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Tech giants' offshore cash-stashing is only ever a delaying tactic

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Comment Do companies have a duty to their shareholders to dodge as much tax as possible? Are Google, Apple and Facebook simply following the law as they ought to by shovelling everything through Ireland and Bermuda?

Unsurprisingly, it depends on which law you think they're supposed to follow, for the law does, in fact, vary across different countries.

John Kay outlines what is true for UK based companies in the FT:

Do companies have a duty to their shareholders to minimise the amount of tax they pay? Even if this involves engaging in complex and artificial schemes that shift profits to jurisdictions in which little or no tax is payable?

Under the 2006 Companies Act, directors of British companies are required to promote the success of the business for the benefit of its members (the shareholders). In doing so, they must have regard to six specific factors: the long-term consequences of their decisions; the interests of employees; relationships with suppliers and customers; the impact of corporate activities on the community and the environment; the company’s reputation for high standards of business conduct; and the need for fairness between different members of the company.

He goes on to conclude that companies domiciled (i.e., where the top, holding, company is) in the UK do not have a duty to aggressively dodge tax, although obviously they should prudently manage their affairs when it comes to taxation.

Unfortunately that doesn't really get us very far. A UK-domiciled company will actually find it very difficult to dodge tax. Delaying having to pay it, yes, this is easy enough, but actually dodging it altogether is, or was until very recent changes, damn near impossible.

Take the Vodafone case as an example. They made a bunch of money in Germany selling phones to Germans from German shops. They stashed that money in Luxembourg and Private Eye then claimed they owed £6bn in tax on it. No one else thought there was a £6bn bill: neither Vodafone nor HMRC did, anyway, but the Eye reckoned that if the law was different from what it actually is at present then there could, in an alternative universe, be a £6bn bill: and that's the number everyone believes.

The actual argument that went through the courts was whether EU law prevailed (no tax payable) or UK law did (some might have been). Vodafone won on a couple of points, but not all. The final result was a Voda-favouring draw and no one really wanted to appeal that decision all the way. HMRC was worried that if Voda won, then there were hundreds of other companies about to make the same, winning, argument against them. Thus came about the deal that ex-HMRC head Dave Hartnett has been so vilified over: he told Vodafone, cough up £1.2bn and we'll forget about it.

Except that's not actually what the deal was. Vodafone agreed that it would bring some of that money into the UK from Luxembourg so that it could pay it out as a dividend to its shareholders. Everyone agrees that if you, as a UK domiciled company, bring your offshore profits into the UK then you've got to pay the tax due on them. Which is what Vodafone did.

More importantly: you cannot get your offshore-stashed profits into the hands of your shareholders unless you do bring them back to the UK and pay the corporation tax due on them. Given that the whole point of being a company is to send money to your shareholders, as a UK company you cannot actually dodge tax by stashing it offshore. You can only delay having to pay it until you repatriate your profits to Blighty.

Tax dodging by UK-based companies is, therefore, quite difficult.

What non UK-based companies do in Britain is rather different. Apple, Facebook, Google and the rest are taking advantage of another set of EU rules. In order to sell your wares in an EU member state, you only need to have one company within your multi-firm empire based in any one of the 27 EU member states. The Single Market is supposed to be a single market, after all. Selling from Ireland to France is, under the EU's rules, supposed to be no different from selling Dorset produce to Somerset. And you pay your corporation tax wherever that one EU company is based.

Ireland does have a low tax rate of 12.5 per cent. But that isn't why all the big companies have subsidiaries there. Nor does Ireland offer special low rates for those with the gall to ask for them. The secret of getting really low rates in Ireland is that Ireland only taxes the profits actually made in Ireland. The profits you make selling in France just aren't taxed by Dublin: what you sell in Wexford is, but not Warsaw.

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