Tech's Tax Maneuvers Are Becoming an Expensive Embarrassment

The tide has turned, the ship has sailed, the train has left the station. Use whatever hoary old cliche you like, but the argument that tech deserves special tax advantages to protect its fragile growth? Stick a fork in it. It's done.

The reasoning behind those advantages started to wilt when 20 year olds in cargo shorts and t-shirts started buying Maseratis and their own personal 757 passenger jets.

It went into convulsions and died when it became apparent that tech was not creating jobs, it was killing them. There is no polite, diplomatic way to say this. Technology adoption cycles can run 40 years or more. At this point, more jobs, especially good, decent middle class jobs, are being eliminated due to tech than are being created. That may well change at some point in the future. But in the long run we're all dead. In the meantime, people have to make a living.

Jobs in retail, administration and processing, manufacturing, customer service, government, hell, even waitering and waitressing are being supplanted. Much of the work that used to be done by the phone, cable, bank and health insurance companies, just to name a few,  has now been foisted on customers in the name of 'efficiency.' It only takes a couple of experiences with a phone tree, a FAQ list or an unsatisfying web chat to learn that the customer is far from always right. Consumers, who also happen to be voters, get it - and they see who's benefiting.

So for tech companies to then demand that they be excused from paying taxes on the one hand while consistently announcing record earnings with the other creates a disconnect. And it pisses people off, a sentiment they communicate to their elected representatives. Who are starting to act, as the following article explains.

Amazon has had to accept tax impositions as the cost of doing business. Apple is watching its sweetheart Irish deal go down the drain. Google is suffering the death of a thousand cuts in Europe. The others will to follow. But as a first step to staunch the bleeding, pleading special circumstances in a developed world where household incomes are declining is tone-deaf, arrogant, counterproductive - and will end up costing more than the advantages ostensibly gained. JL

John Gapper comments in the Financial Times:

An asset can turn into a liability, and this is as true of tax structures as of corporate divisions. Governments are lining up to declare they are shocked, shocked to discover that tax avoidance is going on in their countries.

Every so often, a company announces that it is considering its “strategic options” for one of its businesses, which means that it wants to ditch it as soon as possible. This would be a good time for technology companies to consider their strategic options for their global tax arrangements.

Apple, Google and others were allowed – indeed they were encouraged – by governments not to pay very much corporate tax. It was enough that they brought their innovation, skilled jobs, and halo effect to town.

The way this once worked is nicely shown by the European Commission’s case against Ireland for giving selective state aid to Apple by cooking up a favourable tax deal. Both sides deny that they broke the rules but the admission by an Apple executive that “there was no scientific basis” for the tax figure that it proposed to pay to Ireland will take some explaining.

An asset can turn into a liability, and this is as true of tax structures as of corporate divisions. Governments are lining up to declare they are shocked, shocked to discover that tax avoidance is going on in their countries.

“Some technology companies go to extraordinary lengths to pay little or no tax here,” George Osborne, the UK chancellor, complained to his party’s annual conference on Monday. “If you abuse our tax system, you abuse the trust of the British people.” This is, of course, the same Mr Osborne who is riling other countries not only by cutting the UK’s headline rate of corporate tax to 21 per cent to compete with Ireland’s 12.5 per cent, but also by creating an aggressive “patent box” regime to lower the tax burden on intellectual property.

But there we are. Politicians twist with the popular winds, and tax structures that allowed companies to pay minimal levels of tax on international income and store up cash offshore (only being taxed on it if they return it to US shareholders) are not acceptable any more. Technology is rapidly acquiring the same reputation as banking, of being dependent on welfare.

For these companies, one logical response would be: governments make the rules and they comply. The UK has long permitted Google to sell advertising in Britain while concluding the contracts in Ireland – one reason why the company paid only £20.4m of corporation tax last year on $5.6bn of revenues. As I have argued, politicians can resolve tax inequities if they wish.

They are starting to act. As well as Mr Osborne’s imprecise promise to clamp down on arrangements such as Google’s Irish diversion, France has presented the company with a tax bill for a similar device. Even Ireland, the friendliest of EU tax havens, may end the “double Irish” diversion of taxable profits to offshore centres such as Bermuda, used by Google.

Governments line up to declare they are shocked, shocked to discover tax avoidance is going on

There are two drawbacks to simply waiting for laws to change and then obeying. One is that it could become embarrassing. The most striking aspect of this week’s EU case is how it lifts the lid on tax negotiations. Instead of public company records, we can all examine private lobbying and fixing.

This draws attention to a reality that, like sausage-making, usually remains hidden and makes the consumer feel queasy. Governments are the nominal targets of EU state aid cases but companies suffer at least as much reputational damage – Apple and Fiat dominated this week’s headlines, rather than Ireland and Luxembourg.

More headlines are to come. Not only will there be other EU state aid cases but the attempt by the OECD, the wealthy nation think-tank, to stop companies evading the taxation net includes a push for more transparency in the tax arrangements offered by countries to favoured industries. Openness sounds like something to which nobody could object; it means in practice that others will be held up to ridicule.
The second drawback is greater still. Waiting patiently for politicians to negotiate changes to international tax treaties is one thing; being hit by various governments shifting their tax laws at will is another. Banks know what happens when an unpopular industry becomes a global target: each country imposes its own toll.
The original point of the 1920s global tax agreements that are creaking under the strain of globalisation and the fact that intellectual property can be moved to low-tax regimes was to preclude double taxation. The unintended consequence is that some companies can work around even single taxation, or defer it indefinitely.
The OECD is making faster progress towards fixing the gaps in the system than one might have expected, given that it is having to corral 44 countries with different interests. If progress continues, multinationals that have exploited distortions such as the “double Irish” will pay more – although not as much as politicians suggest – and the system as a whole will endure.
Technology companies could live with that. It would be far worse to return to a world of taxes being levied by any country in which they are regarded as fair game. Mr Osborne’s pledge reflected a wider appetite among UK politicians for ignoring the Irish structure and levying a “Google tax”.
If that happened and the go-it-alone approach spread, it would cause huge difficulties for technology companies and other multinationals. Tax structures that are such a financial liability are not worth keeping.