Tax and Multinationals Post author By Philip Lane Post date April 28, 2012 The NYT has a long article on Apple’s global tax strategies here. Categories In Uncategorized 7 Comments on Tax and Multinationals ← Stability Programme Update → Reminder: IMF loans more expensive than EU loans 7 replies on “Tax and Multinationals” The simplest solution is for the U.S. to reduce its corporate tax rate to the Irish 12.5 percent level. That would make the 1960s Kennedy tax cuts, Laffer’s supply side hypothesis, Reagan’s “get the government off my back” slogan very small potatoes. The U.S. deficit would dramatically shrink, setting up an immediate domestic boom. Dear old Ireland would be royally screwed, but that’s what you get for building an economic system based on sand – selling each other houses, flying under the radar in bank regulation (Depfa Bank), and perfecting the tax haven angle. Corporate tax rates have been falling since the 1990s and among the mainly developed member countries of the Organisation for Economic Cooperation and Development (OECD) the average rate has fallen from near 40% to below 26% in 2010. Meanwhile, US worker pay has fallen to a 50-year low as a ratio of company sales and US GDP according to JP Morgan Chase, one of America’s biggest financial firms. Profit margins were at their highest level in 2010 since the mid-1960s but in fiscal year 2011 which ended on September 30 last, the US effective corporate tax rate on domestic profits fell to 12.1% – – the lowest since 1972 and well below the 25% companies paid on average from 1987 to 2008. US corporate taxes were above 6% of GDP in the early 1950s but since the early 1980s have averaged about 2%. Shelters and loopholes in the current tax system reward companies that aggressively avoid taxes at the expense of those that do not – – in particular companies with foreign earnings who can have an effective rate of less than 10%. As Washington has become more polarised and the Republican majority on the Supreme Court has opened the floodgates for an acceleration of the corporate legalised bribery of Congress and election candidates, companies have become more aggressive in cutting tax liabilities. In 2009, US Senator Dick Durbin of Illinois said in a radio interview in Chicago: “Hard to believe in a time when we are facing a banking crisis, that many of the banks created, that the banks are still the most powerful lobby on Capitol Hill. They frankly own the place.“ Google’s US lobbying bill more than tripled to $5m during the first three months of 2012. Jeff Bezos of Amazon in an echo of John D. Rockefeller of the Standard Trust, warned that he would bankroll a referendum/proposition in California to reverse the ending of a sales tax exemption on digital sales. There are about 35 Internal Revenue Service agents assigned full-time to oil giant ExxonMobil headquarters in Houston, where they conduct a nonstop audit of the company’s tax accounting. In 2009, Exxon paid no US corporate taxes on profits of $19.3bn, receiving instead a $156m credit. The company paid $15.2bn in foreign taxes. Twitter threatened to leave the City of San Francisco if it didn’t get an exemption on a tax of 1.5% on the encashment of stock options. Nobody wants to pay taxes and public funding of research is under threat including a government program that enabled a co-founder of Google to attend Stanford. In fact Google developed from a publicly-funded program that was started there. Last year, Elizabeth Warren of Harvard and Democratic candidate for US Senate in Massachusetts said: There is nobody in this country who got rich on his own. Nobody. You built a factory out there? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did. Allan Sloan of Fortune Magazine wrote last year: It was enough to make anyone from a big company want to crawl under his chair. Here was David Crosby of the Crosby, Stills & Nash folk rock group holding forth at a recent performance in New York City’s Beacon Theatre, not about war or poverty but about corporate power and General Electric. “Can you believe that some big corporations paid no income tax?” he declaimed. “In fact, GE paid no taxes last year.” Then Graham Nash chimed in, “Not only that, GE got a $3.5bn giveback.” Someone from the audience, in which one-percenters were amply represented — who else could afford the tickets? — shouted out, “Play music.” The group promptly launched into its new song: “They want it all, they want it now.” You can figure out who “they” are. Talk to big companies about the sentiment expressed by Crosby and Stills, and they whine, feel aggrieved, and carry on about “class warfare.” But as we’ll soon see, they won’t do anything to help themselves. The United States taxes both individuals and corporations on their worldwide income. Companies usually operate overseas through subsidiaries and the US Internal Revenue Service (IRS) only has authority over the US parent company, which gives the US leverage to tax the profits of the subsidiary indirectly. The US does tax a US parent of a foreign company on some of the foreign subsidiary’s income, which is referred to as “Subpart F income.” Because income earned from active operations of a foreign subsidiary generally aren’t taxed to the parent company unless the funds are brought back into the US, multinational companies based in the US have a strong