Stop blaming companies for using legal tax systems

In May 2013, Apple was one of several US multinationals in the hot seat before a bipartisan US senate subcommittee investigating the use of corporate tax avoidance schemes.

Apple's tax arrangements in Ireland made international headlines, as Apple chief executive Tim Cook revealed that the company paid a sixth of Ireland's multinational tax rate of 12.5 per cent.

The Irish Government was quick to deny assertions that it was providing a "tax haven" to such companies.

Two of the senators leading the investigation retorted with a joint statement, insisting: “Most reasonable people would agree that negotiating special tax arrangements that allow companies to pay little or no income tax meets a common-sense definition of a tax haven.”

In the same year, a similar scenario played out before a parliamentary subcommittee in the UK. Companies highlighted this time included Google and Amazon. Over there, it was noted, Amazon paid just £2.4 million in corporate taxes in 2012 on sales of £4.3 billion.

Ireland came up in those discussions too, as a base through which many of these companies with UK subsidiaries funnelled their tax (lets set aside that if, as UK tax campaigners have argued, Amazon and its compatriots were taxed in each country on the basis of what each country contributes to overall revenue – about 10 per cent in the case of Amazon UK – Amazon in the UK would be entitled to a large tax credit now due to recent global losses).

The fact is, all this huffing and puffing of government investigatory committees remains just so much grandstanding.

Last week, an American president finally had the courage to argue, in a hard-hitting speech in Los Angeles, that the time has come to – yes – change the American tax system to prevent American corporate profits from heading off on productive international tours. Ireland, of course, got yet another mention.

Gaming the system

“What we are trying to do is to say that if you simply acquire a small company in Ireland or some other country to take advantage of the low tax rate [and] you start saying, ‘we are now magically an Irish company’, despite the fact that you might have only 100 employees there and you have got 10,000 employees in the

United States

, you are just gaming the system. You are an American company,” President

Obama

said.

He also identified one of the other hallmarks of the US corporate system whereby many benefit from subsidies and market supports,even now and then, full-on bailouts, at the expense of the US taxpayer.

“You shouldn’t get to call yourself an American company only when you want a handout from American taxpayers,” Obama said.

Well, hallelujah.

Whether a divided US Congress can ever agree on what such a repaired system will be is, sadly, doubtful. Much easier to engage in the histrionics already seen during formal hearings, when members can take the functionally useless but politically safe road of berating the companies. One change that would really help would be removing the tax amnesties granted every one to two decades by the US government, which let the multinationals repatriate offshore profits.

Because that's really the key bit. Say a giant US multinational – let's call it Applooglazon – uses international tax wheezes, such as the famed "Double "Irish", to move money back and forth between Ireland to the Netherlands, back to Ireland, then off to enjoy the sun and swaying palms in Bermuda, where it comes to rest. All its billions are offshore, and cannot come home to the Silicon Valley (or Seattle) corporate mother ship unless Applooglazon repatriates it at the US corporate rate of 35 per cent.

But as Applooglazon knows full well, it’s simply a matter of time before the US government offers one of its regular overseas profits repatriations at a fraction of the standard rate. And that’s when the stockpile comes back. Get rid of those regular repatriations, which get little notice or US media coverage, and the US would go a great way towards fixing its broken system.

There’s also a final false impression that needs to be hit on the head. Just because those Applooglazon profits bypassed the tax coffers of the US and the UK, it doesn’t mean that money is gone from their economies.

For those billions in profit in Bermuda are hedged in multiple currencies, and US or UK-based branches of its banks are circulating that cash through their own investment systems in those countries. It’s not as if Bermuda contains a Bond-villainesque stash of physical gold bars. It still exists as money – internationally jet-setting money that is back out making even more. It’s high time obfuscating national legislatures stopped blaming companies for using legal tax systems and other countries for offering them.

Fix your own domestic system, and the problem will resolve.