Chasing Taxable Income Worldwide
Source：Top Photo Group / AP
Around the globe, large multinationals and rich individuals legally exploit asymmetrical regulations and avoid paying trillions in taxes. But the hunt is on, as international bodies devise means to make them pay their fair share.
Chasing Taxable Income WorldwideBy Monique Hou
After four years of preparatory work, a global chase for taxable corporate income will eventually kick off in July.
The main players behind the scheme are the Paris-based Organization for Economic Cooperation and Development (OECD), the Group of Eight (G8), the Group of Twenty (G20) and the five BRICS countries (Brazil, Russia, India, China and South Africa). The targets they are going after are multinational corporations and individuals around the world who evade or avoid taxes.
The initial report on the project, published by the OECD in February, is titled "Addressing Base Erosion and Profit Shifting"(BEPS).
Pascal Saint-Amans, director of the OECD Center for Tax Policy and Administration, has said that the action program will most likely lead to a rewriting of the international tax architecture. Its ultimate goal is to make it impossible for multinational enterprises to hide any income and ensure that every single dollar in profits is taxed.
The OECD Secretariat is slated to finalize the report and the project's implementation timetable by the end of May. After adoption by the 34-member OECD in June, the program will be submitted to the G20 meeting in Moscow in July. Should everything go according to plan, the initiative could be implemented next year.
The political motive behind the program is the rising inequality in free market societies, as described by economist and Nobel Prize laureate Joseph E. Stiglitz in his book The Price of Inequality. The richest use corporations to protect their wealth, to conceal income and use their influence to make sure that corporate tax rates remain low or that corporations do not need to pay any taxes at all.
In the wake of the 2008 financial crisis, a consensus has gradually grown worldwide that such abuse of taxation must be brought to an end.
On May 21, Apple Inc. CEO Tim Cook was asked to testify at a congressional hearing on the company's untaxed overseas income. A congressional panel found that Apple had shifted billions of dollars in profits out of the United States into affiliates based in low-tax Ireland. In this way Apple avoided paying taxes on at least US$74 billion in revenue between 2009 and 2012.
The Apple case highlights the currently most popular corporate tax avoidance scheme: By shifting profits to subsidiaries in tax havens that levy no or low taxes on companies, multinationals can legally avoid paying business income tax in high-tax industrialized countries. This allocation of profits to tax jurisdictions is also known as transfer pricing. Likewise, multinationals do not need to pay capital gains taxes on shares sold.
Another tax haven is the British Virgin Islands, a group of some 50 isles in the Caribbean Sea. With a total surface area of just 153 square kilometers, they are roughly the size of the Taiwanese offshore island of Jinmen. While just 28,000 people live on the Virgin Islands, a whopping 820,000 companies are registered there.
An online query of the Taiwanese Ministry of Economic Affairs' company registration database under the keyword "Virgin Islands" yields 1,148 hits – foreign companies or Taiwanese companies posing as foreign companies that are registered in the Virgin Islands, but are investors in Taiwan.
Many more Taiwanese companies have established affiliates in other overseas tax havens.
Among Taiwan's top ten listed companies in terms of revenue, nine have established subsidiaries in tax havens abroad. The only exception to the rule is the petrochemical giant CPC Corporation.
Around the globe, widespread public outrage over corporate tax avoidance and tax evasion reached the boiling point last year.
Tax Avoidance Shames Multinationals
Newspaper headlines in Europe and the United States reflected such sentiment:
"Microsoft avoids paying £159 million in corporation tax every year using Luxembourg tax loophole." "Starbucks wakes up and smells the stench of tax avoidance controversy." "Facebook Italy searched for immoral tax evasion." "Google's £6 billion Bermuda tax shelter." "eBay accused of tax evasion in UK."
Actually, these companies are not exceptions. Over the past two decades, many countries designed preferential tax treatment in the form of reduced tax rates or tax holidays to attract foreign investors.
