Google and ExxonMobil run rings around outdated tax laws

Prem Sikka

Tax avoidance shows no sign of abating. Google, the company with the slogan “Don’t be evil", is at it again. The company has been named and shamed by the UK House of Commons' Public Accounts Committee, but that has not persuaded directors to change their ways.

According to information filed with the US Securities and Exchange Commission (SEC), the Google group of companies generated global revenues of US$50.175 billion last year. Some US$4.872 billion (nearly £3.25 billion) of revenues came from the UK.

Google explains these revenues are “based on the billing addresses of our customers for the Google segment and the ship-to-addresses of our customers for the Mobile segment”. But this does not mean the revenues are necessarily booked in the UK, which acts as a marketing mechanism for its Ireland operations. As the Public Accounts Committee heard, through careful attention to detail, a large part of the revenues is booked in Ireland.

Despite the US data, Google’s UK operations reported a revenues of just £506m in 2012, some way short of the figure reported to the SEC. This gave rise to a UK profit of £36.2 million and a corporate tax bill of £11.2 million.

Google’s Irish arm reported revenues of €15.5 billion (£13 billion), of which €11 billion is wiped out by “administrative expenses”. The Irish operations reported a profit of €154m (£131m) in 2012, but paid just €17m (£14.5m) in tax.

Google uses complex corporate structures. Royalty payments, masquerading as administrative expenses, are a key part of the profit shifting strategies. For example, its intellectual property is held in Bermuda, which does not levy corporate taxes. Various subsidiaries pay royalty fees which result in tax deductible expenses in Ireland and elsewhere, but tax-free income in Bermuda.

Google’s SEC filing shows the company had foreign income before taxes of just over US$8 billion for 2012. Most of the income from foreign operations was recorded by an Irish subsidiary. The foreign tax paid/payable was US$358m, equivalent to a rate of 4.43%. The accounts received the customary clean bill of health from auditors Ernst & Young.

Another company using complex corporate structures and intergroup transactions to avoid taxes is ExxonMobil. Its Spanish subsidiary operated for a while from the same address as its auditors PricewaterhouseCoopers. The Spanish company apparently had one employee on an annual salary of €55,000, but it reported net profits of €9.9 billion for the period 2009 to 2011. The key to this was a strategy designed to take advantage of Spanish laws for attracting foreign investment. The company shuffled the payment of dividends and avoided taxes in the US elsewhere.

We can all ask companies to honour their promises of ethical and responsible conduct, but such calls have little effect. All over the world tax authorities are overwhelmed by the tide of avoidance and lack the financial and political resources to investigate giant corporations.

Yes, they can be more aggressive and governments can move to deprive tax dodging companies of any public contracts. But such efforts need to be accompanied by a fundamental reform of the way corporate profits are taxed. The current system is over a hundred years old and is fundamentally flawed.

For example, Google, ExxonMobil and other companies may have hundreds of subsidiaries, but they are unified entities with a common board of directors, common share ownership and a common strategy that directs their operations. The companies publish consolidated financial statements for the group as a whole, which recognise that transactions within the group of companies, do not add any economic value. These transactions have zero effect on their consolidated profits.

Yet the tax treatment is entirely different. For tax purposes Google and ExxonMobil are not treated as a single entity. Instead they are treated as hundreds of separate entities. This encourages them to play royalty and other games and shift profits through artificial transactions and arbitrage the global tax systems.

So the obvious solution is to treat multinational corporations as single unified entities. Their global profit, with some modifications, needs to be allocated to various countries on the basis of employee, sales, assets or other key determinants of profits and taxed at the appropriate rates.

Such a system already operates within some federal states, most notably the United States, Canada, Switzerland and Argentina. It prevents companies from artificially locating domestic profits to internal tax havens. Thus, a company trading in California cannot easily avoid taxes on its local profits by claiming that it is a located in Delaware, which offers minimal taxes on varieties of corporate income.

The above reforms do not necessarily need international agreement and can be implemented unilaterally by any government. It has considerable similarities with the Common Consolidated Corporate Tax Base proposed by the European Union.

The EU’s plan could make a serious dent in tax avoidance, but is opposed by the corporate dominated Organisation for Economic Co-operation and development (OECD). The OECD’s preference is to tweak the current system, which cannot address the fault lines.

Without a fundamental reform companies like Google and ExxonMobil will continue to deprive national governments of much needed revenues.

• This article first appeared on The Conversation website.

Hype wars: Return of the FDI?

