IT WAS meant to win plaudits for clawing more money out of cunning, tax-shy multinationals. Instead, a deal between Google and the British government, in which the tech giant will pay £130m ($185m) in back taxes covering a ten-year period, has attracted only opprobrium.
Critics at home and abroad argue that Google has got off lightly. On the European mainland, for example, suspected corporate tax-dodgers face raids and whopping demands: France wants €500m ($550m) or more from Google. Apple could be on the hook for $8 billion if the European Commission, which is investigating its Irish operations, concludes that it got a cushy deal from the Emerald Isle. Britain may well have been too generous to Google. But the bigger problem with the deal is what it says about international efforts to crack down on corporate-tax avoidance.
Organisation for Economic Cooperation and Development
Nineteen for me, one for you
Corporate taxes are a poor way to raise revenue. Since the burden is ultimately borne by people, whether investors, workers or consumers, it would, in theory, be more efficient to tax them directly. But abolishing corporate levies would create its own problems (see article). In poor countries with large informal sectors, big companies are a rare source of reliable tax revenue. In rich countries, wealthy people would doubtless turn themselves into companies to avoid income taxes. For policymakers, therefore, the priority is to make corporate taxes less distorting and less easy to avoid.
The rules governing the taxation of multinationals are a threadbare patchwork of national laws and bilateral treaties, dating back almost a century and designed for an age of manufacturing, not multimedia. They grow ever more gameable with the spread of e-commerce and companies’ increasing reliance on intangible intellectual property (IP). Technology and drug firms, for instance, routinely move their IP to subsidiaries in tax havens, which can then manipulate the fees they charge other parts of the group for access to it in order to suck their profits into the lower-tax country.
These manoeuvres may be legal, but their goal is tax avoidance, often in a way that flouts the spirit of the law. In an era of austerity, that offends the public mood, which is why governments around the world are being pressed to implement dozens of anti-avoidance measures proposed last year by the OECD, a club of mainly rich countries. Many of these measures make sense. They seek to tie tax more closely to economic activity and also to limit some arcane but hugely profitable tricks, such as using internal loans to claim tax deductions. Progress at the OECD is spurring action: indeed, as part of its deal with British tax authorities, Google has agreed to pay tax in future on a chunk of its sales to British advertisers.
The problem is that the OECD approach maintains a damaging fiction which is ingrained in the current system: that a multinational can be seen as a cluster of separate companies to be treated as if they are trading with each other at arm’s length. The “transfer pricing” rules that police this system are complex and flawed. Keeping this approach, but toughening up the policing, means creating yet more rules—and loopholes.
Better to think of each firm as a single entity. Then countries could either agree to share the tax on companies’ worldwide profits according to a formula that takes account of their sales, employees, assets and so on; or allow the entire worldwide profits to be taxed by the home country, with a tax-credit mechanism for countries where the work actually goes on or revenue is earned—but, crucially, not brass-plate jurisdictions—in order to avoid double taxation. In both cases, the incentives and opportunities to move profits into tax havens would be greatly reduced.
Instead of this unitary approach, however, the patchwork persists, and with it the likelihood of unco-ordinated national tax policies. This is the context in which Google and the British government forged their deal. The bill presented to the company looks from the outside like a sweetheart deal, but it is impossible to be sure because you cannot know how it was calculated. This lack of transparency will do nothing to increase public confidence that tax avoidance is being curbed. Nor, in the long run, will the Google approach help multinationals. If a lot of countries go their own way, at their own pace, the result could be tax chaos, a bloody battle over countries’ taxing rights in which overlapping claims cause the pendulum to swing back from under- to over-taxation.
Tax diplomacy, like politics, is the art of the possible. But failing to push harder for a radical overhaul, at a time when the planets were aligned for change, looks like a costly mistake.