Multinationals’ tax scandals

The essence of a successful tax system is that everyone is as happy as they could ever be to pay what they owe. US computer giant Apple faces a $14.5 billion bill for tax that the EU in Brussels has ruled was avoided in Ireland. Both Dublin and Apple are appealing the EU decision, which found that generous tax breaks granted to the US computer firm to attract it to locate and “brass-plate” many of its operations in Ireland, were illegal. The concessions granted by Irish tax authorities, like those dispensed to international companies by Luxembourg, contravene EU rules. The Irish government, of course, cut the deal because it wanted to create jobs and attract prestigious international corporations. Such tactics had much to do with the emergence in the 1990s of the Irish “Tiger” economy. This collapsed, arguably not because the model was wrong but because Irish companies and the public, just as in Greece, embarked on an unsustainable borrowing binge. Interestingly, the US government has been loud in its denunciation of the EU investigation into Apple’s Irish tax arrangements. This does not make a lot of sense. The Obama administration has protested the activities of major US corporations in “offshoring" their earnings to protect them from US tax, as well as relocating their corporate HQs outside of America for the same reasons. Apple has a huge offshore cash pile of more than $200 billion. Rather than bring that money home for reinvestment and dividends, as well as tax, it is actually borrowing to pay investors and to fund the development of new products. This makes even more sense in US tax terms, since the interest payments can be set aside the tax that Apple actually does hand over to the US Treasury. The problem with taxation law in so many countries is that it is now massively complex. For major companies with operations across the world, this has become a playground for legitimate tax mitigation, using loopholes that have occurred deliberately or through bad drafting. For understaffed and underfunded tax authorities, challenging the intricate stratagems put in place by extremely wealthy corporations is always difficult because these schemes have been designed by highly-paid accountants and lawyers. It can surely be no coincidence that the membership of many legislatures is dominated by - guess who - accountants and lawyers. Governments are clearly being deprived of billions of dollars of revenues every year. This means either that other taxpayers must pay more or governments have less to spend. There is surely an overwhelming case for an across-the-board and absolute simplification of tax codes. Personal and corporate tax rates are set and claimable expenses defined. Multinationals will pay taxes in the countries where income is earned. That tax rate of course may be different from their home country. Unfortunately, besides the catastrophic loss of income for the accountancy and tax-law professions, governments will be reluctant to be the first to introduce a system that might not be mirrored elsewhere. The risk would be that local companies might relocate to jurisdictions where they could continue to play fast and loose with the rules. Yet it seems clear that infinitely simpler and more transparent tax laws are an absolute necessity both for government incomes and to reassure ordinary taxpayers that they are not paying more than their fair share.