Here's the propaganda: Chancellor George Osborne has pulled off a massive coup by personally negotiating a deal to secure the next film in the blockbuster Star Wars saga will be made in the UK.

George Osborne has not been shy about hyping his own success in making this happen:

"It is clear evidence that our incentives are attracting the largest studios back to the UK.

"I am personally committed to seeing more great films and television made in Britain."

Yes, there's our doughty chancellor securing foreign direct investment (FDI) to Britain and securing a healthy future for the UK film industry ... or so he'd want you to believe ...

Here's the reality: previous Star Wars films (in fact the first four) have been made (entirely or substantially) in the UK too, so this is hardly breaking new ground or attracting new business to our shores.

It's also worth analysing what Osborne means when he talks about "our incentives". What that means is that even if just a quarter of the film's production occurs within the UK, then the producers (Lucasfilm) can claim back tax relief on 80% of the full budget. This is a colossal tax break - and is basically offering multinational firms a tax avoidance scheme - giving them the option to reassign profits from elsewhere to the UK.

Hailing this as some kind of success story - when in reality it represents a race to the bottom on tax (i.e. governments prostrating themselves to business)  - is typical of a chancellor who hailed the 'Irish miracle' in 2006 for its slashed corporation tax, shortly before that economy spectacularly imploded.

Of course, Osborne's economic strategy is based on slashing taxes for business and the super-rich. What underpins the Chancellor's thinking is either a deeply flawed belief in Hayekian economics or more crudely a policy of class war: reducing taxes on the wealthy while slashing services and entitlements for everyone else.

Far from being return of the FDI, this is more the (evil) empire fights back ...

Osborne's weather excuse doesn't cut any ice

Yes, the snow had an impact. Undoubtedly. But even without it the ONS concedes that 'growth' would have been "flattish", i.e. no growth.

The reality is that George Osborne's own 'crowding out' explanation for the crisis and recovery strategy (as previously denounced by LEAP) undermined the economy in Q4 of 2010.

As I said when speaking to reps from the Northern Irish public sector union (NIPSA) earlier this month, there are 3 problems with Osborne's economic strategy (you can download my powerpoint presentation from the NIPSA website).

Firstly, is Osborne's own 'independent' Office for Budget Responsibility, which said in June 2010 that if 600,000 public sector jobs were cut, the knock-on effects would mean 700,000 private sector jobs would be lost. In the CSR in October he said that actually only 490,000 public sector jobs would go. However, the Chartered Institute for Personnel and Development looked at his figures and estimates that in fact there will be 725,000 public sector job losses as a result of the £80billion cuts.

Secondly, unemployment is rising. Long-term unemployment (those unemployed 12 months or more) is now at its highest since February 1997 and youth unemployment is the highest on record. The private sector is not 'crowding in' to the space left by the public sector.

Thirdly, Ireland. What Osborne is implementing in the UK has been tried in Ireland: it doesn't work. The public sector been slashed, corporation tax is lower than almost anywhere else in Europe and the economy is in a death spiral.

In Q1 of 2011, we have the VAT rise, rising inflation, rising unemployment and declining capital spending from central and local government to impact on the figures. And there's be no snow for George to hide behind.

Irish budget won't stop the rot

The Irish Parliament’s vote to implement a further, more savage €6 billion programme of spending cuts and tax increases has done nothing to stop the worsening debt crisis transforming the political landscape throughout Europe and beyond.

Quite the opposite. As Ireland follows Greece, and with Portugal and Spain jostling for position in the queue for aid, the conditions of the Intenational Monetary Fund-sponsored package for the Irish Republic are reverberating throughout the continent. And the pressure is mounting across the Atlantic too.

In the United States, Democrats are in open revolt against President Obama’s deal with the Tea Party-inspired Republicans to continue Bush’s 10-year-old tax breaks for the wealthy, which were widely expected to be allowed to expire at the end of the year.

This proposed new deal is part of the political price for agreement on a further debt-funded stimulus. But the markets are worried, and the cost of US borrowing has started to rise.

Dominique Strauss-Kahn the managing director of the IMF says the “piecemeal” country-by-country approach can’t solve the crisis but Germany’s chancellor Angela Merkel is not alone in blocking proposals for a Europe wide rescue scheme. In the Netherlands, Geert Wilders far-right Freedom party teamed up with the so-called Socialist Party to oppose the deal for Ireland.

For the Irish people, the new budget slashes social welfare benefits, public pensions and capital projects, whilst forcing the 45% of low wage earners to pay income tax for the first time in order to rescue the banks and pay the interest on government bonds.

