Corporate giants are allegedly using tax avoidance tactics. Questions are being raised over the methods which multinational giants use to avoid paying their often astronomical tax liabilities.
The point has been raised that in our increasingly global economy, multinational companies are far too easily avoiding tax payment obligations in countries where they have a large presence. At the end of March, tech giant Apple held $145 billion in cash and marketable securities, yet this week it still borrowed $17 billion. The money was borrowed to buy back shares and increase its stock dividend to keep investors happy. If the investors had been paid directly, Apple would have incurred taxes of $9.2 billion, but by borrowing and re-buying shares the way it did, Apple managed to avoid this mammoth tax bill. In addition, the money was borrowed at low interest rates of between 0.51 and 3.88% and the interest payments on this loan will be tax deductible.
Yesterday, the Australian Government turned to businesses and the public for a response to its new paper on multinational companies aggressive tax practices. The paper reveals that, since the onset of the global crisis, companies have been paying 27 cents per dollar in tax, compared to the statutory rate of 30 cents per dollar. The report is part of a wider Government inquiry into taxes which may see multinationals having to reveal exactly how they calculate their local tax bills. Google is another multinational company which has been accused of moving revenue in order to avoid paying taxes; in this case from Australia - which has a corporate tax rate of 30% - to Ireland which has a much lower tax rate of 12.5%.
Similar anger over this issue is bubbling in Europe; especially Britain, where last year, due to anger over its tax payments (or lack thereof), Starbucks promised to pay £10 million over their actual tax obligation in 2013/14 just to silence critics. In the past, Starbucks has avoided paying tax in Britain by claiming that the company loses money there. Questions were raised over this when it was pointed out that, for a company that allegedly loses money in Britain, it sure does buy in a lot of expensive coffee from overseas to stock the stores.
Many of these multinational companies are well known for directing their profits into tax havens with low corporate tax rates. Many tax critics in the US have called for a reduction in the corporate tax rate to avoid companies doing this in the future. Currently, the US corporate tax rate is 35%, one of the highest in the world. Tax law professor at The University of Michigan, Reuven Avi-Yonah, has said he thinks developed countries should cooperate and enact similar tax rules. He may get his wish as the Organisation for Economic Cooperation and development is currently conducting a study on profit shifting. Given the recent crackdown on tax havens in Europe and the agreement of the free exchange of information deal on money held in overseas bank accounts, it’s not unimaginable that multinationals will be next on the international tax hit list.