Amazon and Google having a laugh at taxpayers' expense

Whatever angle you come at it from, the state at national level, as well as key global agencies, exist to make life easier for corporations like Amazon and Google when it comes to taxation.

States everywhere may be short of revenue as the worldwide recession continues to takes it toll. But instead of demanding more from the corporations, the very opposite is happening. 

The ConDems are telling business they can pay less. In the March budget, they cut corporation tax for the third time since 2010. It’s now fallen to 24% and will be reduced to just 21% next year. The cut will cost the Treasury about £400 million in 2015-16.

Where’s this shortfall to come from? Chancellor George Osborne is demanding £11 billion more in spending cuts in 2015-16, a level which has even frightened most of the cabinet into passive resistance. Front-line services like fire face draconian cuts and mass redundancies following today’s announcement by the government’s former chief fire and rescue officer.

Of course, global corporations do everything they can to avoid paying tax on their operations in Britain. Instead, companies like Amazon are registered in lower-tax territories like Luxembourg. They claim that although they employ thousands of workers in Britain, they are not actually based here!

MPs on the public accounts committee can rant and rage all they want – as they did yesterday when they had Google up before them – but the fact is that the UK tax authorities are pretty powerless to do anything about it. Moral pressure cuts no ice with the Googles of this world.

Take the example of Amazon. A Reuters investigation shows that over the past six years, Amazon has paid just £5.9 million in tax on over $23 billion of sales to British customers.  Yet Amazon claims it runs a single European business out of Luxembourg.

Reuters says, however, has gathered evidence which shows that Amazon’s UK operations have a high degree of autonomy, and while the corporation likes to identity itself as a virtual company, this is far from the case. Microsoft and Expedia are other firms that claim a similar position in order to minimise tax bills.

The investigation explains: “The practice is based on international tax rules which allow companies to conduct ‘preparatory and auxiliary’ activities in a country without creating a taxable presence there. The UK tax authority, Her Majesty's Revenue and Customs (HMRC), has never sought to define in court the limits of what an internet company can do in Britain before it is deemed to have a taxable presence.”

However, does such a limit actually exist? Not according to Jacques Sasseville, head of the tax treaty unit at the Organisation for Economic Co-operation and Development (OECD), which advises rich nations on tax policy. He said where sales were conducted online, it was almost “impossible to prove a taxable presence in a jurisdiction, irrespective of how much activity is conducted in that country.”

So with the tax authorities pretty much powerless in the face of transnational, internet-based operations, Osborne is playing along. The cut in corporation tax to 21% puts the rate on a par with Luxembourg’s, although well above Ireland’s 12.5%.

Corporations exist solely to maximise profits, minimise costs (including tax) and increase the market value of traded shares. This is a legal obligation, enforced by the same capitalist state that is at their beck and call. Herein lies the problem.

The state and its agencies through essentially political actions sustain the economic system. They are a perfect example of the division of labour first noted by the economist Adam Smith as capitalism established itself in Britain. That’s why we should never look to the present state to sort out the corporations. That’s not the job of what is now a market state.

Paul Feldman

Communications editor

Tax avoidance: a case of their morals and ours

Do some global corporations behave “immorally” when they set out to reduce their tax bill to a minimum through a variety of dodgy but apparently legal devices? Or are they simply acting out their own morality play?

We ask the question in the light of the accusation made by the Commons public accounts committee against transnationals like Starbucks and Amazon. A PAC report launched today accuses corporations that minimise tax of “outrageous” and “immoral” behaviour.

Chair Margaret Hodge said its report showed that corporations had been allowed to get away with "ripping off" taxpayers because of a weak tax authority, poor legislation and a lack of international co-operation.

"The inescapable conclusion is that multinationals are using structures and exploiting current tax legislation to move offshore profits that are clearly generated from economic activity in the UK."  

Is this former Labour minister Hodge genuinely surprised? This has been going on for years. She bemoans the fact that the revenue from corporation tax has fallen. Two things account for this: the recession and the fact that during the 13 years of New Labour, corporation tax rates fell sharply from 33% to 28%.

New Labour cheered the fact that they had reduced the tax on corporations to among the lowest of the developed economies. It made Britain an attractive place to invest in, so the argument went.

Naturally, the ConDems have pushed on and the rate is heading for 23% next year. At the same time, the burden on taxpayers and consumers has of necessity risen to finance public spending at central and local level.

In 2010-11, corporation tax accounted for just 8% of the UK government’s tax revenue. By contrast, national insurance and income tax accounted for a massive 49% while VAT – a tax on consumption – brought in another 17%.

Those who do the work, who labour to create commodities and services (and profits), also carry the greatest tax burden. So where, you may ask, is the “morality” in this arrangement? Search as hard as you want and “morality” doesn’t figure anywhere. Nor will you hear Hodge or any other MP complaining about this totally immoral situation.

