Eddie Barnes: Taxing times as world looks to Cameron

The world is looking to David Cameron, as G8 summit host, to cut a deal that stops multinationals avoiding what they owe in tax. Picture: PA

Apple gets worshipped. When founder Steve Jobs died in 2011, for example, pilgrims held silent night-time vigils, using the electric lights of their iPhones instead of candles to bear witness to their loss.

So when his successor, Tim Cook, the new leader of the Apple religion, found himself hauled before angry US senators last week, the experience must have been unusual. No doting media waiting to find out what amazing new gadget the company had produced. Instead, there was Democrat Senator Carl Levin. Apple “wasn’t satisfied with shifting its profits to a low-tax offshore tax haven,” he thundered.

Instead, it pursued the “Holy Grail on tax avoidance” – a remarkable wheeze under which the firm had managed to create offshore subsidiaries which, despite being located on land, in Ireland, were effectively tax resident nowhere. In fact, the senators revealed, one subsidiary called Apple Sales International, located in County Cork, had paid tax of just “five hundredths of 1 per cent” on income of $74 billion over the past four years. Former Republican presidential candidate John McCain accused the firm of “depriving the American people of revenue”. The millions of ordinary taxpayers who have little choice but to cough up what they owe could have added that Apple, on this occasion, had clearly kissed the legendary luck-bringing Blarney stone.

For Apple in America, read Google in Britain. Its executive chairman, Eric Schmidt, had come over to the UK last week to take part in the firm’s trendy “Big Tent” event in the Herefordshire countryside. Normally, politicians would be expected to turn up and fawn, in the hope that some of the Google glamour might rub off on them. This time, however, was different. Schmidt was seen leaving a backdoor at Downing Street after a meeting with David Cameron. He then decided to stay away from his own gig, as Labour leader Ed Miliband gate-crashed the tent to lambast him for declaring that tax avoidance was “just capitalism”. “I can’t be the only person in this room,” Miliband told the firm’s executives, squirming in their seats, “who feels deeply disappointed that a great company like Google should be reduced to arguing that, even though it employs thousands of people in the UK, and makes billions here, it is fair that it should pay a fraction of 1 per cent in tax.”

For bankers from 2007 to 2012, read multinationals today. Fed up and tired after five years of recession, citizens in the west have run out of patience with the elites who appear not to be suffering. And whether they are American Republicans or British Social Democrats, the politicians are piling in.

Pro-business figures may claim we are witnessing the latest episode in the game of “Blame The Rich Guy”. An assault on the profits of these big firms will only have the effect of cutting back the West’s chances of recovery, they warn. But it appears that the political mood is set; it is time for the multinationals to pay up. According to some estimates, there is a staggering $21 trillion of private wealth sitting in tax havens, billions of which could be being paid in tax. How do the super-rich and the multinationals do it? And are politicians finally going to make them pay up?

Corporate tax avoidance is now so high up the political agenda that tackling it is now expected to be one of the dominant themes of the G8 summit of western leaders in Northern Ireland next month. But even the firms’ numerous critics agree that no laws are being broken. The beauty of a global system with more than 700 tax jurisdictions to pick and choose from is that, with smart lawyers and accountants at your disposal, they don’t have to be.

Paul Collier, a professor of economics at Oxford University, suggests there are two easy ways to launder profits free of tax. The basic way is for a firm’s subsidiary in a high-tax country to sell its output at an artificially low price to a fellow subsidiary in a low-tax nation. This slashes the tax on profits the company in the high-tax country has to pay and boosts them in the country where little tax has to be paid. The practice is particularly acute in developing nations, says Collier, where tax authorities are struggling to keep up with clever accountants. “When I discussed with the Zambian tax authority why the copper companies were paying so little tax despite the high world price of copper, its officials ruefully explained that there were few smart accountants in Zambia, they all worked for the companies, and their job was to minimise tax,” he said.

This form of fixing is relatively easy to spot, however. And so, Collier says, firms have moved on to smarter methods. A company will set up subsidiaries in low-tax regions or tax havens. And these will then charge the parent company for services rendered – so taking on the profit of a product as they do so. For Google, it means ensuring that UK advertising deals are “closed” by staff in Dublin (despite its Northern Europe chief Mark Brittin admitting to MPs last week that a “lot of the aspects of selling” did take place in the UK). For other firms – technology, pharmaceutical and mining operations are in the firing line – subsidiary shell companies “provide” the intellectual property rights, or the brand rights, or the insurance and sales and finance expertise.

