Taxing times as tech giants shift profits
The latest report by the United States rating agency Moody’s on the cash reserves of America’s non-financial companies shows a total of $US1.7 trillion held in their balance sheets. The top five cash holders are all information technology companies: Apple, Microsoft, Alphabet (parent of Google), Cisco and Oracle. They held a total of $US504 billion at the end of 2015. Apple alone sits on $US215.7 billion. These companies are richer than most of the world’s states. Australia’s foreign reserves, for example, are $66 billion ($US47 billion).
Some 70 per cent of the $US1.7 trillion is held outside the US, to avoid the corporate taxes that would have to be paid if it were repatriated. Apple keeps 93 per cent of its cash overseas. This is the result of aggressive tax planning to shift profits into low tax jurisdictions such as Ireland, where the corporate tax rate is 12.5 per cent.
The effect is a reduced rate of reinvestment in the businesses, worrying shareholders about what happens when demand for the current products is sated, and a shrinking of government revenue that leads to cuts in health, education and welfare budgets. The latter effect is made worse by pressure from domestic business lobbies for lower corporate tax rates, as if their largest transactional members have any intention of paying them.
Of course, the companies protest they are complying with the tax laws, and indeed they are. But the undeniable evidence of corporate profit shifting through the loopholes has got conservative governments tied up in knots. In Britain, David Cameron’s government earned derision with a deal in January for Google to pay a meagre £130 million ($264 million) in back taxes for the previous 10 years, while allowing the company to keep routing its British revenues through Ireland.
In France, François Hollande’s Socialists are tackling Google more robustly. On Tuesday they sent the police into the company’s Paris office, seeking evidence for charges of financial fraud and money laundering. About 100 investigators and five magistrates were involved in the 5am raid. Fans of the French crime drama Spiral will know how rough and disrespectful this can get.
The prosecutors say they are trying to nail down Google’s story that it doesn’t control a “permanent establishment” in France, and that its 700 employees in the country are merely service providers to its office in Dublin. It’s been reported the French tax office seeks €1.6 billion ($2.48 billion) in back taxes, with no deal about the Irish route. Google paid only €5 million in tax to France in 2014, after reporting €216 million in earnings. Advertising industry researchers estimate real earnings were about €1.7 billion that year.
The battle has opened in Australia, too. Labor has announced a package to stop the lurk of multinationals using loans to Australian subsidiaries to divert revenue away to low-tax jurisdictions such as Luxembourg. The Coalition introduced a multinational anti-avoidance law last year, and Scott Morrison’s new budget has a diverted-profits tax. But experts have their doubts about the impact: Morrison himself expects to raise only an extra $200 million over four years. Perhaps, along with French submarines, Canberra could do with some advice from Paris on tax collection to help pay for them.
Barack Obama swung through Vietnam this week, as expected lifting the embargo on US arms sales to the former enemy regime. But his strategy for pushing back against China in the South-East Asia region is looking weaker, even if Hillary Clinton makes it to the White House as successor.
Clinton has eased the support she gave as secretary of state in Obama’s first term for the Trans-Pacific Partnership (TPP), a trade and investment pact that gave particular advantage to Vietnam, Malaysia and some other regional members. With Bernie Sanders now getting a strong voice in shaping the Democrat platform for the November election, she will have little wriggle room to return to a trade deal she once called the “gold standard”, and Republican presumptive candidate Donald Trump is an outright trade protectionist. Without US ratification, the TPP will die, and it was the most substantive part of the Obama–Clinton “pivot” to Asia.
Now another uncertainty comes with the election of Rodrigo Duterte as president of the Philippines. He takes office on July 1, about the time the Permanent Court of Arbitration at The Hague is expected to give its ruling on Manila’s case against Chinese claims to nearby maritime areas. The verdict is expected to go against Beijing, giving it a choice of defiantly going ahead with its island-building program or backing off.
Duterte, who comes from a regional city mayorship, is now suggesting he’ll step back from outgoing President Benigno Aquino’s approach of steady legal and diplomatic pressure, and seek an economic deal with Beijing, which would be music to Chinese ears.
More tension around Taiwan, too. In her inaugural speech on May 20, the island’s new president Tsai Ing-wen refused to deliver on a Beijing demand to repeat the so-called “1992 Consensus” whereby a former president from the rival Kuomintang, the Chinese Nationalist Party, gave a formula of words agreeing Taiwan and the mainland were “One China”.
Chinese communist supremo Xi Jinping had earlier said “the earth will move and the mountains will shake” if she did not accept the 1992 Consensus. Instead Tsai just said that in 1992 China and Taiwan had agreed to “set aside differences to seek common ground”. The best that Beijing got was a nod to the Republic of China constitution applying in Taiwan, which in theory covers the mainland as well − not the sort of “One China” that the Communist Party has in mind.
Beijing is expected to make life as hard as possible for Tsai, in the hope of a return to power by the KMT. Yet it has a dilemma. By applying prestrictions on trade, investment and tourist flows, it would make Taiwan less dependent on the mainland. This is Tsai’s objective anyway, which she hopes to partly achieve by joining the TPP. Her domestic program includes a truth and reconciliation process to address abuses during the period of KMT autocracy from 1949 to the early 1990s.
US and Israeli politics are ever more unaligned, threatening tensions to come as the region around the Jewish homeland seems to get more and more unstable.
In America, Bernie Sanders is the strongest-ever Jewish presidential aspirant, but he wants a more “even-handed” US policy towards the Israel–Palestinian issue and seems likely to get it written into the Democrat election platform. One of his advisers joining the Democrats’ platform drafting committee is Jim Zogby, of Lebanese Maronite Christian background, who hopes to elevate Palestinian rights in the draft and refer to Israel’s “occupation” of the territories it took nearly 50 years ago.
Meanwhile in Israel, Prime Minister Benjamin Netanyahu has appointed a defence minister who brings five more Knesset members to his coalition: the ultranationalist Avigdor Lieberman, a former nightclub bouncer from Moldova, who has previously suggested bombing Egypt’s Aswan Dam, deporting Arab Israelis to Palestinian areas, hanging terrorists and dismantling the Palestinian Authority.
This article was first published in the print edition of The Saturday Paper on May 28, 2016 as "Taxing times as tech giants shift profits".
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