Original URL: http://www.theregister.co.uk/2013/06/11/can_pay_dont_pay_wont_pay_tax/

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

Someone always pays, sooner or later

By Tim Worstall

Posted in Financial News, 11th June 2013 08:03 GMT

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.

Flog gear from Ireland and pay no tax? Come on, what's the catch?

So, sell everything from Dublin, pay the legally required amount of tax in this single market and then park it in Bermuda. Which is where US-domiciled companies face the same problem Vodafone did. They can't get that money back to their shareholders without paying US corporate income tax. Which is 35 per cent, minus whatever foreign profits tax has already been paid: not a lot, as above. At this point companies can't dodge taxes in the sense of not coughing up at all; they're only able to delay paying them.

This is where the different laws come in. US tax law is, on paper, not that different from UK law. But as Eric Schmidt has pointed out, he'd be staring down a bunch of shareholder lawsuits if he wasn't being aggressive in curtailing Google's tax bill. So there's certainly pressure on US managers to be as aggressive as possible, in a way in which UK-based people simply don't experience.

Unless there's a tax amnesty of course, as there has been in the past. And probably should be again, in fact. These US companies have $1.7 trillion piled up offshore and they'd love to get that back into the US so they can pay it out to shareholders.

The entirely bizarre argument against an amnesty is that if there is one, then the companies will just pay it to shareholders. Err, yes, this is the point of a company.

And if US shareholders suddenly get an extra $1.7 trillion they can do one of two things with it. Spend it, which would be a nice stimulus (well over twice the size of the fiscal stimulus that the Obama government actually came up with) or they can invest it. And investment is good; it's what produces the next generation of gadgetry and jobs.

Oh, and Amazon? They're not even using the EU law excuse. The standard international double taxation treaty means that warehouses don't lead to taxation. Obviously, on the way to your customer your goods will indeed stop in a warehouse at some point. Going to make exporting damn difficult if you owe profits tax in every place you've used a warehouse.

Whether the law should be this way is another matter: this is the way that it is currently. It's terribly easy for a non-UK company to not pay corporation tax in the UK on profits made by selling into the UK. That's because the basic assumption about corporation tax is that you pay it where the company is based, not where the sales are. It's also very easy for a company to delay paying tax on foreign profits, but almost impossible to never pay such tax: as soon as you try to get it to your shareholders, which is the point of the game, then it's going to get taxed.

Some people get very upset by this.

I'm afraid that I don't. For two reasons: the first being that even if we collect the tax from the company, it's not really the “company” itself that pays it. It's some combination of the shareholders and the workers that bear the actual burden of it. How that is apportioned between the two is indeed a matter squabbled about amongst economists, but two basic points are accepted by all:

Companies don't pay taxes, people do.

We have only ever taxed corporations because they were a convenient place to pick up the cheque. Given that, as above, they're obviously not a convenient place now, we may as well drop the pretence and just tax the people – which is what ultimately happens anyway, at the moment.

The second point is this bizarre idea that the tax an organisation pays to the Treasury is the measure of good that it does the country. Which is, frankly, insane.

The NHS provides no corporation tax at all, but we all think that it's a pretty good idea to have a healthcare system – even if it's not exactly the same as the one we've got now. Thus, the value of the NHS must be expressed as something other than the tax that it doesn't pay. That value being that it has been known, occasionally, to cure people of illness and disease.

And it's just the same for companies: the value of their existence is in the goods and services they provide. The value of Google is that we get to, well, google. Amazon sells us cheap reading material; Starbucks peddles bad coffee; and I'm sure someone can find some use for Facebook.

We must value all of these things at more than we pay for them, precisely because we willingly use them. That value, over and above what we do pay, is called the consumer surplus; a surplus which is vastly larger than whatever tax is or isn't being paid.

One entirely serious academic paper claims that the consumer surplus is actually 50 times the profits of the people providing the goods. With those sort of numbers, who in the hell cares about the tax? ®