incentive to repatriate their foreign profits. In other words, they elect to defer their tax on those profits as long as possible. This is referred to as the “trapped earnings problem.” However, under a territorial system where tax would be paid in each individual jurisdiction, it’s argued that there would be a greater incentive to engage in profit-shifting. The mainly huge rise in tax evasion in the last decade (some may argue that it’s avoidance but there is of course borderline and actual illegality) has encouraged the new arrivals Google, Amazon and Facebook to join the game but at some point, the facilitation by the Irish authorities, will increase the likelihood of the US imposing a minimum tax on profits reported in a foreign jurisdiction. The UK is Google’s biggest overseas market; it’s also important for Apple and Amazon. How long will the UK tolerate significant operators in its market paying little taxes compared with other businesses? The European Commission also has an interest and there is the distortion of national statistics, creating phantom output and exports. Are the existing legitimate incentives not enough? The State is investigating alleged accounting irregularities at Anglo Irish Bank but Irish registered companies can raise invoices or accept invoice charges that raise costs in one year by several billion euros and that’s always kosher? http://www.finfacts.ie/irishfinancenews/article_1024185.shtml @ Michael Hennigan ‘Last year, Elizabeth Warren of Harvard and Democratic candidate for US Senate in Massachusetts said: There is nobody in this country who got rich on his own. Nobody. You built a factory out there? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did’ Good for you Elizabeth and thank you Michael for those informative posts, which fit neatly with your usual take on the insiders and gatekeepers on this little island. It’s the old story, I am afraid, rules are for little people. All of the same problems arise in relation to environmental issues, where profits are privatized and damage to the commons is socialized. At the risk of boring everyone, I have to say that Pierre Bourdieu has many excellent analyses about how games of power involve a continual adjustment of the rules themselves. One of the ways you win is to get control of the rulebook, but a cloak of legitimacy is of course required. Religion doesn’t cut it nowadays, but we have our techno-professional priesthoods. When entire professions are dedicated to transmuting tax evasion into tax avoidance, it is pretty difficult for Joe Public to tell what is ‘fair’. Absent an ethical basis, the notion of professionalism rings pretty hollow, but this is precisely the juncture to which the so-called ‘financial services industry’ has taken us. The more thoughtful members of the banking and accountancy professions must be able to see that the financial and political commons, ie public trust in politicians and bankers, is being destroyed. It’s never too late to get sober though. Michael Polanyi had a lot to say about the market and its limits in his 1947 Great Transformation. As Dork never fails to remind us, the current game is about extraction, not production. These authors have much to say. http://whynationsfail.com/summary/ @Michael Hennigan careful now!!! Corporations should pay their share of tax? That is dangerous talk!!!! The simplest solution would be to implement a global tax rate of 85% and get those leeches to actually contribute something useful to the world whos governments funded and citizens developed the ideas that created their products. But of course ‘we would rather be ruined than changed’. Or just what Michael H said. “Apple, like many other multinationals, is using perfectly legal methods to keep a significant portion of their profits out of the hands of the I.R.S.,” Mr. Sullivan said. “And when America’s most profitable companies pay less, the general public has to pay more.” This works. But what is the outcome of the slow, inevitable process which leaches away their ‘competitive’ edge? Samsung will sink Apple. Then what? Amazon will have to pay state sales taxes in the US if it wants to keep its existing, highly efficient model. Then what? States become income constrained at the margin (you cannot sustain continual upward aggregate economic expansion in a finite system) – as we now know. So some selected Sacred Bovines may have to be sacrificially sacrificed. Its known in International Relations speak as Realism. Folks in Bermuda, Netherlands and Cork do not riot in US cities. The situation is likely to get considerably worse before the social elastic eventually snaps. Easter Island happened because the ruling elites behaved in a irrationally rational manner, and used violence to supress dissent (or so the anthropologists assert). The aggregate economic situations in both the US and UK are weakening, not improving, despite the desperate rumours to the contrary. Its a slow process, but it is inevitable. Is the EU any better? Marginally perhaps. That’s 600+ million income constrained consumers. So to whom will Chindia export their increasing amounts goods and services? Selling internally is not much fun. And if (when) they become export constrained? Then what? This last question is giving some folks a few sleepless nights. ps: @ MH: Thanks for that informative update. Comments are closed.