In this blog post, Aniket Chaudhury, a student at Department of Law, Calcutta University (Hazra Campus) and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, compares and contrasts how big market players modify their financial situation to pay lesser tax.
What is tax shaming?
Tax shaming can be understood in simple words as the modification of an individual’s financial situation to lower the amount of income tax owed using legal methods. This can be achieved only by claiming the permissible credits and deductions. This practice is therefore different from tax evasion which uses illegal means such as underreporting of their income to avoid paying taxes.
Many companies worldwide, for instance the U.S. companies have had a growing outcry over “inversions,” which is a means of restructuring the business so that the U.S. parent could be replaced by a foreign parent entity in a nation which has lower corporate tax rates.
This in recent times lead to Apple CEO Tim Cook being called to testify regarding Apple’s tax strategies by the U.S. Senate Permanent Subcommittee on Investigations in April 2013 and executives from Apple, Google, and Microsoft faced an Australian senate inquiry into their alleged tax avoidance in April 2015.
Tax shaming could be better understood if we analyse the cases of three big and well-known companies worldwide.
The multinational company which is virtually the lifeline of most of the people in the world and which requires no brief explanation as to what it is and what it stands for had also been a culprit of tax shaming. It’s a shame to have such a black patch associated with a powerhouse like Google.
In 2012, it was reported that the tech giant avoided paying $2 billion in global income taxes by moving $10 billion in revenue, or 80 percent of its pre-tax profit to Bermuda because it doesn’t have a corporate income tax. It had nearly doubled the money that it was sheltering in Bermuda since 2008.
The U.S. Internal Revenue Service (IRS) audited Google’s offshore strategy in 2011. According to their reports Google was saving about $1 billion in taxes per year by shifting its profits through Ireland and the Netherlands to Bermuda, cutting its overseas tax rate to 2.4 percent. Its overall effective tax rate was 22.2 percent in 2009.
The European Commission therefore in 2012 proposed that the EU countries should collaborate to crack down on tax evasion, which costs them about $1.31 trillion per year.
In 2012, when asked about the scenario of the way his company avoids paying taxes, Eric Schmidt, then CEO of Google had to say that he is “proud” of the situation. “It’s called capitalism. We are proudly capitalistic. I’m not confused about this. We pay lots of taxes; we pay them in the legally prescribed ways,” he said. “I am very proud of the structure that we set up. We did it based on the incentives that the governments offered us to operate.”
The head of Britain’s public accounts committee, Margaret Hodge publicly rebuked Google’s tax behaviour in 2013. She told one of the company’s European executives that Google’s practices were “devious, calculated and, in my view, unethical.” Hodge’s comments were seen as one of the catalysts for the development of the Google Tax bill.
Amazon
Amazon is an American electronic commerce and cloud computing company with headquarters in Seattle, Washington as of 2016. It is the fifth largest company overall. It operates in sixteen (16) different countries all together with sales of 62% or $55.469 billion from North America sales and 38% or $33.519 billion from international sales in 2014.
Amazon had made an elaborate avoidance scheme and codenamed Project Goldcrest. It came into light earlier this year after intense scrutiny from European authorities. It embarked on a complex 28-step scheme, which took more than two years to complete and fundamentally reordered its global business in Europe using a maze of offshore entities and intercompany agreements.
The company had never publicly disclosed full details of Project Goldcrest. The company’s move to Luxembourg had been well documented in this. Now, Amazon is facing a landmark court ruling in the US that could prise open its obscure tax structure in Luxembourg, after a high-stakes legal battle that has shed unprecedented light on the technology giant’s irregular and twisting tax affairs. The case could force Amazon to pay more than $1.5bn (£1bn) in unpaid taxes. It also throws sharp relief tensions between the US and Europe over how to tax multinationals that operate in both jurisdictions. Both the continents are trying to recover vast sums from Amazon’s multibillion-dollar pool of untaxed income held in Luxembourg.
The IRS had criticised Project Goldcrest for depriving it of tax and attacked core features as predicated on “legally baseless” methods. The new documents that have emerged show the complexity the company resorted to in order to make the scheme work and the involvement of executives at the highest levels of the company.
