US giant firms and Europe's new response to tax fraud
Just over 5 years ago citizen activism against corporate tax evasion/ avoidance began when mainly women in a group called UK Uncut began occupying the high profile London retail stores of the Arcadia group such as Topshop, BHS, Burton, Miss Selfridge and Dorothy Perkins, controlled by Sir Philip Green, one of Britain's richest men, who had given a £1.2bn tax-free dividend to his wife — a resident of Monaco. Last week, Rupert Murdoch, another billionaire, said strong new laws were required to prevent small local businesses from being ruined by global tech companies paying “token” taxes.
Much progress has been achieved in recent years, including the support of the G20 group of the 19 leading advanced and emerging economies for the OECD's Base Erosion and Profit Shifting (BEPS) proposals on reform of international tax rules. Much remains to be done but the momentum for ending the effective exemption from local anti-tax fraud rules applying in Europe, and availed of in particular by US giant firms, is unstoppable.
In March 2009 President Obama called on the US Congress to enact corporate tax reforms and he cited a Cayman Islands building where more than 18,000 US companies are housed.
Either this is the biggest building in the world or it is the biggest tax scam in the world. I think the American people know which it is.
The five-storey office building, known as Ugland House in George Town, Grand Cayman, is the location of Maples and Calder, a law firm and company services provider.
The administration estimated that US companies paid an effective tax rate of just 2.3% on the $700bn they earned in foreign profits in 2004 and it proposed the ending of the 'check-the-box' loophole — see also here from the US Congressional Research Service.
Later Obama proposed that the US should apply a minimum tax on foreign profits — Robert Pozen of the Brookings Institution said in 2011 that corporations should no longer be allowed to indefinitely defer American taxes on profits in low-tax jurisdictions but a 20% levy should be reduced to reflect any taxes paid by United States multinationals in low-tax countries. He said if a foreign subsidiary of an American corporation pays some tax in a low-tax jurisdiction, it should receive a tax credit for that amount against the 20% tax. For example, if corporate profits in Ireland were taxed at 12.5%, they would be subject to an American tax of only 7.5% (20% minus 12.5%).
This is not as far-fetched as it once seemed as Republicans reacting to their voters' preferences, may not always support business interests — it is the biggest potential risk to Ireland's headline rate.
The Obama administration failed to gain any traction with Congress on reform of the dysfunctional US corporate tax system, and now is pathetically left with questioning the "basic fairness" of European Commission investigations into tax deals struck by American companies including Apple and McDonald's — last week Robert Stack, the US Treasury's deputy assistant secretary for international tax affairs, said following meetings with EU regulators in Brussels that he's worried that Margrethe Vestager, EU Competition commissioner, is making unreasonable demands of US companies in her state aid investigations which focus on special tax deals e.g. the special Irish deals for Apple.
Frank Clemente, executive director of Americans for Tax Fairness, a liberal advocacy group, said it was “pathetic” to see Robert Stack complaining about the European Commission’s investigations.
He ought to spend his time fulminating against the tax dodging these companies are doing rather than criticising European policymakers for trying to close the loopholes.
In 2013 the biggest story on tax avoidance was the US Senate's report on Apple's use of "stateless" Irish shell companies that enabled it to route billions in profits tax-free without having the use the more public "Double Irish" tax dodge.
In November 2014, Jean-Claude Juncker, the new president of the European Commission, was forced to embrace corporate tax reforms after the massive LuxLeaks leak of 28,000 tax-related documents from the offices of PricewaterhouseCoopers (PwC) in Luxembourg, where Juncker had been prime minister for almost two decades.
Marius Kohl, known in financial circles as “Monsieur Ruling,” who retired in 2013, had sole authority at Sociétés 6, a finance ministry agency, to approve or reject the tax deals for the 50,000 Luxembourg-registered holding companies, most of which have foreign parents.
“Monsieur Ruling” would meet companies tax representatives and sometimes give an oral preliminary ruling that was seldom reversed and operated for five years.
“I could say ‘yes’ or ‘no,’ ” Kohl said according to a Wall Street Journal interview, which he described as his first. “Sometimes it’s easier if you only have to ask one person.”
The Journal said that US companies operating abroad generated about 9% of their foreign profits from Luxembourg-based subsidiaries, on the whole, while employing only 0.1% of their foreign workforces in the country, figures from the US Commerce Department’s Bureau of Economic Analysis showed.
For Luxembourg-based units of US companies, the effective income-tax rate had been as low as 0.4% in recent years, according to an analysis by Kimberly A. Clausing, an economics professor at Oregon’s Reed College. Much of the foreign profit of American companies never returns home to face the US’s 35% corporate tax rate.
In 2015 Starbucks reported its first profit in 17 years from its chain of almost 800 coffee shops in the UK.
A Reuters investigation in 2012 showed how Starbucks UK — using invoice royalty charges to shift profits to the Netherlands — had booked cumulative sales of more than £3bn since opening in Britain but had paid only £8.6m in corporation tax over the same period.
