The term “tax avoidance” came into public awareness in 2012 when the British MP’s shunned light on Google’s, Amazon’s and Starbucks tax payments. It turned out that the companies were paying nothing close to the official tax rate. For example, Google had sales of £2.5bn but only paid £3.4m in taxes. When investigations were made, it turned out that the companies had done nothing illegal. They had acted in the letter of the law but not in the spirit of the law. They avoided paying taxes by exploiting loopholes within the tax regime and making use of differences between the tax laws of different countries. Having clever accountants, lawyers and finance experts companies can save millions while the tax regimes lose the equivalent sum.
In the United States from the year 2009 until the year, 2018 Amazon paid an effective tax rate of 3 per cent while the official tax rate was 35 per cent until 2017 when Donald Trump lowered it to 21 per cent. In fact, during some years Amazon even received federal tax rebates. Amazon is not an exception when it comes to avoiding taxes. According to CBS News, 60 profitable Fortune 500 companies paid no federal income taxes in 2018. The amount that they should have paid if they had not taken part in tax avoidance would have been $16.4 billion. The big companies have become so good at what they are doing that they even received a net tax rebate of $4.3 billion.
Multinational companies operate in numerous different tax regimes through their subsidiaries. In this way, they can take advantage of the differences in the tax laws. There are multiple ways how they avoid taxes but it mostly comes down to moving capital between their subsidiaries in different ways. Companies want to increase their costs because they are taxed based on the profits they make. As profit is equal to revenue minus costs, then the bigger the costs the smaller the tax they have to pay. Of course, the companies don’t want to increase actual costs but they want to increase costs artificially. This is done through e.g. intracompany transactions. Using this method, a company can borrow money to its subsidiary where the other subsidiary receives the interest payment and the other one has to pay it. The company that receives the payment marks it down as a profit and the other one as a loss. The company will then make sure that the losses are realized in a high tax country and the profits in a low tax country. Costs can also be incurred in other different ways such as royalty payments which have the same result as interest payments. Intracompany transactions are just one of many different tricks companies use. Another popular way of avoiding taxes is to funnel the money into tax havens. Once the money is funnelled into a tax haven it is only going to be taxed if it is repatriated. But still while holding the money in a tax haven companies can earn interest on the money which of course is tax-free. The tricks companies use have become widely known and the media has named some of the tricks. The “Double Irish” and the “Dutch Sandwich” are maybe some of the most well-known terms linked to corporate tax avoidance. Trough the use of these corporate tax avoidance tools multinationals were able to funnel $1 trillion into tax havens between the years 2004 to 2018.
By avoiding taxes companies try to increase their shareholder value. However, the tax that they are not paying is then taken away from the public services. In this way, tax avoidance increases inequality as most of the shareholders tend to be wealthier individuals who receive bigger dividends as the tax burden of the company decreases. On the other hand, people who would benefit from public services are gaining less. If we want to increase the well being of the general public then it might be better to start thinking of companies working for the public and not only for their shareholders.
Action has been taken to get rid of tax avoidance. For example, the OECD has made an action plan to reduce tax avoidance and the European Commission gave Apple a $13 billion fine for taking part in it. In 2013 Google executive Eric Schmidt spoke about the benefits of a tax reform which would decrease tax avoidance. However, a couple of years later, The Guardian was able to reveal that Google was one of the companies lobbying against OECD tax reforms using the name the Digital Economy Group. This just shows that what the executives say can be very different from what they actually do. In addition to the difficulties in getting rid of tax avoidance, countries also compete for tax revenue so they don’t necessarily want to make changes as these could drive companies away from their countries. This is especially true for countries that implicitly allow tax avoidance. These countries benefit from companies moving into their tax regimes. Such countries are for example Ireland and the Netherlands.
Politicians in the US such as Elizabeth Warren, Bernie Sanders and Alexandria Ocasio-Cortez are proposing to increase taxes on the rich. If companies were to be affected by these possible changes in the tax rate then the loopholes in the tax laws should first be closed. In the case that the loopholes were not closed the increased tax burden would be borne by the companies acting in the spirit of the law. Meanwhile, the loophole exploiting companies would continue in their old ways.