Michael Noonan, finance spokesman for the centre-right Fine Gael party stated the obvious: "This budget is the budget of a puppet government who are doing what they have been told to do by the IMF, the EU Commission and the European Central Bank."

But what he didn’t say is that the demands of these agencies are themselves orchestrated and conducted by the much more powerful forces at work in the rapidly contracting global capitalist economy.

Even as the captive Irish government was applauding itself, warnings of further mass assaults could be detected in the absurdly optimistic growth forecasts underpinning the new budget.

Finance Minister Brian Lenihan pins Irish hopes on gross domestic product national income (GDP) expanding by 1.7 percent next year, nearly double the European Commission's forecast of 0.9 percent.

The government is forecasting growth of 3.2 percent in 2012, 3.0 percent in 2013 and 2.8 percent in 2014, but Danny McCoy, head of the Irish Business and Employers Confederation said he saw little in the budget to help job creation or restore economic competitiveness.

In reality, governments throughout the world are in a competitive race to destroy living standards, driven by the needs of an economic system of global corporations competing for declining profits as markets shrink and collapse.

The crisis began when credit-funded stimulus reached its limits. Political parties of the left and right are ganging up together to design and implement “austerity” programmes that can only accelerate the process of contraction. Despite the rhetoric of recovery it is what they are required to do.

Campaigns to resist the assault on people’s lives must be brought together with the democratic and legislative means to replace the moribund capitalist system rather than patch it up. People’s Assemblies can begin to construct a richer form of democratic control based on social ownership and not-for-profit production and finance. Check out A World to Win’s proposals for transforming social relations in our new Beyond Resistance booklet.

Gerry Gold
Economics Editor
reposted from www.aworldtowin.net

Race to the bottom

Ireland’s already severe economic troubles just got a whole lot worse.

Its plan to reduce its budget deficit to 3% of GDP in four years by cutting spending by €7.5bn has been undermined by lower growth prospects both at home and abroad and higher debt interest costs.

So, in a warning of what is to come elsewhere, Ireland’s Fianna Fail government has DOUBLED its programme of cuts to €15bn.

And this comes only days after the UK's Lib-Tory Coalition announced the latest details of its own savage assault on the public sector intended to hit a strikingly similar target.

You can almost feel the brutal threat contained within the official Irish statement:

'The Government realises that the expenditure adjustments and revenue raising measures that must now be introduced will have an impact on the living standards of citizens. But it is neither credible nor realistic to delay these measures.'

And you can almost see the baseball bats wielded by the bailiffs sent in by the money marketeers who’ve driven up the price of borrowing for Ireland, and a long list of other highly indebted countries.

'Our obligations are clear. We must demonstrate that we are bringing sustainability to our public finances. We must stabilise our debt to GDP ratio over the period of the Plan. And we must set out our strategy for returning our economy to growth.'

Things are getting rapidly worse for the millions of ordinary people already struggling to deal with the costs of debt repayments incurred when governments decided they had no option but to bail out the bankrupt banking sector in 2007 and 2008 and issued monstrous amounts of new credit in the hope that it would stimulate a ‘recovery’.

Despite better than expected growth figures for the UK in the last half year, its economy hasn’t even recovered half of the production it lost during the first part of the dive into its worst post war recession.

Meanwhile, the world economy is heading into a renewal of decline. Look at South Africa for example. Unemployment there is growing relentlessly beyond 25%. If the workers who’ve given up looking for a non-existent job are included the figure is over 36%. Whilst carmaker Ford has used its government bailout to slash production, sell off Volvo and cut its involvement with Mazda and returned to profit, parts of America have an official unemployment rate of 20%. And one person in five out of work is the official rate for the whole of Spain.

With profit-seeking capitalist society no longer able to offer jobs to so many people – and forcing governments to slash support for the unemployed – belief in the system is being undermined. It’s no wonder that the dream weavers are hard at work spreading the myth of a ‘return to growth and prosperity’. As increasing numbers begin to realise that the game is up, the need for a society that is based on need rather than shareholder returns becomes increasingly urgent.

Cameron has just delayed the details of the growth package that was expected to follow the biggest assault on public spending since the post war creation of the welfare state. Could this be an admission that there’s nothing he can do besides opening the way for a few thousand jobs in off-shore wind turbine manufacture?

It’s high time people – workers, students, farmers, pensioners, the unemployed, communities – formed new kinds of democratic forums and began to explore how to use them to take things into their own hands. As illusions that the system can provide for people’s needs are broken up, there is nothing to lose and everything to gain.