Amazon on the other hand maintains that it operates a pan-European business from its Luxembourg base, where it has more than 1,000 employees. “Amazon pays all the taxes we are required to pay in every country where we operate,” a spokesman for the company said.
Over the past 20 years, Amazon had largely avoided US federal taxation by managing its books to avoid reporting any meaningful profits. Project Goldcrest had played a significant role in Amazon’s aggressive tax strategy, depriving governments on both sides of the Atlantic of large sums of tax since the project’s completion in 2006. Critics argue that Amazon’s aggressive tax planning had also bolstered its ability to undercut rivals on price.
In 2015, Amazon decided that they will start paying more taxes in several European countries where it does business, instead of channelling its revenue through a holding company in the low-tax haven of Luxembourg, after pressure from regulators. Amazon had attributed more than $7 billion worth of sales to Britain in 2013, but paid only $6.5 million in tax.
Starbucks
Starbucks Corporation is an American coffee company and coffeehouse chain. Starbucks was founded in Seattle, Washington in 1971. Today it operates 23,768 locations worldwide.
They had sales of £400m in the UK in 2012 but paid no corporation tax. It transferred some money to a Dutch sister company in royalty payments, bought coffee beans from Switzerland and paid high interest rates to borrow from other parts of the business.
In 2012, Lawmakers scoffed as Troy Alstead, Starbucks global chief financial officer, claimed that the coffee giant had reported losses for all but one of the 15 years it has operated in the U.K. and was down to poor performance and still didn’t make an attempt to minimize its taxes in Britain. Margaret Hodge, head of parliament’s Public Accounts Committee upon hearing the above statement cross questioned as to if the Company had been incurring such losses over the years then what might have been the reason for them to stick around and continue investing for so long?
To his defence Alstead acknowledged to the panel that its taxable profits in the U.K. are calculated after royalties paid to its European headquarters in the Netherlands have been deducted. He said that Starbucks had a special tax arrangement with the Dutch government covering its headquarters, but declined to give details. “Respectfully I can assure you there is no tax avoidance here,” Alstead told the panel.
Starbucks became the poster child for corporate tax avoidance in 2012 after details of its meagre tax contribution emerged. It was accused of using artificial corporate structures to shift profits out of the UK into lower tax jurisdictions. Owing to this they paid nearly as much corporation tax in 2015 as it did in its first 14 years in the UK, after bowing to pressure to scrap its complex tax structures. (Tax contribution for 2015 was only slightly less than the £8.6m it paid over the 14 years after its 1998 UK debut, despite £3bn worth of sales in that time).
It still faced criticism for a lack of transparency that makes it hard to determine whether it is paying a fair amount of tax. Tax accountant Richard Murphy said it was impossible to know if Starbucks was still aggressively avoiding tax until accounts for its European parent company, Starbucks EMEA, are published. However, the coffee company’s increased UK tax bill was partly the result of a strong year in which like-for-like sales grew by 3.8%.
Starbucks said in-store technology such as wireless charging Power mats and super-fast Wi-Fi had helped boost sales. It also cut costs by renegotiating leases, closing unprofitable stores and selling others to franchisees. Administrative expenses have been reduced, while it benefited from lower coffee prices, leading to an increase in its operating profit margin from 0.5% to 6.9%.
Conclusion
Going through tax shaming and its ploy being adopted by such big names we get an idea as to why, even if it isn’t illegal yet it’s a way of getting away especially for big companies who make their revenue in billions and thus the subsequent taxes amount to a healthy figure and precisely the reason why they try avoiding it. Nobody likes paying taxes from a household to a big multinational powerhouse yet to give it back to the government in respect of the enormous profits gained, we do need to fill the tax bills as and when necessary else even bigger influential names don’t get away from such global shaming. In 2013, the director-general of the CBI, John Cridland had come down to the conclusion that, “A company may be making good revenues but pay lower amounts of tax for completely legitimate business reasons. But if it’s doing this by using so-called ‘black-box’ arrangements, where transactions are designed for no commercial purpose at all, other than to avoid tax, then the CBI does not condone it, even if it is legal.”
Aniket Chaudhury
DEABL July 2016
+919051556336
