The financial crisis and resulting recessions have served to accelerate a process that was probably inevitable given the ever-increasing connectedness of the world economy. Rules and agreements made by sovereign governments a number of decades ago for the taxation of multinationals’ profits have not been fit for purpose for some time.
As one of the tax agreements contained in the latest batch of Lux leaks documents puts it, in relation to Black & Decker, it “in common with many multinational groups, no longer organises itself along geographic or country lines”. That sentence was written in 2003.
Multinationals can construct operational, R&D, treasury and intellectual property aspects of their operations in different jurisdictions and do so while all the time seeking to drive down the amount of tax they pay on their profits.
The global rules put in place so that companies wouldn’t find themselves being repeatedly taxed on their activities as they moved across jurisdictions, are now so unfit for purpose that companies are increasingly managing to avoid taxation of their activities as they move across, or between, jurisdictions.
The big four accountancy firms, which make so much money helping their clients avoid taxes, and which are themselves global in reach and significant lobbyists for new rules and laws that reduce taxation, play a key role.
The latest Lux leaks disclosures show how it is not just PricewaterhouseCoopers that has been busy negotiating advanced tax agreements with the authorities in Luxembourg. KPMG, Deloitte and Ernst & Young are also involved.
Protecting their own
Traditionally, tax authorities seeking to raise tax income within their own borders have been indifferent to their colleagues’ travails in other jurisdictions (in contrast to, for instance, customs services). Indeed, it is a feature of the modern world that governments can even frustrate the efforts of other tax authorities, while seeking to lure foreign direct investment to their shores, or to protect the interests of their native multinationals.
But now, with the increased connectivity that comes with modern technology, and the way western societies in particular are struggling to maintain the public services their citizens have come to expect, there is a groundswell of public anger about hugely profitable household names, such as Microsoft, Google, Facebook, Amazon, etc, managing to avoid tax while enjoying near-monopoly status in society.
One of the striking features of the Luxembourg disclosures is the existence of companies with millions and sometimes billions of euro in assets, and no employees. Yet these employeeless legal entities can serve to suck massive amounts of taxable income out of other jurisdictions, by way of interest payments, dividend payments and royalty payments.
One theme that has emerged from the global tax debate is a determination to align substance with (taxable) profits. The writing would appear to be on the wall for jurisdictions such as Luxembourg which have very successfully lured enormous amounts of money into their economy by way of brass plate operations.
With a population of just 500,000, it is hard to see how the Duchy can comply with the new dispensation apparently coming down the tracks, which will seek to better align substance and profits. By contrast Ireland, with substantial tech and pharma operations based here alongside key global tax structures, looks better placed.
At times it can seem as if sovereign governments are the lesser power in a contest with the globe’s corporate giants. Whatever about the rights of that, the fact is that if the scandalous practices currently commonplace in the multinational world are not brought to an end by way of international co-operation, they are likely to be brought to an end by way of unilateral actions by governments chasing the popular mood. Very few would profit from that, and profitable global corporations probably have the most to lose.
