Corporate Tax

The New International Company Tax of 15%: Fact or Hype?

Headlines make a big breakthrough in taxing multinationals, especially big tech. The OECD (Organization for Economic Cooperation and Development) has announced an occasion to celebrate. One hundred and thirty-six countries agreed to enforce a global corporate tax rate of at least 15% and a fairer system of taxing profits where they are made.

But is it you?

Let’s look at how corporations do their tax evasion. In 2012, Ian Griffiths, an investigative reporter for The Guardian newspaper, revealed the surprising fact that Amazon had sales of $ 213 million in the UK while it had sales of $ 11 billion in Luxembourg.

What? Where? Luxembourg? It is the last Grand Duchy of Europe. With fewer than 500,000 residents, it’s a country smaller than the average American city. It is also one of the leading financial centers in the world and recognized as being in the big league with New York, London and Hong Kong. How can little Luxembourg be so great? It sells something everyone wants, something more valuable than gold, diamonds, or oil – tax breaks, and at a very affordable price.

The Financial Times described this Dutchy as follows: “Luxembourg sometimes resembles a criminal company to which a country is tied.”

Calling small Luxembourg a criminal company is a bit unfair because countries like the US – including their tax courts – have made these multinational corporation tax avoidance programs perfectly legal.

But calling little Luxembourg a criminal company is a bit unfair, as countries like the US – including their tax courts – declare that these multinational corporate tax avoidance programs are perfectly legal.

What does the tax haven get out of it?

While in the US and most developed countries the corporate tax rate would be around 30% (currently only 21% in the US), a tax haven like Luxenberg will only charge 2%. It will give the company a tax report guaranteeing this rate, provided the company also agrees to have a minimum presence in the country. So for its UK sales, Amazon will have most of its employees in the UK, but only one symbolic employee, if any, in Luxembourg. Hence, for these employees, UK taxpayers pay for health care, their children’s education and so on and so on. Luxembourg does not offer any of these services. The 2% is pure sauce.

Is it really such a big tax haven?

In 2014, Antoine Deltour, a Luxembourg auditor with PricewaterhouseCooper (PwC), was so upset about what he saw and how nothing was made of the Amazon revelations that he felt he needed to do something. It appeared on the French equivalent of 60 Minutes called Cash Investigations, describing small office buildings with a long list of large multinational corporations (MNCs) on the doorstep.

At one building entrance there were 340 MNCs on the list. Think of the names of all the big companies you know until you are too tired to continue: Microsoft, Amazon, Koch Industries, and so on and so on. Most of them will be standing at a door in Luxembourg. Of course, in this fairytale land of dreamy tax rates, the name “Disney” appears as expected.

Imaginary expenses

The creative ways tax attorneys and accountants come up with to cut taxes, and which are endorsed by government tax authorities, arouse admiration. Here is another one described by Tax Law Professor E. Kleinbard of the Gould School of Law in Course Notes he entitled, Through a Latte Darkly.

Starbucks can buy coffee beans directly from producers in South America, but has set up a company in Switzerland from which Starbucks US sources its coffee. The beans are not shipped to inland Switzerland, but directly to the USA. The Swiss company only processes the orders on their computers. Starbucks Switzerland invoices Starbucks US for this service and the IRS allows this.

So how does the tax officer allow this obvious evasion? There is a tax rule called “transfer pricing”. It allows a company to charge for internal services what it would pay if it had bought those services from an outside company. Starbucks was able to show that small coffee shops had to order through a broker who paid around 20% for discussion purposes.

Together we call this shift in sales and expense allowances Profit shifting.

How big is the loss for the US?

In the Fall 2014 issue of the Journal of Economic Perspectives, Gabriel Zucman noted that the tax haven secrecy surrounding this practice makes it difficult to estimate the exact amount of tax loss for the US, but he could give us a terrifying estimate that the US is losing outright from this legal tax avoidance method full 20% of corporate tax:

“Calculating the cost of tax havens to foreign governments is fraught with difficulty. However, balance of payments data and corporate filings show that US companies Profit shifts to Bermuda, Luxembourg and similar countries on a large and growing scale. About 20 percent of all US corporate profits are posted in such ports today, a ten-fold increase since the 1980s. “

What does the new reform do?

So before the reform we had fake sales locations plus imaginary expenses – remember, it’s all perfectly legal, but only because governments say so.

We might expect the reform to be simple and straightforward by requiring companies to declare 100% of their in-country sales on the country’s tax returns; For example, sales in the US would be reported as US income. Of course not. Simple reforms would prevent continued tax evasion. The reform stipulates that only 25% of sales made in a country have to be reported in the country, a full 75% remain in the tax haven. Now 75% is also taxed at 15%, but that goes into the tax haven. That’s still a lot better than reporting in the US with a base tax rate of 30%.

And there is one small exception: corporate profits are only taxed over 10%.

And if you think yes, but there are so many other deductions in the US that they don’t pay 30%. Well, the tax havens can give them the same tax breaks. The new reforms also include complicated safe-haven provisions and deferrals. It will be about 20 years before investigative reporters and whistleblowers uncover how little tax havens actually charge of the 15% of the 75%.

Complexity is used over simplicity to hide loopholes the size of freight trains in nested exceptions. (Dodd Frank via Glass Steagall is another example) You, the average voter, cannot criticize it, the confused phrase tells you because you cannot understand it, you must be in awe of this high level performance – and believe what you do is told about it.

However, Susana Ruiz, Head of Tax Policy at Oxfam, has the patience and expertise to read and understand the proposal. Here is their conclusion:

“The tax devil is in the details, including a complex web of exceptions that could let big offenders like Amazon off the hook. At the last minute, global corporation tax of 15 percent was given a whopping 10-year grace period, and additional loopholes leave it practically without teeth. “

Bidens 15%

Biden suggests corporate income tax of at least 15% for US based companies, but this applies to sales they make in the US.

In the end

The 15% or more corporate tax evasion reform is just another of many examples of financial reforms that appear to address economic inequality but do the bare minimum to preserve them. There is no need for the US or any other country to partner with any other country to tax sales made in their country. U.S. tax law could state that a sale in the United States is a sale in the United States

While the big headlines uncritically proclaim a big step forward that all companies will now pay a 15% tax, they fail to mention that the US is only getting 15% of 25% after 10% of US-declared sales have been deducted will.

I can’t put it better than Susana Ruiz from Oxfam: “Today’s tax deal should finally put an end to tax havens. Instead it was written by them. “

Reform may be a step in the right direction, but it is a baby step. But the Multi Nationals are now safe from an effective attack on their privileged tax systems for decades to come.

Jan D. Weir

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