Is the U.K. a Tech Company Tax Haven?
News coming out of the United Kingdom is lending some credibility to rumors that American companies have been dodging overseas taxes. Starbucks (NASDAQ:SBUX) came under fire in October and is being investigated for suspicious activity, notably not paying any taxes while generating 398 million pounds ($635.7 million) in sales in 2011. Now, tech giants such as Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB), and Google (NASDAQ:GOOG) are in the spotlight.
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The Telegraph reports that Apple paid just 1.9 percent in taxes on $36.8 billion in profits made outside America in 2011. The corporate tax rate in Britain is 24 percent, in line with the average. However, by channeling its business through a subsidiary in County Cork, Ireland, the company is “legally” dodging the tax. Apple keeps about $83 billion of its $123 billion treasure chest offshore.
Facebook was accused of paying less than 1 percent of its 2011 revenue in taxes, and has attracted flak from the media for what some authorities have called “disingenuous and immoral” behavior. A growing list of incidents has prompted what could amount to a full-scale war against corporate tax evasion in the U.K.
Ireland in particular seems to be a hot spot for large tech companies who may be up to no good. Dublin already has 23 major cloud data centers, and more are on the way. Microsoft (NASDAQ:MSFT) is investing $1 billion to build an EMEA data center and Google is building a $100 million data center. Previously, Google was lobbying the government in Ireland for the rights to build out Internet infrastructure in the country. Google was the subject of criticism for paying only 6 million pounds ($9.5 million) on a revenue of 395 million pounds ($630.9 million) in 2011.
The common trick is to push money from the U.K. to Ireland and from there, through other havens in Bermuda or the Virgin Islands.
Deloitte pegs Ireland’s 12.5 percent corporate tax rate as the “cornerstone of Ireland’s industrial policy.” By comparison, the corporate tax rate in the United States is 35 percent, which is high given a global average around 25 percent.
The corporate tax rate has attracted a lot of heated debate in the soon-to-end American presidential election. Republican candidate Mitt Romney wants to see the corporate tax rate cut to 25 percent, arguing that the current rate is exactly the kind of thing that drives companies overseas to engage in “gamesmanship,” such as funneling money through subsidiaries an County Cork.
According to The Huffington Post, the top ten most profitable U.S. corporations paid an average tax rate of just 9 percent. Microsoft and Apple both made the list and, given reports out of the U.K., could join Google and Amazon in front of the Public Accounts Committee.
The issue is particularly a hot button in America because of candidate Mitt Romney’s connection to the business world and accusations that he paid as little as 14.1 percent on an income of $13.1 million in 2011.
The heart of the issue is a very real concern about how much the corporate tax rate affects a company’s ability to stay competitive. There’s no doubt that the more money a company has, the more it can reinvest in itself and the better it can compete. Every country on the planet approaches the issue in a different way, and some do it better than others. One indicator of how good or bad of a job they do is how many companies go overseas. On that account, America is pretty bad at taxes.
The debate is complicated and nuanced and there are a thousand arguments justifying and decrying why a company would jump through hoops in order to avoid taxes. Whether the solution is Romney’s proposed tax cut is a question for policy analysts and executives to hash out. However, it’s clear that the current system — whereby American tax code pushes companies overseas and then, once there, exploits loopholes — is broken.