As reported in Reuters, “David Cameron takes on the tax havens.” There is nothing more likely to spark anger than an unfair tax regime. The American Revolution was founded on it. So the discovery that some of the largest and most successful companies in the world — among them Google, Apple, Amazon and Starbucks – have legally minimized the tax they pay, sometimes to as low as zero, in many nations in which they earn the lion’s share of their revenue is causing considerable irritation.
The result was evident at the G8 meeting in Northern Ireland, where Britain’s conservative government, chairing the conference of the world’s richest nations, put making corporation tax fairer at the top of its agenda, after the civil war in Syria. David Cameron, who like most conservatives believes in low taxes, is in a bind.
In an attempt to reduce public borrowing he is imposing high personal taxation on the Brits — lifting “value added” consumption tax to a record 20 percent — but finds that many of the most profitable companies operating in Britain are dodging taxes altogether. He thinks it is unfair. And so do his voters. He is under intense pressure to deliver a solution or he can expect to be turfed out of Downing Street.
At Davos this year he signaled his intention of doing something about it. “Companies need to wake up and smell the coffee,” he said, “because the customers who buy from them have had enough.” “In a world where some companies navigate their way around legitimate tax systems — and even low tax rates — with an army of clever accountants,” he said, “some forms of avoidance have become so aggressive that I think it’s time to call for more responsibility and for governments to act accordingly.”
When it was discovered that Starbucks in the UK paid just $13.46 million in corporation tax in its 14 years of trading, and zero in the last three years, despite UK sales of nearly $626 million in 2011 alone, it sparked an informal boycott by customers that is damaging the company’s bottom line. Amazon had revenue of $5.2 billion in the UK in 2011 yet paid only $2.8 million in taxes. Google, too, has been avoiding UK tax, paying just $16 million in taxes on a turnover between 2006 and 2011 of $18 billion. When Vodafone bought Mannesmann last year for $241 billion, but routed its sale through a tax haven to avoid paying UK tax, angry protests led to the company shutting its flagship London store.
A House of Commons committee summoned executives from the three companies to explain themselves and was not convinced by their answers. While Starbucks, which attracts 31% of market share in the UK, boasted to shareholders it was making 15% profits, it was telling the taxman it made a loss in 14 of the 15 years it had been trading. The committee found Amazon executives “evasive” and unable to explain why on $5.24 billion of sales in the UK — which amounted to a quarter of all sales outside the U.S. — it paid “virtually no corporation tax.” By routing all of its UK sales through Ireland, Google was able to reduce its tax liabilities on $620 million of revenue in 2011 to just $9.4 million. Many individuals would like that sort of generous tax regime.
Tax avoidance by multinational companies is not a British issue. Apple pays a lot of tax in the U.S. — it claims it is “the largest corporate taxpayer in America” — but it also parks $102 billion of profits offshore to avoid paying tax on it. Rather than bring cash back to America to be taxed, Apple finds it cheaper to borrow $17 billion here. What may be good for Apple is bad for the rest of us. As a Senate investigating committee found, “Its actions disadvantage Apple’s domestic competitors, force other taxpayers to shoulder the tax burden Apple has cast off, and undermine the fairness of the U.S. tax code.”
The effect on the tax burden passed from corporations to individuals is startling. According to the committee, in 1952 corporate tax generated 32.1% of all federal tax revenue, individual taxes 42.2%, and payroll tax 9.7%. Today, corporate tax accounts for 8.9% of federal tax revenue, leaving individual and payroll tax shares of overall revenue at 41.5% and 40%.
Nothing the above companies do is illegal, but they have smarter tax lawyers than the governments of the countries where they earn their revenue. Nor is what they are doing new. In the bad old days of empire, mother countries used to exploit their colonies by trading in raw materials and commodities. All transactions were billed through the home country and the colonies were bypassed. Colonial masters got rich and the colonies stayed poor.
Poor countries are still being exploited, despite winning their independence. It is a bizarre fact that, despite its cold climate, the island of Jersey in the English Channel, because of its tax haven status, is, according to Professor Paul Collier of Oxford University, who advises Cameron on tax-dodging, the world’s number one exporter of bananas.
So long as multinationals kept to exploiting workers in poorer countries, tax avoidance on a world scale was not an issue. Now that rich countries are suffering enforced poverty through prolonged recession and austerity and desperately need the tax revenue, they have begun to wake up.
Which is why Cameron has persuaded his G8 partners to work together to bring home the tax they believe is due them. He has taken the lead by persuading all tax shelters under British jurisdiction — such as Bermuda, the Caymans, the British Virgin Islands, the Isle of Man, and the Channel Islands, including banana-less Jersey — to open their books for inspection.
The current tax system is a self-defeating, unfair hotchpotch. In single trading areas like the European Union, particularly in a single currency zone where interest rates are identical across all nations, one of the few variables left for governments to lure investors is a low corporate tax rate. It is a beggar-thy-neighbor policy that, for instance, channels all Apple sales in London through an Irish subsidiary in Cork. Corporations play one jurisdiction against another.
The first move to make the regime more fair is for greater corporate transparency so governments can see exactly how the tricks are played. It is all very well for Eric Schmidt, Google’s executive chairman, to say he is “perplexed” about the angry reaction to his company minimizing its tax liabilities and that “everyone would benefit from a simpler, more transparent system,” and Apple’s Tim Cook to say “the right approach would be simplicity,” but unless companies explain the labyrinthine corporate structures they have erected to throw the tax man off the scent, a simpler tax code will prove impossible to draft.
The alternative will be bad for business. Unless corporations take the lead, volunteer information, and propose how they intend to pay taxes to the countries where they earn revenue, lawmakers will take it upon themselves to impose draconian tax measures. To defend their intellectual property, and ensure they obtain a just reward for their ingenuity, companies would do well to come forward with plans of their own. If they drag their feet and leave it to legislators, many of whom are not as pro-business as Cameron, new tax regulations will destroy profitability, hamper innovation, and slow progress.
Nicholas Wapshott is the author of Keynes Hayek: The Clash That Defined Modern Economics. Read extracts here.