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 |  Subject: Corporate Tax Loopholes Ripe for Crackdown: Thieving Statists Claim  Wed Apr 08, 2009 5:35 am | |
| PARIS — Government leaders are heralding the recent progress in dissuading offshore tax evasion through secretive havens like Switzerland, Liechtenstein and the Channel Islands. But what of the potentially bigger prize for revenue collectors: cracking down on corporate tax planning?
A patchwork of rules and divergent tax rates allows multinational corporations, especially banks, to set up offices outside their main markets and book earnings accrued over a broad area in the country with the lowest rate, shifting revenue away from countries that impose a higher tax burden.
By setting low corporate tax rates, countries like Ireland and Switzerland hope to tempt companies to invest, bringing added benefits like employment and research centers. They also set an atmosphere that prevents countries from raising corporate taxes out of fear that companies might flee if rates rise too high. Companies, of course, want to keep their taxes as low as possible.
But with Western governments shifting to a more interventionist bent as the recession deepens, the burden of re-filling their dwindling coffers will fall increasingly on hard-pushed and less-mobile workers. So the time may be ripe for countries to look again at closing loopholes for companies, according to some experts.
Mario Monti, the president of Bocconi University and a former European commissioner for the single market as well as a former antitrust chief, said there was a need to define exactly what constituted corporate profit; then, countries should try to agree on a floor for company tax rates that would not be breached. If that cannot be globally, he suggested, at least it might be possible regionally.
“Tax revenues are falling and each member is playing the role of tax haven relative to its partners,” Mr. Monti said. “How can governments take care of redistribution if their hands are tied?”
The agreements made with tax havens like Switzerland and Andorra before the Group of 20 meeting last week cover tax evasion and fraud. The Organization for Economic Cooperation and Development announced Tuesday that the four countries left on its tax haven blacklist — Uruguay, Costa Rica, Malaysia and the Philippines — have now committed to meeting international standards.
But Stephan Kuhn, tax chief for Europe, the Middle East, India and Africa at Ernst & Young, foresees no major changes for companies from the G-20’s pledges because the vast majority are not involved in tax fraud. Rather they are working within the complex web of rules.
“There is a freedom for moving capital and freedom to locate where you like,” he said. “Companies are constantly looking to save costs, and tax is a major cost.”
Officials cite some steps taken already against companies working offshore and argue that more companies will fall into line.
“We’ve made more progress in the last two months than in the last 10 years,” said Jeffrey Owens, director for taxes at the O.E.C.D., which has been trying for more than a decade to improve the exchange of information and avoid beggar-thy-neighbor tax policies. “We’ve moved very substantially to a level playing field,” he said, adding the recent agreements apply as much to companies as to individuals.
“We’re in favor of fair tax competition,” Mr. Owens said. “It’s up to each country to decide its own rate of tax.”
Corporate tax rates have been slipping in recent years and now range from 35 percent in the United States to 15.8 percent in Germany and 12.5 percent in Ireland, according to Ernst & Young. That does not take account of tax breaks like regional grants, and few companies actually pay the stated rates, since they are able to take advantage of a variety of complex tax breaks.
The situation becomes most contentious when assessing what balance sheet items should be accounted for where, and at what price. Transfer pricing, or booking the price of intercompany transfers of assets at sometimes artificially low rates, is a particular minefield for authorities.
“For big multinational corporations, paying tax is essentially optional,” argued Jason Sharman, a professor at Griffith University in Queensland, Australia. “The crackdown has been centered on individuals. Authorities are de facto allowing companies to play fast and loose with the books.”
BusinessEurope, which represents 20 million European companies from its base in Brussels, declined to comment on the issue.
The operations of a company like eBay, the U.S. Internet giant that owns the online calling service Skype, shows how complex corporate fiscal matters have become.
The eBay virtual marketplace runs across Europe and does not distribute physical goods. Its European headquarters is in Bern, where the corporate tax rate is on average 18.6 percent, according to BAK Basel, a consultancy. It also has subsidiaries registered in Dublin and a Luxembourg registration, which allows its E.U.-based users to pay the low Luxembourg value added tax of 15 percent.
In addition, eBay’s payment arm PayPal is registered as a bank in Luxembourg, while its U.S. operations are incorporated in the tax-friendly U.S. state of Delaware.
“Like many other multinational corporations, we are subject to tax in multiple U.S. and foreign tax jurisdictions and have structured our operations to reduce our effective tax rate,” the company said in its 2008 annual report. In 2008, eBay made a $404 million provision for taxes, about 19 percent of its reported income.
Other foreign companies with an important European presence in Switzerland include PepsiCo, Mattel, General Motors and GlaxoSmithKline. Microsoft, has used subsidiaries in Ireland to shave its annual tax bill.
Swiss officials argue that Delaware offers similar tax advantages.
According to the state, 63 percent of the Fortune 500 companies are incorporated in Delaware, which charges no income tax on corporations operating outside the state and has no tax on royalties, allowing some corporations to transfer ownership of trademarks and patents to subsidiaries in the state.
It is impossible to gauge exactly how much money is lost by national tax authorities from offshore centers. But there have been a few estimates, and some signs of action.
A report released in 2008 by the U.S. Senate estimated that some $100 billion in taxes could be evaded by the use of offshore tax shelters, including $30 billion to $60 billion from corporations.
A study this year by the U.S. Government Accountability Office found that many of the largest U.S. corporations operated subsidiaries in offshore havens that might let them evade or defer tax bills. It singled out Citigroup as having 427 subsidiaries in offshore havens like the Cayman Islands, British Virgin Islands and Switzerland.
A French government report in 2007 estimated the annual loss from fiscal fraud — including sales tax, personal and corporate evasion — at €20 billion a year, or $16.5 billion at current exchange rates.
A recent report from the publication Alternatives Economiques found that among the CAC 40 companies in France, there were around 1,500 offshore subsidiaries; banks were the biggest offenders.
Last week, Paris prosecutors confirmed they were investigating whether the oil company Total, the tire company Michelin and the French operations of sportswear maker Adidas had committed tax fraud through bank accounts in Liechtenstein. The companies denied the accusations.
In March, the British revenue service estimated that it had lost from £2.1 billion to £6.6 billion a year, or $3.1 billion to $9.7 billion, during the early part of this decade because of corporate tax avoidance. The Trades Union Congress, an umbrella union group, suggested that the figure is more like £12 billion.
In a statement, the revenue office said it “takes any attempt to get around the tax rules extremely seriously” and is “well aware of the type of avoidance structures referred to in recent press reports and has an excellent track record for closing them down.”
European Union countries tried to avoid what was called “a race to the bottom” by establishing a nonbinding code of conduct. It was completed in 1997 and has been updated periodically since then.
But, many analysts say, it is largely ineffective as there was no effort to harmonize rates. “There was a lack of political will,” said John Christensen, director of the Tax Justice Network, a group that aims to improve fiscal openness. The E.U. group studying the issue, he added, “operated in total secrecy and so it was prone to lobbying.”
The Tax Justice Network has proposed that companies should detail accounts of their activity in each country in which they operate. That, Mr. Christensen said, would also help identify risks building in the financial system. It would also raise the cost of doing business.
“Most politicians are still being very timid,” Mr. Christensen said. “Companies will always seek out the weakest link.”
http://www.nytimes.com/2009/04/08/business/global/08tax.html?ref=global-home |
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