “wrong” about it, and there is nothing inherently “right” or “wrong” about paying it or not paying it. The biggest hope is that one day accountancy will be entirely automated and avoidance accessible to all rather than the privileged few.

    State-backed money is as wrong as state-backed contracts.

  • DeathFromAbove

    Some practical suggestions:

    1. Introduce a Land Value Tax and use it to get rid of the tax burden on those paid least (i.e. move everyone earning under £30, 000 per annum out of the tax band). Use this tax and make it high enough (say, 50%-70%) to also get rid of council (poll) tax, VAT, corporation tax and other such regressive taxes. Land Value Tax is impossible to avoid. Those who do try and avoid it relinquish their right to use the land. This is compensation for land enclosures, which affects us to this day.

    2. Legalise and tax marijuana.

    3. Companies like Google should have to pay to gather private data. This money could be used to get rid of an over-complicated benefits system that reflects the Speenhamland experiment and replaced by a non-means tested citizens’ income. There could be a form of “Digital Value Tax”.

    4. Get rid of patents, or reform the system entirely so it doesn’t restrict competition.

    5. Stop subsidising rail companies, utility companies, welfare-to-work organisations, banks, ATOS, “private” care homes and many others. Use the money saved from this to top up citizen’s income for the disabled, pensioners and their carers.

  • Paul

    Why the hell would you want more police and government oppression, more people to make war and whatever it is that solicitors do. I think I’d prefer Amazon, Google and Starbucks to decide what to spend their extra cash on. To my knowledge they provide a pretty good service and when I give them my money I decide what I get back. When did your government do that for you?

  • Robert

    First of all you operate on the wrong premise: government has no right or entitlement to the money in the first place. You fail to address the fact that these so-called unpaid taxes are used to pay employees, benefits, reinvest in the company or others, and in general benefit those more appropriately entitled i.e. those who work for it. This modern communist diatribe is nothing new. It’s the classic ploy of: “We’ll do great things with the plunder we take from those to whom it rightfully belongs.” It’s nothing less than the same line that the plundering royalty of ancient time claimed. We’re going to rob you of every last cent you have but in exchange, we’ll protect you by conscripting you into our defense force so you can also give you life for us. I’m sick of the modern communist who claim government and the leeches working the system are somehow entitled to what I an others work for. Yes, there is a small obligation for individuals to support the system of order established in their society but when the extortion exceeds the benefit for the productive segments it’s time to boot out the politicians, the special interest, and the modern communists.

  • VP Associates

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