By this means the profit of a product stays in these jurisdictions – not in the actual place of sale where the tax take would be higher. Consequently, it means that there is only a tiny sum to pay in tax. Starbucks is said to have amassed sales valued at £3 billion in Britain since 1999, but paid only £8.6 million in Corporation tax, thanks to the fact that all the profit has been tucked away elsewhere (although it has since agreed to pay £20 million in corporation tax after the figures were published).

The firms in the spotlight over recent weeks do not dispute such practices. Instead they are asking what is wrong with them. All they are doing, after all, is boosting the value of their investors’ shareholdings. Defending Google’s own arrangements last week, Schmidt declared: “Virtually all of the American companies have tax structures like this. And there are analogous structures for European companies in America. But governments have a lot more power than we do. We have to follow the law and if the law changes we will absolutely follow it.”

Apple’s Cook claimed that the problem was with the US tax system which made it prohibitively expensive for firms with huge sums of money in foreign subsidiaries to move it back home. In a globalised world, in which consumers can shop around the world from the comfort of their living room, firms are simply doing the same: shopping about for the lowest tax rate.

Mark Littlewood, Director General of the Institute of Economic Affairs, notes: “Companies quite rightly need protection from being taxed and double and treble taxed on dealings within the business.” And, he added, we are forgetting the impact that expanding firms can have on an economy. Those on the political right would argue the answer is therefore to make the loopholes redundant by lowering tax across the board. Google is now expected to relocate its own activities from Dublin to London, enticed by the prospect of Chancellor George Osborne’s cut in corporation tax to 20 per cent. It is a path also backed by Alex Salmond, who last week declared he wanted to undercut Osborne and ensure that Scotland went as low as 17 per cent. Apple told US senators last week that it would be happy to move its billions back to America, but that, unless it decided to re-form as a charity, tax rates in the homeland made it utterly impractical.

Yet tax campaigners argue this ignores the moral dimension. How can it be right for profits to be allocated to subsidiary companies in low tax parts of the world which have had nothing to do with making them? And to crack down on this, attention is turning to the Lough Erne resort in Northern Ireland where, next month, Prime Minister David Cameron will host the G8 summit. The last time the summit was hosted in the UK was at Gleneagles in 2005, when it persuaded member states to double levels of international aid. Cameron has pledged to use his chance at the top table to crack down on aggressive tax avoidance by multinationals. Will he do so?

The test, argue the campaigners, is whether the eight nations – the UK, the US, France, Germany, Italy, Japan, Russia and Canada – will back a move to force firms to show the exact sums they make in each country they work in. Last week, the cause was taken up by the EU, with Europe’s top regulatory official, Michel Barnier, backing the measure. The idea is simple, says tax campaigner Richard Murphy, who has long demanded the “country by country” reporting. “If we could see into a Cayman Islands subsidiary then we’d be able to see the fix. I don’t think we’d be catching people because behaviour would change immediately.” The campaigners believe that once the wiring has been exposed, and people can see the huge profits being registered in shell companies, firms will quickly alter their behaviour to avoid a worldwide PR disaster. After all, globalisation works both ways. Or, as Collier puts it: “Transparency alone could discourage much tax avoidance because it could impose damaging reputational costs.”

Cameron has so far suggested he would only back such reporting on a voluntary basis. But, for the tax campaigners, mandatory rules are the acid test. The companies and, perhaps more importantly, the huge accountancy and legal firms which advise them on their various wheezes, are said to be deeply opposed to such plans. So, says Murphy, if Cameron doesn’t act “he’ll show that he’s afraid of big business”.

Meanwhile, for the firms involved, the discomfort goes on. At an event recently, Google’s co-founder and ceo Larry Page mused how it might be nice for technologists like himself to have “safe places where we can try out new things and figure out the effect on society… without having to deploy it to the world”. He was talking about a place to incubate new ideas. But it seems that Google and the rest of the world’s super-powered multinationals would quite like to keep their “safe places” for more down-to-earth financial reasons too. The question is whether the political elite that will gather in Ulster are going to let them.

Twitter: @EddieBarnes23