Imagine by some turn of good fortune you earned $5.19 billion over the course of four years. What would you expect to pay in taxes? At least 40 percent or so, right? While that is the case for individuals, cunning corporations with earnings of that caliber continue to pay alarmingly paltry tax amounts thanks to sophisticated accounting techniques. This accounting sleight of hand is why four U.S. corporations operating in the U.K.–Google UK, Facebook, Starbucks, and Amazon–posted sales of about $5.2 billion over the last four years but paid just over $50 million in taxes, a tax rate of 0.97%.
If you’re outraged by this figure, you’re not alone. In the U.K., the egregious tax avoidance of firms like Starbucks has incited protests–a practice known as “tax shaming“–by citizens urging corporations to pay their fare share to support the nation. Protesters have also called for government officials to close the loopholes that enable corporations to shirk their taxes. Such loopholes call for accounting tricks so elaborate that a tax degree would help to make sense of it. The following synopsis helps explain the basics.
Income Shifting through IP Royalty Payments
Income shifting in the form of royalty payments is the scheme that enabled Starbucks, which had sales of $670 million in the UK last year, to pay no corporate tax. Starbucks managed to lower its taxable income by paying regular intellectual property (IP) royalty fees to its European headquarters in Amsterdam. The fees pay for the use of Starbucks’ IP, which is its name brand and business methods in this case.
The money transferred to Amsterdam is now subject to lower tax rates than in the U.K. Google, Microsoft, and Apple are some of the companies who regularly engage in shifting income to locations with lower tax rates, such as Switzerland, Bermuda, and Ireland.
Using Foreign Subsidiaries as Tax Havens
Another accounting method that allows multinationals to get away with the tax equivalent of murder is the use of subsidiaries in countries with favorable tax treatment. The best illustration of this practice comes from one of the worst tax-avoidance offenders, Apple. Foreign sales account for 60 percent of the company’s profits. They funnel the profits through subsidiaries in Ireland without being taxed. Ireland allows certain corporations to claim non-residence when they have an affiliation with a company that does business there. So, Apple channels its sales income through its principal Irish company which pays no tax.
Serial Loans
In theory, U.S. companies must pay taxes on monies returned to the country from foreign subsidiaries, including money returned via loans. Companies circumvent this by using short-term loans to give U.S. headquarters access to offshore monies sans tax liability. Corporations exploit the limits and exclusions in the tax code to set up continuous, or serial, short-term loans.
Europeans have already spoken out against tax-dodging and companies have responded. Perhaps if Americans also become disillusioned enough with the practice their outrage would catalyze the government and corporations to put an end to shady tax-avoidance wizardry.
