In December 2012, demonstrators led a country-wide protest against Starbucks over the coffee chain's tax evasion tactics. A Reuters investigation found that through the magic of profit shifting, the company had avoided paying any tax in the U.K. for three years - at a time when ordinary Britains were being asked to accept tough austerity measures. Luke MacGregor/Reuters
"I am proud to be paying taxes in the United States," radio DJ Arthur Godfrey once said. "The only thing is, I could be just as proud for half of the money."
That's certainly been the attitude of many companies of late. In a banner year on the stock markets, multinational corporations seem to have redoubled their efforts in 2013 to keep as much of their profits from the taxman as possible.
And the rules governing how — and where — multinationals pay their taxes seem set up to help them do that.
"Some rules … were built on the assumption that one country would forego taxation because another country would be imposing tax," the OECD said in a recent paper on international tax evasion. "[But] vast amounts of money are kept offshore and go untaxed."
U.S. think-tank the Public Interest Research Group recently calculated that the amount of profits being held in Bermuda by America's 100 largest companies was more than 10 times the island nation's entire GDP.For decades, multinational corporations have used tax havens like the Cayman Islands, Bermuda, the Isle of Man and Luxembourg to shield profits from tax authorities without running afoul of the law. More and more, real profits derived from real business activity are shifted around the world through numerous local subsidiaries to take advantage of specific tax loopholes.
In one famous case uncovered by the Guardian newspaper, the cartel that controls two-thirds of the global trade in bananas banked more than $50 billion US in sales in one five-year period. But by the time the accounting was done, the total profits on those sales amounted to only $1.4 billion, on which the three members of the oligopoly paid a mere $200 million in tax.
Research firm Audit Analytics said recently the amount of profit being moved offshore by U.S. companies has risen by 70 per cent in the last five years and hit nearly $2 trillion in 2013.
The scale of profit shifting can be jaw-dropping. In 2012, the Cayman Islands received more foreign direct investment than Japan, World Bank data shows.
The amount of genuine economic activity happening in Japan is almost certainly exponentially higher than in the Cayman Islands, but yet there's more money passing through the latter.
A recent U.S. government report found that a five-storey building in the Cayman Islands, whose only actual tenant was a law firm, was in fact the mailing address for 18,857 foreign companies.
Tech companies among worst offenders
In 2013, much of the coverage of corporate tax evasion focused on two giants of the technology industry: Apple and Google.
Apple CEO Tim Cook was hauled in front of a Congressional hearing in May to explain how his company managed to avoid paying U.S. tax on at least $74 billion in profits between 2009 and 2012.
Cook retorted that with a $6 billion tax bill in 2012 alone, Apple likely paid more U.S. tax that year than any other company, but the bad optics were hard to ignore.
Google, for its part, employed two curiously named techniques known as a "double Irish" and a "Dutch sandwich" to book most of its foreign profit through a subsidiary called Google Ireland Ltd. and avoid paying $6 billion in taxes last year, regulatory filings show. (See the sidebar on the right for an explainer of how they did it.)
Even boring old General Electric booked $108 billion worth of its profits overseas, outside the reach of U.S. tax laws.
With eye-popping numbers like that, tax authorities say they are cracking down.
OECD takes aim at profit shifting
Last summer, the OECD published the results of its latest research into profit shifting. The Action Plan on Base Erosion and Profit Shifting outlines how developed nations could collaborate to thwart some of the more egregious attempts to move profits around for no other reason than to avoid taxes.
The document is full of high-minded ideals but lacks teeth.
Experts say most of the tax evasion-related measures announced last year amounted to well-meaning statements that lack real enforcement."There's a lot of inertia to keep the status quo in place," said Richard Murphy, a U.K.-based accountant and economist at the forefront of a global charge to close tax loopholes. "However you try to fix a bad system it's still bad, and the OECD is trying to make a bankrupt international tax system work just a little bit better."
"At least the mood music has changed, but the simple reality is a lot of these efforts have no power to implement real change," Murphy said.
Allison Christians agrees. She's a lecturer in the Faculty of Law at McGill University in Montreal, and she, too, doubts the latest "crackdown" will be any more effective than previous ones.
"It's the same old international governance problem," she says. "Rich countries write vague statements to agree to on paper, but then they default to the same old policies they always have."
Most countries turn a blind eye
Subsidiaries of multinationals colluding to shift money around to avoid tax "should be the situation in which everyone concerned … pounces on it and says 'You can't do that'," tax lawyer Michael Durst told a November 2012 conference aimed at closing tax loopholes. But the fact is most countries play along, and as long as even one country finds it in its best interest to kowtow to a multinational corporation, tax havens will continue to exist.
"Canada doesn't have a lot of multinationals, and we'd like to have more," Christians said. "How are you going to do that if you're taxing them out of step with everybody else?"
South of the border, there is already a movement afoot to drop the corporate tax rate dramatically to compete with low-tax jurisdictions. Democratic Senator Max Baucus of Montana is sponsoring a bill to that effect, and while such a cut would cost Uncle Sam a lot of money up front, Baucus hopes to recoup some of that by limiting the amount of profit that American companies can keep overseas and still be allowed to do business in the world's largest economy.
"Max Baucus thinks the U.S. can act alone to close global tax loopholes, but I have my doubts," said Christians.
It's worth noting that corporations have lined up in opposition to Baucus's proposal — curious given that the reform he's proposing would ostensibly see their base tax rates come way down.
Public must drive change
The real hope for substantive tax change, Christians says, lies in the rising public awareness of the issue and the kind of protests seen in Britain in 2012 when people questioned why companies like Starbucks were allowed to skimp on taxes at a time when individual taxpayers were facing harsh austerity measures.
"You're seeing regular people out in the streets with protest signs," she said. "People are starting to locate decision-makers, and they're seeing the real source of the problem isn't Google or Starbucks or HSBC. It's governments doing this, and [people are] not used to that.
"NGOs are taking on tax issues as human rights issues, and that gives me some hope some things are changing."
There are other green shoots of hope, too. The European Union recently passed legislation requiring country-by-country financial reporting from its banks. In April, it approved similar laws for the resource industry to ensure that more of the benefits of resource extraction stay close to where the resources were extracted.
The law says big mining companies have to disclose tax payments "in all the main countries in which [they] operate," but even that wording allows a lot of leeway, Murphy says.
"They don't tell us about the Cayman Islands or British Virgin Islands," he said, "They tell us what they're doing in the places we know they already are."
Some companies, most notably Vodafone, have made overtures toward transparency by breaking down how much they're spending on taxes and where. But Vodafone's gestures came only after scrutiny of how little tax the telecommunications giant was paying in its home country of Britain.
None of these measures will amount to much until developed economies demonstrate they have the political will to enact binding legislation. And that, most likely, is going to come from taxpayers telling them to do so.
Until that happens, even the OECD acknowledges there's going to be "a perception that the rules for the taxation of cross-border activities are regularly broken and that taxes are paid only by the naive."
Egypt and several European countries urge their nationals to get out of Libya as spiralling violence between the military and Islamists leaves scores d... More Egypt and several European countries urge their nationals to get out of Libya as spiralling violence between the military and Islamists leaves scores dead. Duration: 00:54
Date 2 hrs ago, Duration 0:54, Views 7