How states compete to offer low taxes

Submitted by cathy n on 5 February, 2016 - 10:33

Law professor Sol Picciotto has proposed a new approach to stop tax avoidance by transnational corporations. He spoke to Ed Maltby from Solidarity.

Taxing transnational corporations already involves international agreement, based on tax treaties. The issue is, what kind of agreement? Until now, there has only been loose coordination. That's because governments like to hang onto what they call "sovereignty".

This means that TNCs can play off one government against another. Current agreements mean governments compete to offer tax breaks to MNCs. Governments need stronger co-operation, but so far they have been unable to reach an agreement on what that would be. What's needed is an agreement to treat TNCs in line with the business reality, that they are single companies.

We think of Google as one company. But governments try to tax the particular subsidiary in each country. So HMRC has been trying to tax Google in the UK. TNCS split up the function that they attribute to different subsidiaries in different countries. They can put some functions in either outright tax havens like the Cayman Islands or Bermuda, or in countries that offer them very low rates like Ireland or Luxembourg. They attribute more profit to the subsidiaries that they put into lower-tax countries. The profit that they channel through Ireland to Luxembourg is supposed to be royalties received for use of the Google software. This software was developed in California, but it was sold to this Irish subsidiary a long time ago.

The various Google operating companies pay a royalty. These royalties are usually deductible from the gross profits that they make in different countries. So that reduces the taxable profits. This allows Google to have a worldwide tax break. The best solution would be to treat Google as a single worldwide tax entity, in order to tax it on its real activities in each country. That's what they have in federal countries like the US, where they charge state corporate taxes on a given country's total US profits, divided up according to a formula and apportioned to each state. There is a proposal now to apply this in the EU, but governments are blocking that. The reason they give is that it is difficult to agree how to apportion the profit. But the real reason is that it would take away their ability to attract investment by offering tax breaks.

Tax breaks attract little real investment, so, it is to the detriment of other, more productive kinds of investment, but they still get some money out of it. It's really a beggar-thy-neighbour approach, but the Irish for example do quite well out of it. Countries like the UK could move towards a better approach even without an international agreement, by dropping the fiction that they are only taxing Google UK. The fact that Google is paying its UK employees £150,000 on average shows that they are making a lot of money here.

The whole Google operation depends on close interaction with users and advertisers to do targeted advertising. The idea that all that takes place somewhere else doesn't really wash. I don't know why Google thought they could get away with the tax deal. Maybe they thought that no-one would realise! There is enough information available for most people to realise that it's a very bad deal. In fact HMRC is more aggressive towards other companies. But Google is a powerful company and it's an American company. The US Treasury has been making a fuss about Europeans attacking American companies, but in this case it is the other way around, they are going easy on Google because it is an American company.

The European Commission has taken decisions against Apple. But a lot of American companies have been getting these sweetheart deals. I would say that the real level of Google tax ought to be two or three times what they are paying. It's not as astronomical as some people are suggesting, but the amount they are paying is very low.