Amazon in 2015 returned its European headquarters from Luxembourg to the UK; it was reported at the year end that Apple's Italian subsidiary has agreed to pay €318m following an investigation into tax fraud allegations, Italy's tax office said. It was claimed that the company failed to pay €880m in tax between 2008 and 2013, according to La Repubblica.
The settlement followed an investigation by prosecutors in Milan.
In October 2015 it was reported that almost 75% of US Fortune 500 companies booked profits to tax havens in 2014, with just 30 companies accounting for 62% of earnings stashed offshore,
In recent weeks, news of Google’s deal with the HMRC, the UK's revenue and customs authority, that will see it pay £130mn in back taxes from the last 10 years, arising from most of its revenues being booked in Dublin, has triggered a firestorm.
The Financial Times reports that the Tax Justice Network, a pressure group, has estimated that Google should be paying about £200m every year in corporation tax based, they say, on the company’s declared profit margins and sales in Britain. Google paid £20.5m in tax in 2013 based on attributed UK profits, compared with $5.6bn in UK revenues.
MPs including Boris Johnson, London’s mayor, have termed Google’s payment as “derisory," while tax experts have described the deal as opaque.
Activists are also criticising the extensive access of Google executives to ministers.
In 2013 at a meeting of the House of Commons public accounts committee, Margaret Hodge MP, then chair, told a Google executive that his company's behaviour over its tax arrangements was “devious, calculated and, in my view, unethical.”
Peter Barron, Google’s European public affairs chief, wrote in the FT last week: “Governments make tax law, the tax authorities independently enforce the law and Google complies with the law.”
The FT said that for many people, neither Google’s explanation nor the size of its tax bill are anything like good enough.
A Google whistleblower told the Independent newspaper:
HMRC cannot simply say we just apply the laws, we don’t make them. They need to advise MPs better about what is required. They need to make clear what criteria they apply and how they apply it when determining who pays what tax.
Google's Peter Barron also wrote in the FT:
In all the coverage of Google’s tax settlement, little has been said about the international tax rules and how they work. Corporation tax is paid on profits, not revenue, and is collected where the economic activity that generates those profits takes place. As a US company, we pay the bulk of our corporate tax in the US: $3.3bn in the last reported year.
Google’s last annual report, shows that it had $6.48bn in revenues in the United Kingdom in 2014, that were mainly booked in Ireland while its global profit margin was 26.2% before taxes. That would give a profit of $1.68bn in the UK and tax at 20% would be $336m but Google would argue that most of its intellectual capital arises in the US.
However Google employs about 800 engineers in the UK and its future expected tax bill of about £30m would be about 3% of its 2014 profit.
The FT says in an editorial:
Other countries are increasingly questioning the legitimacy of these tactics (so-called commissionaire arrangements depending on polite fiction that the business is genuinely done in Ireland). France is said to be pursuing a settlement with Google worth three times the UK’s amount, even though the company’s operations there are smaller. Were Britain to follow Paris and argue that Google had a “permanent establishment” in Britain, the tax position could be transformed. It would raise the possibility of taxing a greater proportion of Google’s notional £1bn of UK profits.
Given their ability to shift intellectual property and revenues around the globe at will, it remains difficult to fit internet companies into territorial tax systems. But that is no excuse not to try, especially given the increasing importance of the digital economy. The ability of large businesses to arbitrage the rules is unfair to other companies and ultimately an invitation to widespread avoidance. It is why Mr Osborne (UK chancellor) has championed the work of the OECD to tighten international tax rules.
This deal may indeed be the best that Britain can get. But before signing up to it, HMRC should test the real extent of Google’s UK liabilities. Public confidence would be served were it to bring a case before the courts to judge whether the company has a UK permanent establishment and what impact this might have on its tax liabilities. Until this is done, Mr Osborne should keep the champagne firmly on ice.
France said on Tuesday that it would not settle with Google over back taxes, saying that the Google deal with the UK government last month “seems more the product of a negotiation than the application of the law”
Michel Sapin, French finance minister, said at a conference in Paris, according to the FT:
The French tax administration does not negotiate the amount of taxes owed. It applies the rules.
Last week, the European Commission announced new tax proposals that include:
legally-binding measures to block the most common methods used by companies to avoid paying tax;
a recommendation to Member States on how to prevent tax treaty abuse;
a proposal for Member States to share tax-related information on multinationals operating in the EU;
actions to promote tax good governance internationally;
a new EU process for listing third countries that refuse to play fair.
The times are changing and the days of cosy relationships between high paid lawyers and accountants with senior revenue authority officials coupled with politically sanctioned exemptions from tax fraud rules applying to smaller companies, will soon be over in Europe.
The challenge for Ireland is that we are as reliant today on US-owned company exporting jobs as we were in 1990, while the exporting performance of the indigenous sector remains dismal.
Pic on top: Apple's Steve Jobs, bottom-right in black shirt, and Facebook's Mark Zuckerberg, flank President Obama, at a February 2011 dinner in Silicon Valley, with tech company chiefs.
Google tax deal heralds global showdown | FT Comment