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Should Google pay its fair share of taxes?

Ken Brown, MBA Programme Director

Faculty Blog

Why should companies pay tax?  An American billionairess once said ‘We don’t pay taxes, only the little people pay taxes’.  Big companies are thinking like that too – they don’t need to pay taxes if they don’t have too.

Companies like; Google, Amazon, Apple, Starbucks pay very little corporate income tax.  Shareholders will be very pleased, after all isn't this what the company should be doing; minimising taxes paid and maximising shareholder wealth.  Indirectly most of the working population would see some benefit through their pension holdings of these (tax avoiding) companies. But on a direct basis, most employees do not have large stock portfolios that benefit from this corporate tax avoidance.

As you can see from the diagrams, profits have been rising, but tax receipts are falling.

image 1

source:Economist.com

These large companies can take advantage of rules on domicile, setting themselves up in low tax jurisdictions (eg, Ireland) and then routing their profits through that location, even more tax can be avoided if they then route the profits through a Dutch subsidiary and then on to a subsidiary in a Caribbean location where there is zero tax.

The last few years have seen considerable sacrifices by employees – their wages have fallen in value in real terms, but at the same time companies are making record profits and paying less tax.  Many of the governments of the big western economies had to spend tens of billions to bail out the financial sector and then cut back on public spending because the fiscal deficit had widened too much.  What would really help narrow that gap would be higher corporate tax revenues, but instead corporate taxes have been falling as profits rise, because of the increased use of tax avoidance schemes.

Blog image - tax table 2 - Feb 14

Corporate tax avoidance by the likes of Google, Amazon, Starbucks & Apple has been a big issue in the UK over the last year and may emerge as a big issue again as the corporate reporting season gets under way soon.  What is it like in your country?  Do these companies pay a fair share of tax or do they avoid tax in your country as well?  Does this matter?  As mentioned earlier, are they not just maximising wealth for their shareholders?  What would happen if they were threatened with higher taxes?  They would take the divide and rule attitude; ‘if you make us pay higher taxes, we will locate elsewhere’.

 

Blog image - Apple taxes - NY times - Feb14

Source: NY Times

The companies are not doing anything illegal – they are legitimately setting up subsidiaries in Ireland, Holland and then in the Caribbean to legally route their profits to low or zero tax jurisdictions, while their main businesses will be in UK, France or Germany for example.  These main businesses may have revenues in the £billions, but profits will be in the low single figure £millions (if they pay any tax).

The stock market will see this tax avoidance as normal and expect companies to practice it.  There may even be a valuation discount on companies that don’t do this.  Companies can blame the markets for this behaviour, saying that it is stock market expectations for ever higher earnings that drive them to implement all these tax avoidance schemes.

Should the big companies pay their fair share of taxes or should they be allowed to carry on as they are doing and locate in tax havens and pay the absolute minimum in corporate tax?  If they should pay more tax, how is that to be achieved?

If companies don’t pay taxes, why should you?