Prem Sikka
Tax avoidance shows no sign of abating. Google, the company with the
slogan “Don’t be evil", is at it again. The company has been
named and
shamed by the UK House of Commons' Public Accounts Committee, but that has not persuaded directors to change their ways.
According to
information
filed with the US Securities and Exchange Commission (SEC), the Google
group of companies generated global revenues of US$50.175 billion last
year. Some US$4.872 billion (nearly £3.25 billion) of revenues came from
the UK.
Google explains these revenues are “based on the billing addresses of
our customers for the Google segment and the ship-to-addresses of our
customers for the Mobile segment”. But this does not mean the revenues
are necessarily booked in the UK, which acts as a marketing mechanism
for its Ireland operations. As the Public Accounts Committee heard,
through careful attention to detail, a large part of the revenues is
booked in Ireland.
Despite the US data, Google’s
UK operations
reported a revenues of just £506m in 2012, some way short of the figure
reported to the SEC. This gave rise to a UK profit of £36.2 million and
a corporate tax bill of £11.2 million.
Google’s
Irish arm
reported revenues of €15.5 billion (£13 billion), of which €11 billion
is wiped out by “administrative expenses”. The Irish operations reported
a profit of €154m (£131m) in 2012, but paid just €17m (£14.5m) in tax.
Google uses complex corporate structures. Royalty payments,
masquerading as administrative expenses, are a key part of the profit
shifting strategies. For example, its intellectual property is held in
Bermuda, which does not levy corporate taxes. Various subsidiaries pay
royalty fees which result in tax deductible expenses in Ireland and
elsewhere, but tax-free income in Bermuda.
Google’s SEC filing shows the company had foreign income before taxes
of just over US$8 billion for 2012. Most of the income from foreign
operations was recorded by an Irish subsidiary. The foreign tax
paid/payable was
US$358m, equivalent to a rate of 4.43%. The accounts received the customary clean bill of health from auditors Ernst & Young.
Another company using complex corporate structures and intergroup transactions to avoid taxes is
ExxonMobil.
Its Spanish subsidiary operated for a while from the same address as
its auditors PricewaterhouseCoopers. The Spanish company apparently had
one employee on an annual salary of €55,000, but it reported net profits
of €9.9 billion for the period 2009 to 2011. The key to this was a
strategy designed to take advantage of Spanish laws for attracting
foreign investment. The company shuffled the payment of dividends and
avoided taxes in the US elsewhere.
We can all ask companies to honour their promises of ethical and
responsible conduct, but such calls have little effect. All over the
world tax authorities are overwhelmed by the tide of avoidance and lack
the financial and political resources to investigate giant corporations.
Yes, they can be more aggressive and governments can move to deprive
tax dodging companies of any public contracts. But such efforts need to
be accompanied by a fundamental reform of the way corporate profits are
taxed. The current system is over a hundred years old and is
fundamentally flawed.
For example, Google, ExxonMobil and other companies may have hundreds
of subsidiaries, but they are unified entities with a common board of
directors, common share ownership and a common strategy that directs
their operations. The companies publish consolidated financial
statements for the group as a whole, which recognise that transactions
within the group of companies, do not add any economic value. These
transactions have zero effect on their consolidated profits.
Yet the tax treatment is entirely different. For tax purposes Google
and ExxonMobil are not treated as a single entity. Instead they are
treated as hundreds of separate entities. This encourages them to play
royalty and other games and shift profits through artificial
transactions and arbitrage the global tax systems.
So the obvious solution is to
treat multinational corporations as single unified entities.
Their global profit, with some modifications, needs to be allocated to
various countries on the basis of employee, sales, assets or other key
determinants of profits and taxed at the appropriate rates.
Such a system already operates within some federal states, most
notably the United States, Canada, Switzerland and Argentina. It
prevents companies from artificially locating domestic profits to
internal tax havens. Thus, a company trading in California cannot easily
avoid taxes on its local profits by claiming that it is a located in
Delaware, which offers minimal taxes on varieties of corporate income.
The above reforms do not necessarily need international agreement and
can be implemented unilaterally by any government. It has considerable
similarities with the
Common Consolidated Corporate Tax Base proposed by the European Union.
The EU’s plan could make a serious dent in tax avoidance, but is opposed by the corporate dominated
Organisation for Economic Co-operation and development (OECD). The OECD’s preference is to tweak the current system, which cannot address the fault lines.
Without a fundamental reform companies like Google and ExxonMobil
will continue to deprive national governments of much needed revenues.
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