The revelation that Apple has shifted 9 billon dollars of revenue out of Australia over the last ten years is the latest example of the way modern corporations minimise their tax bill.
Corporations are currently paying enormous fees to the best tax advisers money can buy to legally move revenues and shift costs to ensure profits are declared in low taxing jurisdictions, with little or no profits declared in high taxing jurisdictions. The transfer pricing industry has been so successful that now, arguably, they are threatening the viability of nations to operate.
Judging by the language used by finance ministers at the G20, it could be a long wait before there is a co-ordinated solution to what is now an international concern. The main problem with enforcing a new regime to crackdown on the transfer pricing strategies used by multinationals is that while tax evasion is illegal, the tax avoidance strategies currently in use are perfectly legal.
Corporations have a duty to their shareholders to make profits. They have no duty to be fair, or to support social goods such as hospitals, schools or other essential infrastructure. That is the duty of government. Yet the emerging problem for the global economy is that to provide these essential services, governments require appropriate funding, and most of this funding comes from tax.
Australians and citizens the world-over have long been aware that multinational corporations have been avoiding taxes on a major scale. In December 2012 and January 2013 the UK press released details of Starbucks’ tax avoidance in the UK, which led to citizen protests. In Australia, there have been widespread press reports on tax avoidance by multinationals such as Google, eBay and Amazon.
Even our Treasurer, Joe Hockey, told international finance ministers at the G20 meeting in Sydney that he was at a loss to know what to say to a small business person in Sydney, who is competing against "a massive multinational that doesn’t have to pay tax and yet they have to pay tax".
The concerns over tax avoidance were a hot topic at the G20 meeting of Finance Ministers and Central Bank Governors in Australia, and the official response highlights just how hard it will be to find a solution. In the communique from that meeting there was some strong language in relation to corporate Base Erosion and Profit Shifting (BEPS), which starts by stating, “we are committed to a global response to BEPS based on sound tax policy principles.”
Yet after this firm start, the language moderates and becomes more aspirational. For example, “we will start to deliver”, and “we expect to begin”, soon followed by “we call on all financial centres to match our commitments”, “we urge all jurisdictions that have not yet complied…” until finally the calls, demands and urgings became a “request”.
None of the above will have any impact on the multinationals’ tax avoidance strategies. Even if, improbably, all nations agreed to stronger tax laws, multinationals will still be able to avoid them. As the accounts of Apple Sales International stated in 2009, “The company is not tax resident in any jurisdiction.”
This is chilling indeed. If a company has no tax residency anywhere in the world, then the best laws in the world won’t apply to that company. In theory, nation states could co-operate with each other to charge a tax on the worldwide profits of a multinational corporation. The countries could then apportion that tax, collected across the world, between the jurisdictions where the multinational actually made the profit.
However, because of worldwide tax competition between countries, as they try to attract multinationals to operate in their country, this will not happen. Ultimately, as nation states are the ones responsible for allowing corporations to operate in their country while failing to tax them, it is contingent on them to find a solution.
Considering profits are so easily shifted across the globe, nations must now find new alternatives to secure a fair percentage of tax on multinational corporation income. Perhaps countries could charge these corporations a licence fee to operate in their country, based on a percentage of sales and employee payroll. This would remove the need to locate and tax profits, while also ensuring the multinationals contribute to the good governance of the countries they operate in.
Considering nations such as Australia must protect their tax base to continue to provide for a healthy, educated workforce and services such as critical IT infrastructure, the corporations might actually be able to consider it some form of investment.