Google and ExxonMobil run rings around outdated tax laws

Got away again. MarcProudfoot

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.

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