Tax dodging: Brass necks and brass plates

Original Cartoon by Donal Casey

Questions about Ireland’s role in Apple and Google’s tax avoidance have put our corporation tax regime under the international spotlight again. But NIALL SHANAHAN suggests there’s a head of steam building up against corporate tax dodging.

DEVIOUS, CALCULATED, unethical. That’s how the chair of a British parliamentary committee described Google’s tax affairs earlier this year. Laying in to the company’s northern Europe operations director Matt Brittin, MP Margaret Hodge said: “You are a company that says you ‘do no evil’. And I think that you do do evil.”

It was an uncomfortable afternoon for the American internet giant along with other household brands like Amazon and Starbucks, which pay paltry tax to the British exchequer despite massive sales and operations in the country. But another word kept coming up as the UK Public Accounts Committee meticulously examined corporate tax avoidance. That word was ‘Ireland.’

Google’s UK sales, for example, are closed and invoiced here. This allows the company to claim that no profits are generated in Britain, which hugely reduces its UK tax obligations. Google boss Eric Schmidt has defended the practice, audaciously claiming that his company’s contribution to the UK economy is more important than the tax it pays.
 
His attitude is not exceptional. A report by US Citizens for Tax Justice recently found that corporate tax avoidance was costing national exchequers – and ordinary citizens – hundreds of billions. Companies like Nike, Microsoft and Apple hoard funds in offshore tax havens in order to avoid paying taxes that could be supporting vital public services and keeping tax costs down for ordinary PAYE workers.

While Google was responding to Hodge’s assault, Apple, which paid just 2% tax on $74 billion profits in the USA, was under fire at a US Senate hearing. Yet another IT multinational had been systematically avoiding tax, this time by housing cash in an Irish subsidiary that hadn’t declared its tax residency anywhere in the world.

Rotten core

Apple chief executive Tim Cook claims the company pays “all the taxes we owe.” Not surprisingly, all these global giants say the same thing. But, while this may be technically true, there is no doubt that big companies can exploit complex and varied national tax systems to ensure they pay little or no tax. Instead profits grow bigger as they move from country to country, well protected by an army of accountants and lawyers.

The development agency Christian Aid says corporate tax dodging is also undermining global development. Its 2010 report Tax of Life revealed that tax shifted to the USA and Europe from six African countries amounted to 17% of total official Irish aid to the people of those states between 2005 and 2007.

The organisation concluded that characteristics which crippled the Irish economy – light regulation, a lack of financial transparency, and tax arrangements that favour the wealthy – also allow unscrupulous companies to shift billions of Euro out of the developing world.

How it works

The Christian Aid report throws some light on how global tax avoidance and evasion strategies work. For many decades, multinational subsidiaries have been able to sell goods and services to other parts of their parent company based in different countries. This is known as ‘transfer pricing’ and it works for everything “from nuclear reactors to cornflakes” as well as intangibles like intellectual property rights, management services or insurance.

Unrelated companies achieve the same effect through a process called false invoicing. Together abusive transfer pricing and false invoicing across borders are referred to as ‘trade mispricing.’ Christian Aid estimates that trade mispricing costs the developing world almost €120 billion a year – almost twice the annual global aid budget. The agency says this much cash could save the lives of 350,000 children under the age of five every year.

G8 expectations

Promising to use the G8 presidency to crack down on tax avoiding businesses and rich individuals, British Prime Minister David Cameron used the run-up to the recent Fermanagh summit to declare his ambitions to “rewrite the rules on tax.” In Fermanagh, the world leaders called on the OECD (which draws up international guidelines on tax) to draft a template for multinationals to report the tax they pay to revenue authorities in every jurisdiction where they operate. But there was no commitment to make such information public or for companies to disclosure other economic activity on a country-by-country basis.

The G8 leaders also agreed that “countries should change rules that let companies shift their profits across borders to avoid taxes.” This provoked some speculation about Irish corporate tax rates and the thousands of Irish jobs that depend on foreign investment. But the Irish Government seems confident that there’s no threat.Nevertheless, Ireland’s facilitation of so-called ‘brass plate’ companies – virtual enterprises that exist here purely for the redirection of profits to offshore havens – is now in the limelight. And rightly so.

As for the Lough Erne declaration  at the G8 summit, Murray Worthy, tax campaigner for the anti-poverty charity War on Want, observes: “As always, the devil will be in the detail and there is no detail here. Talk of stopping companies shifting profits to avoid taxes is a huge step forwards, but we have heard great promises from the world’s heads of state before. It is what they do that counts.”

Whatever about the G8, watch out for the Foreign Account Tax Compliance Act, or FATCA, which comes into full force later this year. This controversial US measure is being described as an aggressive initiative to punish financial firms who fail to disclose details of all US citizens’ assets held overseas.

Fair Share

Meanwhile, trade unions like IMPACT are among more than 230 organisations that have signed the Global Alliance for Tax Justice ‘Fair Share Commitment,’ which highlights the civic society anger at the failure of corporations and the world’s rich to pay their fair share in taxes.

This is an edited version of the main feature in the latest edition of Work & Life magazine, which is currently circulating to IMPACT members in the workplace.