Gerry Gold
Economics editor
http://www.aworldtowin.net/
27 October 2010

Are the banks about to fail again?

Last month the Irish government bailed out the banks again, forcing their budget deficit to balloon to an astonishing 32%. It was all too familiar, the banks have once again been bailed out with public money, yet remain in private control and with very little regulation or oversight. There was even the Irish Finance Minister, Brian Lenihan, popping up to say the biggest bank, Anglo Irish, was too big to fail.

People of course said that about Lehman Brothers, but it failed and the world did not implode. What has vanished though is many Irish jobs, welfare rights and public services - all apparently necessary to avoid a crisis. Instead the collapsing demand in the economy caused credit rating agencies to downgrade Ireland back in July.

And so to the UK, and today the New Economics Foundation (NEF) has published a report Where did our money go? Building a banking system fit for purpose, which warns "[UK] Banks set to demand fresh bail-out in 2011" and cites increased borrowing by them.

It also highlights the a "shocking" lack of information on how banks had used the bail-out money. Like Ireland a lack of ownership and control accompanied the bailout - criticised with great foresight by LEAP Chair John McDonnell at the time - and now we may be on the brink of further collapse.

Referring to the NEF report, LEAP's Graham Turner, from GFC Economics, said "the Bank of England also warned in its June Financial Stability Review that there will be a huge increase in refinancing requirements for UK banks in 2011. This remains a systemic threat."

Like Ireland again, the UK is about to embark on unprecedented mass public spending cuts - which would sap demand from the economy, and could possibly simply be the precursor to funding another bailout for the bankers.

If the UK banks do suffer a second round of collapse, then it is time to nationalise the assets as well as the losses and control the sector for public good not shareholder and speculator gain.

There's an excellent piece in today's Morning Star on this, Banks on the brink yet again - well worth a read.

'Creative destruction' order of the day

Despite the G20’s attempts at confidence-boosting rhetoric, the interdependent components of the global economy remain locked in a deadly embrace, wrestling with each other as they plummet to the ground.

Ever more desperate attempts to resuscitate the fantastic but failed world of credit and debt dilute the value of currencies and further worsen the health of the global corporations as demand falls for the goods they produce, sending their share prices down.

In Britain, all talk of a “recovery” later this year has disappeared and next week’s Budget is in fact a crisis measure as public finances spiral out of control. European steel production is close to collapse and a trade war with China is looming over its dumping strategy.

The Irish government is the first to admit in practice that neither additional government borrowing, nor expanding the supply of money can help its country withstand the impact of the global crisis of dwindling production and consumption. It won’t be the last.

In measures designed to forestall the looming threat of state bankruptcy, its emergency second budget looks like the flailing autotomised arms of a threatened octopus, when a limb is severed by the endangered creature.

In a so far maverick response to the shock forecast that economic activity in the Republic is forecast to shrink by 8% this year, a dramatic worsening of last year’s 3% contraction, finance minister Brian Lenihan warned of "a serious decline in national living standards: the sharpest fall on record.”

Taxes will rise, though not on corporate profits, and spending on services will be slashed. In the public sector pay will be hard hit affecting a large part of the population.

Nevertheless, with already the worst government deficit in Europe, and the entire financial sector in a state of collapse, a new Irish agency will be provided with funds to buy up the banks’ property and land-based bad debt. The catch here is that no-one knows what its real value is, nor what the price should be.

Elsewhere in Europe, rather than taking the route of printing money to add to the trillions already given or promised to the banks, Germany and France have been giving away vouchers in a new-for-old car scrapping scheme.

Demand for Germany’s €2,500 vouchers has been hugely successful. Far more people have applied than expected, and concern is rising about the public anger that will erupt when the money runs out. Angela Merkel’s surprised government has added a further €3.5bn taking the total available to €5bn.

Sales of brand new small cars have soared, but there’s a catch here too – it doesn’t seem to have increased consumption overall. The second hand market has collapsed completely and what spending there is, is transferring from other products like TVs and sofas.

As the crisis enters historically uncharted territory, governments are exhausting all the weapons they can use in their attempts to rescue the capitalist way of life. The Irish pioneers have opened the doors to a new phase.

Joseph Schumpeter, an economist high priest of capitalist business cycles, and an opponent of Keynes, described the process in his famous book, Capitalism, Socialism and Democracy, when he wrote: “This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.”

Gerry Gold
Economics editor
A World to Win
http://www.aworldtowin.net/