National tax regulations, however, have not been able to keep pace with globalization. Instead of regarding large multinationals as single entities, they treat them as groups of independent companies. As a result, companies can take advantage of the asymmetry of information regarding the tax systems of various countries to gain leeway for avoiding or evading taxes.
"Such leeway means that countries around the globe provide huge subsidies to multinational enterprises. These companies gain a competitive edge simply by banking on a reduced tax burden, beating domestic competitors by lengths," observes an attorney at one of Taiwan's three largest law firms. The attorney, who did not want to be named, acknowledged that virtually all his clients use similar tax avoidance schemes.
Addressing the World Economic Forum earlier this year, British prime minister David Cameron declared war on tax avoidance: "Individuals and businesses must pay their fair share. And businesses who think they can carry on dodging their fair share or they can keep selling to the UK and setting up ever more complex tax arrangements abroad to squeeze their tax bills right down, well, they need to wake up and smell the coffee, because the public who buys from them have had enough."
Cameron, who currently holds the G8 presidency, has said that fighting the scourge of tax evasion and tackling aggressive tax avoidance will be at the top of the agenda at the leaders' summit in Northern Ireland in June.
As multinationals shift profits to low-tax countries to minimize their taxes, the treasuries of many countries are hemorrhaging money, as the revenues they should receive escape their grasp.
The Economist magazine estimates that US$20 trillion (about NT$600 trillion) in corporate tax money is sheltered in the world's 50-60 tax havens.
Official figures by the Chinese government estimate that China loses 300 billion renminbi in tax revenue every year (about NT$1.5 trillion), because multinationals use clever accounting to shift profits to tax havens.
For their part, most multinationals argue that shifting profits to minimize taxes is not illegal at all, that it is a legitimate way of saving on taxes, and not tax avoidance or evasion.
However, the average taxpayer sees things in a starkly different light. "Anger grows over large companies' tax bills as attention turns to eBay and Ikea," and "Google, Amazon, Starbucks: The rise of 'tax shaming'" are recent headlines that reflect how much public opinion has turned against the multinationals and that their brand reputation is taking a dive. In Britain, U.S. coffeehouse chain Starbucks even faced a consumer boycott.
Public Outrage Emboldens Global Chase for Tax Avoiders
The U.S. Congress has already adopted the Foreign Account Tax Compliance Act (FATCA), which requires the reporting to U.S. tax authorities of foreign financial assets and offshore accounts held by U.S. taxpayers.
China has also issued three circulars updating tax regulations, which allow levying a capital gains tax between 10 percent and 20 percent on the transfer of shares by non-resident enterprises holding stakes in foreign or domestic companies in China via offshore holding companies.
Australia, Britain and Italy are also stepping up efforts to chase tax evaders. In a meeting in January this year, the heads of revenue of the BRICS nations agreed to extend mutual cooperation to prevent tax evasion and avoidance and confront non-compliance with tax laws internationally.
The best weapon to fight immoral tax avoidance is transparency.
During the past five years, the OECD has worked on greater transparency in taxation and mutual exchange of tax information, while also debating the action program as a basis for international cooperation in chasing taxable income.
The OECD's Pascal Saint-Amans notes that so far more than 40 countries have signed information exchange agreements, including the Cayman Islands, a well-established offshore tax haven in the Caribbean.
Companies would no longer gain any benefit from avoiding taxes if their entire global revenue was taxed without exception and if there were no significant differences in tax rates for countries around the globe. That is also the direction the OECD and G20 efforts are headed.
One law firm head, who felt compelled to help his clients exploit tax loopholes in the past, breathes a sigh of relief given that immoral tax avoidance has come under fire worldwide. "We advise our clients to take into account their business reputation and slowly phase out use of such tax manipulation," the attorney said on condition of anonymity.
Whether Taiwan, which is not a member of any international organization, will be able to realize tax fairness will be an important yardstick for the well-being of its people.
Translated from the Chinese by Susanne Ganz