Yesterday's Dilbert strip featured in a fun way one of the most troubling realities states are facing lately, losing corporate tax money just when they need it the most. The problem is the state tends to transfer this problem to their citizens without hesitation.
Corporate tax can be quite heavy in some developed countries, so giants like Apple, Google, IBM, Microsoft or Oracle fight it by using some techniques that effectively lower they total taxation. I do not want to call neither of these techniques "tax evasion" or similar because then they would be illegal and what said companies are doing is not. I prefer the term tax shifting because that is what they are doing, they are paying their taxes, but they are doing it from countries with a very low (or inexistent) corporate income tax.
Everything starts by moving the company money between your own subsidiaries in a way that makes the earnings land in the ones located on low-tax countries and the expenses in the ones on high-tax countries. The second part is easy, right? but the former takes some complicated moves... Let's take the example of Google, as Bloomberg did in a fantastic article two months ago, anyway you could replace Google by almost any big corporation you can think of...
Google starts by assigning great part of its earnings to its Irish office. The corporate tax in Ireland is low enough to make it a better decision to pay taxes there than doing it in the US, but Google does not stop here. By using an Irish law that makes it possible to transfer earnings coming from royalties to other EU-countries, the money now lands safely and mostly non-taxed in the Netherlands. Once in the Netherlands, the Dutch subsidiary can transfer directly all earnings to a holding in Bermuda (Google Ireland Holdings in this example); taxes in Bermuda are not a problem at all. As you can see the Dutch company is just a middle man, thus giving birth to the term Dutch Sandwich seen in the cartoon. Only downside? The moment the money returns to the highly-taxed country it will be taxed as it should have been, they are deferring the tax payment not avoiding it. Of course corporations know better and find their way to bring the money back...
The only questionable part of these techniques is when the company is considering as royalties some earnings that really come from sales and services, the rest is perfectly valid and, if I can say so, ethic.
The damnified party of this strategy is not the highly-taxed country as it may seem at first sight, because the country then decides to tax more heavily their citizens to recover from that lost corporate tax revenue. This takes us again to the cartoon above: the damnified are the people who cannot do what the big corporations are doing. This is obviously wrong, citizens should not pay for the imperfection and loopholes of the tax laws of the country they live in. Have they tried lowering the corporate tax so the money never tries to leave the country? No. What is better? settling for a 15% (for example) of trillions of dollars or trying to take an astronomical 35%, getting away with nothing and then raising a 2% of what you already take from individuals instead? Of course this extra 2% in income tax adds to a lower amount, so it does not match what you are missing from the corporate part... And to make things worse, it directly affects the citizen's purchasing power, putting the country in a dangerous vicious circle. But it seems that today's governments are unable of doing such an easy calculation...
No comments:
Post a Comment