The tech giants inventing their own tax regimes
Tue 3 May 2016
Opinion Recently, technology giants such as Google, Apple, and Facebook have come under fire for tax avoidance: deliberately structuring companies and subsidiaries to pay the lowest amount of tax legally allowed. Multinational corporations have evolved a complex system to take advantage of international variations in tax codes to substantially reduce their overall taxes paid. Investigations by tax authorities all over the world have revealed that corporate tax rates are often in the single digits. While corporations do have a fiduciary responsibility to maximize earnings for their shareholders, tax avoidance keeps money that should reasonably be considered a legitimate business expense out of the hands of the governments of countries where business is conducted.
At the same time, those companies are paying millions to charities, setting a path for corporate social responsibility and deciding themselves which social programs should benefit from their contributions. Have these companies, within a completely legal framework, effectively created their own tax system outside the boundaries of governmental regulation and control?
This is not an issue that lies solely with one country at a time; rather, each corporation creates a complex web of financial transactions structured to reduce overall tax obligations worldwide. A single multinational corporation can, through complex schemes of selling and billing products and intellectual properties, avoid taxes in several different countries at the same time. For example, Microsoft is under fire in the US, the EU, Australia, India at the same time for moving money out of the relatively higher-tax countries into designated tax havens.
Following an investigation by the UK tax authorities in February of this year Google agreed to pay $185 million in back taxes for a time period stretching back to 2005. The investigation revealed that from 2006-2011, Google paid only $16 million in taxes on $18 billion in reported revenue in Britain. However, 2011 alone, Google donated $100 million to charities. In 2014 and 2015, Google topped the list of the companies that have the best reputation for corporate social responsibility worldwide, based on a survey of the general public conducted by the Reputation Institute.
Apple was subject to a tax avoidance investigation in Italy, where it was alleged that the company avoided paying Italy’s 27.5% corporate tax by routing sales through Ireland, paying the much friendlier 12% Irish corporate tax, one of the lowest in the EU. Italian authorities alleged that Apple’s Italian subsidiary, Apple Italia, should have paid over a billion dollars in taxes, but paid only $34 million. The company settled the suit in December 2015, agreeing to pay $348 million to the Italian government. Since Apple revised their charitable contributions policy in 2011, they have given at least $325 million to various charities and matching programs.
Another technology giant, Cisco, was able to reduce its US tax bill from 2005 – 2011 by $7 billion dollars by charging half of its worldwide profit to a Swiss subsidiary that employed less than 100 people. In 2010 alone, Philanthropy.com estimated Cisco’s worldwide giving in product and cash to be $90,202,099, which marked a 17% increase over 2009.
Facebook was also investigated for diverting profit from UK advertising sales through Ireland when it was revealed that they paid less than $10,000 in corporate taxes in the UK in 2014. Facebook agreed to change the way that they report sales to substantially increase the taxes paid in Britain. (need info on facebook charitable contribution – not just Zuckerberg!)
Amazon agreed to restructure its method of diverting profits to Luxembourg, another EU country that offers very low comparative tax rates for corporations. In 2013, Amazon attributed $7.29 billion in sales to the UK, but paid only $4.2 million in taxes, as the majority of those profits were booked to Luxembourg instead. In a study [PDF] by CalPoly Tech, Amazon paid an average 4.3% tax rate in the United States for the period 2009-2011, as a result of the practice of shifting profits overseas. In the same study, Apple paid 14% in taxes and Google paid 17.9%.
According to an investigation conducted by the US Senate in 2013, Microsoft has channeled more than $60 billion dollars overseas, to avoid paying corporate taxes in the US. If that money had not been moved to tax havens, the US government would have been paid about $19.4 billion dollars. In 2011 alone, reduced its federal tax bill by $2.43 billion dollars. At the same time, the company’s 2011 worldwide giving (both products and cash) according to their annual Citizenship Report was $949 million.
The same Senate investigation found that Verizon made over $19 billion dollars in profits from 2008-2012, but paid no US federal income taxes at all: instead, it received $535 million in tax rebates, and won an additional $6 billion in federal contracts to be completed from 2011-2013. Verizon disputed these findings, stating that the numbers were taken from when Verizon was partially owned by Vodafone; so profit numbers were skewed, and Vodafone was responsible for filing Verizon’s taxes at that time.
In 2009, Intel was required to pay $643 million in Denmark over a disputed company sale. Intel purchased Danish technology company Giga, then sold it to one of their own subsidiaries for an amount well below market rate, thereby sidestepping the tax due on the sale. Intel’s 2009 Executive Summary on Corporate Responsibility showed a worldwide charitable donation amount of $100 million. In 2010, Intel gave an estimated 38.8 million to charity,
and in 2015, Intel pledged $300 million to promote diversity in tech. A generous amount that generated positive press coverage; an amount that was less than half of what was saved by the company in tax avoidance on a single intercompany action.
“We pay what we owe” is the common thread that runs through the official statements from corporate CEOS and spokespersons. Apple CEO Tim Cook said, in a television interview with 60 Minutes, “Apple pays every tax dollar we owe.” Matt Brittin, President of EMEA Business and Operations for Google, said in a televised hearing in the UK, “We find ourselves in the position where we are paying the tax that the tax authorities told us to pay.”
Given the choice, the average taxpayer would probably love to determine where their own tax dollars were spent: schools or military; interstate highway maintenance or clean energy research?
Shifting the focus from the amounts that were actually paid, instead of talking about the amounts that were successfully avoided, is a strategy designed to mitigate corporate responsibility for tax avoidance. It takes the onus from the corporations themselves and places it instead with politicians. Since the corporate practice of tax avoidance is within the limits of the law, the laws much change first, and the corporations will follow.
And tax reforms are beginning to gain traction in the political sphere. For example, as of April 2015 a new regulation in Britain allows a punitive 25% penalty to be set on top of taxes owed by companies that are found to be artificially diverting funds overseas. In January 2016 the EU commission put forth a fair tax proposal to standardize corporate tax policies and anti-tax avoidance strategies throughout the EU.
Surely, multinational companies pay what they owe. The smallest amount that they can manage, through taxes, since garnering high returns for investors is a part of their fiduciary responsibility. And they also pay to charities, a discretionary amount that makes them good corporate citizens of the world. It is a good thing to give to charity and support worthy causes.
However, keeping funds out of the hands of the government on one side, and donating generously with the other is in effect taking the decision on where those dollars should be spent out of the hands of the government. It’s not a bad deal. Given the choice, the average taxpayer would probably love to determine where their own tax dollars were spent: schools or military; interstate highway maintenance or clean energy research?
Citizens are not able to make those determinations. But by avoiding payment of corporate taxes, and instead paying discretionary amounts to charity, corporations are still taking huge amounts in estimated tax savings while presenting themselves as active in corporate social responsibility.