How Amazon and Apple Do It
Lessons in the Art of Clever Tax Dodging
“Congress could act tomorrow to shut down tax haven abuse by revoking laws that enable and encourage the practice of shifting money into offshore tax havens.”
Richard Phillips, Institute on Taxation and Economic Policy
This is the seventh in a series on offshore tax dodging. The first in the series is here.
In the parallel universe of tax havens, there are two methods to sidestep tax:
● One is illegal called, ‘evasion’ (See: Easy Tax Evasion).
● The other is permitted by governments through tax loopholes and so is called, ‘avoidance’.
What you are about to read is all legal thanks to our politicians.[1]
Multinational corporations are permitted in law to:
● pretend that sales made in a high tax country are made in a low tax country.
● transfer intellectual property rights such as patents, from a high tax jurisdiction to a low tax one where royalties are not, or are minimally, taxed.
● pretend the corporation has expenses in a foreign country (which it does not) that are set off against that income.
These schemes are called ‘profit shifting that erodes a country's tax base’. Hence you may see the term ‘base erosion profit shifting’ (BEPS).
Amazon’s Ruse Uncovered
Corporations keep their financial information as secret as the Coca-Cola company does its formula for Coke. However, in 2012 Guardian investigative journalist Ian Griffith dug through US Security and Exchange Commission filings. Although Amazon was the leading bookseller in the UK, selling one in four books, it had paid no tax in the UK that year. He discovered that Amazon reported sales in Britain of $213 million, while its sales in Luxembourg were $11 billion.
What? Where? Luxembourg? It’s the last Grand Duchy of Europe. With a population under 500,000, it’s a country smaller than the average American city. It’s also one of the world’s leading financial centers and recognized as being in the big leagues with New York, London, and Hong Kong.
How can little Luxembourg be so amazing? It sells something every corporation wants — ‘legal’ tax dodging at a very affordable price.
What’s the trick? Amazon established its European headquarters in Luxembourg. It so arranged its business model that a Brit buying a book in the UK is ordering from and paying to Amazon Luxembourg not Amazon UK. However, not a single book came from Luxembourg. The books were stored and delivered from Amazon UK’s warehouse.
Only a few Amazon employees are needed to keep up the façade of running a business in Luxembourg. Without Amazon’s tax, the average taxpayers of the UK are on the hook to provide the thousands of Amazon employees with healthcare, education for their children, etc. etc. Relieved of this burden, Luxembourg can give Amazon a very special tax deal and still reap a huge gain.
As a result of getting exposed for its profit, shifting, Amazon said it would book sales in Britain, Germany, Italy and Spain, but significantly not other countries where it sold product, especially developing nations.
A Company Without a Country
Apple gets the credit for conjuring up the idea of a ghost corporation. The late tax professor Edward Kleinbard dubbed them ‘ stateless corporations.’ This example of Apple’s genius at work in avoiding tax is detailed in a 2013 Senate Report. Here’s a quick rundown of one scheme from that report.
•The US taxes corporations by place of incorporation
• Ireland taxes according to where a corporation is managed.
Apple Incorporated a subsidiary in Ireland called Apple Operations International (AOI)— but it was managed in Cupertino. Since it was not incorporated in the US and not managed in Ireland, it fit the bill as a company without a country and not taxed in either country.
Apple admitted that five years prior to the Senate hearing AOI had not filed a tax return in any country. In that period, Apple told the Senate Committee that AOI had received $29.2 billion in dividends from lower tier offshore Apple affiliates. It did not pay a cent of tax to the US or Ireland on this income.
According to the same Senate Report, Apple had a bushel full of other subsidiaries. AOI had a subsidiary, Apple Operations Europe (AOE),which had 40 employees in Ireland who supposedly generated $42 billion in income. AOE paid tax of $7 million voluntarily (it wasn’t managed in Ireland and not subject to tax). That was at a rate of 0.005% but not Ireland’s corporate tax rate of 12.5% (Note the US rate is 21%).
Why It's a Big Deal
In a 2016 study entitled, The Effect of Profit Shifting on the Corporate Tax Base in the United States and Beyond, Tax Professor Kimberly Clausen found “that profit shifting is likely costing the US government between $77 and $111 billion in corporate tax revenue by 2012, and these revenue losses have increased substantially in recent years”.
In a joint study by the US PIRG Education Fund and Institute on Taxation and Economic Policy entitled, Offshore Shell Games 2017: The Use of Offshore Tax Havens by Fortune 500 Companies, the researchers found: “Most of America’s largest corporations maintain subsidiaries in offshore tax havens. At least 366 companies, or 73 percent of the Fortune 500, operate one or more subsidiaries in tax haven countries. All told, these 366 companies maintain at least 9,755 tax haven subsidiaries”.
The joint study noted the significant role played by Bermuda and the Cayman Islands Despite the small size of their economies, American multinationals implausibly claim to
have earned billions each year in these island nations. In fact, the profits that all American multinationals claimed to earn in Bermuda and the Cayman Islands totaled 18 times and 13 times each country’s entire yearly economic output, respectively”
In an article for the Tax Foundation, Professor Clausen observed that many corporations treat their tax department as a profit centre. Now resources that were once devoted to product development are dedicated to taking advantage of tax loopholes.
“The very intellectual abilities that would normally go into generating innovation or figuring out the best way to organize the production process are now at times diverted to the best way to report profit and the best way to arrange the accounting”.
We will see a few more of the ingenious schemes these brilliant tax planners have devised, next.
Yes, many corporations in those, and other jurisdictions, do the same type of tax avoidance. The OECD has formed a convention with 135 country signatures, including the ones you mentioned to stop tax avoidance with a 15% minimum tax. The developing world nations are not happy with it, saying it favours the developed world and are asking the UN to develop its own convention that will be fairer to the developing countries. The OECD report on progress of its convention is expected next week.
However, I believe there's a simpler solution. A country could say to any corporation that wants to sell product within its jurisdiction, that it must show the sales and pay tax according to that country's tax code. There's no need for a convention with complex terms as the OECD convention has –122 pages with explanatory memos to come.
Australia is trying this but the corporate lobby is blocking it. And I don't believe that the average voters in Australia, or anywhere, have the background to understand what's at issue. It may fail in Australia.
I saw Apple existence in huge measure in Cork Ireland in Fall 2016. It was so surprising to see so many Asian and American, and very young people swarming the restaurants and venues of the town unlike most of the cities of Ireland. Then we realize that Apple was based there for tax write off purposes, though, I know it did bring us time commerce to the area Apple what is the big winner?