The recent U.S. Senate hearing on Apple’s innovative but legal tax avoidance came against a backdrop of growing public outrage in Britain, France, Germany and Ireland over illegal tax evasion and legal tax avoidance.
UK politicians had already grilled Google, Amazon and Starbucks about their ability to avoid taxes on their UK profits, and had used “tax shaming”—if not the UK tax code itself—to persuade Starbucks to pay up. France recently presented Google with a €1.7 billion tax bill.
The ongoing clashes between governments and multinationals over tax avoidance have fueled momentum for international tax cooperation and global tax reforms. Much as nations used to engage in mutually destructive trade wars, today they are engaging in a destructive competition to attract multinational corporations through low-tax regimes.
The Apple saga is a case in point. By shifting its profits to an Irish shell corporation that had no home country for tax purposes, Apple in effect created “stateless income” and was able to pay just 1.9% tax on its overseas profits of $37 billion.
Governments are recognizing that their industrial-era tax codes don’t work well in the digital age: “It is much easier for businesses with royalties and digital products to move profits to low-tax countries than it is, say, for grocery stores or automakers. A downloaded application, unlike a car, can be sold from anywhere.”
The OECD, comprised of 34 developed nations, has said: “Global solutions are needed to ensure that tax systems do not unduly favor multinational enterprises, leaving citizens and small businesses with bigger tax bills. Many of the existing rules which protect multinational corporations from paying double taxation too often allow them to pay no taxes at all. These rules do not properly reflect today’s economic integration across borders, the value of intellectual property or new communications technologies. These gaps, which enable multinationals to eliminate or reduce their taxation on income, give them an unfair competitive advantage over smaller businesses. They hurt investment, growth and employment and can leave average citizens footing a larger chunk of the tax bill.”
U.S.-based multinationals are pushing for another tax holiday so they can bring “overseas” profits “home” at a drastically reduced tax rate. (“Overseas profits” and “repatriation” are not literal terms; some of U.S. multinationals’ $1.6 trillion in cash that is classified as “permanently invested overseas” is parked in Manhattan bank accounts.)
he corporations argue that giving them another “repatriation holiday” will lead to more investment and jobs in the U.S. This is nonsense.
A similar repatriation holiday in 2004 “led to no discernible increase in American investment or hiring. On the contrary, some of the companies that brought back the most money laid off thousands of workers, and a study by the National Bureau of Economic Research later concluded that 92 cents on every dollar was used for dividends, stock buybacks or executive bonuses. A study by the Congressional Joint Committee on Taxation estimated that a similar program would result in $79 billion in forgone tax revenue over a decade.”
President Obama is right that the U.S. tax code rewards companies that ship profits and jobs overseas. A Bloomberg News analysis found that the “build-up of offshore profits—totaling $1.46 trillion for the 83 companies examined—has increased because of incentives in the U.S. tax code for booking profits offshore and leaving them there.”
There is hope on the horizon. The OECD is looking at profit shifting and tax base erosion. The G8, G20 and OECD are working on an international standard for the automatic exchange of tax information. An EU summit this week revealed strong support for a US-led drive to tackle banking secrecy.
Angel Gurría, the head of the OECD, has rightly urged the G20 to crack down on multinationals’ tax avoidance because it is undermining the ability of governments to recover from the financial crisis. “This is about the survival of democracy,” he said.