Which brings us to our main point: absolute morality is conditional, evolving with successive periods of history. And within this absolute is the relative morality of different social classes. For capitalism and the global corporations, the moral imperative can only be the bottom line.

Corporate-driven globalisation of the world economy freed the transnationals from territorial jurisdictions and facilitated the creation of subsidiaries, joint ventures, special purpose entities and trusts to benefit from low taxes and subsidies.
  

Professor Prem Sika, of the Centre for Global Accountability, Essex University, points out that “taxation is targeted by financial engineers who regard it as an avoidable cost, rather than a return to society on the investment of social capital (education, security, healthcare, legal system, etc.).”

In other words, for the corporations the whole issue of taxation (or how to avoid it) is an essential aspect of capitalist accumulation itself and not some form of aberrant, “immoral” behaviour.  

Take the case of food and drinks giant Cadbury-Schweppes. It set up a shell company in Ireland with no office and no employees but with £500 million in cash, which was allocated to different parts of the group. The incentive was a simple one. Corporation tax in Ireland is 12.5% - less than half the rate in Britain.

Under what are known as the Controlled Foreign Company rules (CFC), HMRC tried to collect the missing taxes. But after a series of cases, the European Court of Justice found in favour of the company on the grounds that member states could not block corporations from operating in different parts of the European Union.

Appealing to corporations to behave more “responsibly”, to pay more tax will produce a few, marginal concessions. But it will leave the main issues unchallenged and unquestioned. This because the argument about their morals and ours is in reality about class and power.  

Paul Feldman
Communications editor

Corporate tax scams you may have missed

Protests outside Vodafone shops at the weekend amid claims that the mobile phone company had been let off most of a £6 billion tax bill, highlight the fact that the major corporations ultimately call the shots at the expense of the ordinary taxpayer.

Vodafone’s case is just one example where transnational corporations (TNCs) deploy vast resources to minimise, avoid, reduce or eliminate tax liability. HMRC, who cannot compete at the same level of expertise, usually come off worst when they launch a challenge.

Take the case of food and drinks giant Cadbury-Schweppes. It set up a shell company in Ireland with no office and no employees but with £500 million in cash, which was allocated to different parts of the group. The incentive was a simple one. Corporation tax in Ireland is 12.5% - less than half the rate in Britain.

Under what are known as the Controlled Foreign Company rules (CFC), HMRC tried to collect the missing taxes. But after a series of cases, the European Court of Justice found in favour of the company on the grounds that member states could not block corporations from operating in different parts of the European Union. In 2008, HMRC lost against Vodafone in a similar case. Vodafone was thought to owe about £6 billion; it eventually settled for £1.2 billion.

An extraordinary case highlighted by BBC Radio’s File on Four is that of the Alliance Boots pharmacy and health products group. It is one of more than 27,000 companies registered for taxation purposes in the Swiss region of Zug, equivalent to one for every man, woman and child.

The reason that Burger King, Boots and other corporations are in Zug is simple – the rate of tax on corporate profits is 8.8% compared with 28% in Britain. After a series of mergers, Alliance Boots was eventually taken over by a private equity firm. The company used to pay around £120 million a year in taxes in Britain. One expert reckons the company paid about £14 million last year – an effective tax rate of just 3% on its £450 million plus profits.

Companies can also reduce corporation tax rates by using transfer pricing, which sets the price at which one unit of a group sells goods or services to another unit of the same group in a different tax jurisdiction. Google used this device to avoid virtually any corporation tax on its £1.6bn advertising revenues in Britain.

The capitalist state and governments of various hues are entirely complicit. In Britain, the corporation tax rate was 53% in 1983. It’s now heading for 24%, while some suggest that because of transfer pricing scams, the effective rate is 21%. During the credit-fuelled boom, corporate tax revenues rose to help pay for public spending. They collapsed in 2008 and helped accelerate the budget deficit. Now ordinary people face horrific cuts in services, jobs, wages and conditions as a result.

Professor Prem Sika, of the Centre for Global Accountability, Essex University, points out that “taxation is targeted by financial engineers who regard it as an avoidable cost, rather than a return to society on the investment of social capital (education, security, healthcare, legal system, etc.).”

Globalisation, of course, freed corporations from territorial jurisdictions and facilitated the creation of subsidiaries, joint ventures, special purpose entities and trust to benefit from low taxes and subsidies.

In the Dark Side of Transfer Pricing, Sika adds: “Reducing or eliminating taxes is attractive to corporations as it boosts shareholder value, post-tax earnings and returns to shareholders. It also increases company dividends and executive rewards as these are linked to reported earnings.”

In other words, for the corporations the whole issue of taxation (or how to avoid it) is an essential aspect of capitalist accumulation itself and not some form of aberrant behaviour. There can be no semblance of tax justice so long as the profit system rules the roost.

Paul Feldman
Communications editor