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article imageOp-Ed: How to derail the corporate tax evasion gravy train

By Paul Wallis     Dec 25, 2012 in Business
Sydney - Corporate tax evasion is well known. However, there are a few holes in the methodology which might not be so legal. The Australian version of the situation may be a template for dealing with the situation.
The Sydney Morning Herald
Company documents filed with Australian, European and Asian authorities show the Australian arms of Apple, Google and eBay are part of complex networks of subsidiaries held by their US parents through intermediary companies in tax havens.
In April the Tax Office hit Apple with a $28.5 million bill for back taxes. Google Australia declared a loss of $3.9 million last year, and paid just $74,176 in Australian tax.
Google Australia also made about $2 billion in revenue in Australia, routed through Google Singapore. Normal corporate tax would have been a gross $650 million or so before deductions, but thanks to Singapore’s tax laws, none was paid.
So, what’s wrong with that, you may ask? A few things:
Point of sale for the revenue was actually in Australia, regardless of where the transaction was processed. Under the rules applying to Australia’s GST, a 10% tax would normally be payable on that $2 billion for services. Unless there’s an actual legally defined exemption for offshore banks, that tax is payable. That’ll be $200 million, thanks, Google.
It’s also quite irrelevant where the money is deposited. It’s where the revenue is acquired that matters. There’s no tax law which says that tax isn’t payable in applicable jurisdictions. Tax at the point of deposit has no bearing on whether tax on revenue derived in a tax jurisdiction is payable, wherever that money may go. Revenue sourced in Australia is taxable at Australian rates. That’ll be another $650 million, and don’t be evil about slow payment, please.
The British Virgin Islands, for example, have no corporate tax, which has made them the world’s tax haven. Those laws apply to the British Virgin Islands, not the source of revenue or anywhere else on Earth. By rights, there should be no defence at all for simply depositing the money somewhere else.
A Guardian article on Facebook’s tax manoeuvres reprinted in the Sydney Morning Herald explains the basic international tango for not paying taxes:
…..allowed Facebook Ireland to make gross 2011 profits of £840 million - or £3.1 million per each of its 287 staff. Despite the high gross profit, Facebook Ireland was able to cut its tax bill to just €3.2 million by using an accounting technique called the "Double Irish".
The manoeuvre allows multinationals to move large amounts of money to other subsidiaries in the form of royalty payments. Facebook moved nearly £750 million to the Cayman Islands and its Californian parent in licensing and royalty payments.
Twenty-six US corporations paid more to their CEOs than they did in US tax in 2011.
Twenty-six US corporations paid more to their CEOs than they did in US tax in 2011.
After the transfers, Facebook Ireland reported a £15 million annual loss, despite it accounting for 44 per cent of the social network's $US3.15 billion ($A3.03 billion) revenues.
Note the use of the phrase “after transfers”. This is the crux of the issue. According to the records, this money was transferred after revenue was earned, as well as being sourced in the UK. There’s the Achilles heel. The revenue already existed and it was obviously quite clear where this revenue was sourced. Unless that loss was incurred in Northern Ireland, where UK tax laws apply, it’s quite irrelevant.
Put it this way-
You sell a widget in Australia. You make $100 profit on that widget. Your point of sale in is in Siberia, but the actual service and transaction happen in Australia. Is tax payable on goods, services and the profit? Yes.
Without the source of revenue, there is no transaction. Accounting gymnastics have nothing to do with whether tax is payable. It is.
Not just online
Online companies have been singled out as the main transgressors, but it should be noted that under this current misinterpretation of rules, any sort of transaction could theoretically be sent offshore and avoid tax. Buying a car using your phone banking service, for example, could route the payment to the Caymans.
The legislators have apparently taken the “Wild West/no laws” myth of online transactions much too literally and put tax evasion in the too hard basket. In practice, there’s never been any defence at law simply because a transaction or an offence occurs in any particular place or another. Nowhere on Earth is really ex juris.
There are also mutual trade treaties, etc. If you sell something in Singapore, you’re not exempt from Singaporean tax simply because you sent the cash to Australia by phone. Why would you be? What possible sense does it make?
…And a bit of pure, bloody-minded pedantry
There’s a Catch 22 here for tax dodgers as well, and it’s a beauty:
• If you’re a company in Australia, you’re required to comply with a range of standard accounting practices.
• If you source revenue in Australia, accounts must comply with the mandatory accounting standards for both corporate law and tax law purposes.
• If you claim that money received from Australian customers wasn’t derived within Australia for purchase of goods or services, you’re automatically in breach of statutes for your accounting practices.
• Any claim that the money wasn’t sourced from Australia is not only demonstrably wrong; it’s also a fully documented form of fraud.
A caveat
In my opinion, there is no defence at all for any corporation claiming exemption from tax as a result of payments being directed anywhere on Earth. The revenue is earned at point of purchase wherever that may be and tax is therefore payable.
That said, the tax evasion practices above are not yet deemed actually illegal, and soggy legislation in various countries may well allow some version of tax evasion to occur in theory for corporate tax. If so, that legislation needs to be tightened immediately.
The evasion of VAT and GST in the UK and Australia is far less ambivalent. These laws have catchall provisions. A service is provided, therefore tax is payable. It’d be a good idea if this angle was explored in detail.
The guts of politicians
It remains to be seen whether lawmakers (or in the case of the US, law fakers) have the intestinal machinery to glue their revenue models together at the expense of their patrons. It seems very unlikely that even with fiduciary Armageddon being rolled out every day that simply collection payable tax is going to happen without more tantrums. A few billionaires might be short of a few bucks, so the news will be full of heart-rending cries of socialism and the inequality of expecting people who earn more in an hour than 99% of the population earns in a year being expected to pay a pittance.
So the questions are:
Will the world’s invertebrate politicians suddenly develop guts? Probably not.
Can existing laws be used to enforce tax payments? Probably so, if correctly interpreted.
My suggestion to politicians is to do what they do best- Avoid the issue, say it’s part of complex legislation and generally duck any sort of responsibility. Let the law take its course and the money will be received, making budgets a lot less painful.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
More about corporate tax evasion, Australian GST, UK VAT, British Virgin Islands tax haven, AAS27
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