In Europe, for every euro that is paid in taxes by a multinational corporation, the host country loses up to 5 euros. Companies like Google, Facebook, and Nike, transfer large amounts of wealth to tax heavens in addition to being tax exempted by governments.
Taxing, especially when done without any positive results for those who are robbed of their efforts, is immoral.
But do you know what is also immoral? That multinational corporations are allowed to launder their enormous wealth, in addition to being exempted from paying local or federal taxes. The proportion of money spent on salaries and benefits to employees pales into comparison with the wealth that is laundered through tax heavens into the pockets of corporate owners.
Private enterprises are, without a doubt, the largest generators of employment, and while providing employment they, directly and indirectly, help move small and large economies. When people are employed they tend to, naturally and voluntarily, spend their wealth. This is not what happens with taxation, even though in many countries paying taxes should be voluntary, not forced.
In the same way that they are great generators of employment, opportunity, and ingenuity, multinational corporations are also the largest abusers of labor and tax policies.
No one can deny that the deplorable conditions under which people work in China, for example, are abusive, and a modern form of slavery.
Many wannabe economists explain that even though modern slaves work 18-hour shifts for little pay -literally cents of a dollar per hour- it is preferable for people to have something to do, rather than not having a job at all.
Most multinationals are allied with governments and such an alignment does not result in the best policies for the working middle-class or the poor.
For starters, governments are never in the business of ending poverty, and corporations are certainly not in the business of paying what is fair. They pay what legislation requires, both to employees and in taxes to their partner governments. This is why they migrate their factories to poorer countries, where wages are lower and taxes almost nonexistent.
Is this legal? Sure. In many cases. But legality is only one aspect of laundering money to tax heavens. Another issue is morality. As I said before, it is not moral to force anyone to pay taxes, not individuals and not corporations. It is not moral either to hide revenue in tax heavens, so taxes cannot be applied on such wealth while paying zero taxes to third world nations for generating a couple of thousand jobs.
But isn’t this what the free market is all about? Perhaps. In part. So, let’s see what the consequences are of hiding revenue, a practice that, by the way, does not only occur in poor countries.
In the case of Spain, multinationals avoid paying 13.5 billion euros a year that they then transfer to tax havens.
Although they have a part of their business based in a territory, these companies try to reduce the payment of taxes by artificially moving profits to other jurisdictions. A given country can lose an average of 10% to 30% of the corporate tax collection, some 2.6 billion euros that are evaporated by means of tax engineering.
How many benefits are diverted to other countries due to differences in corporate tax rates?
Which countries win and lose from aggressive tax competition?
According to Gabriel Zucman, a professor at Berkeley, a form of globalization must be found that is sustainable and does not harm the weakest. He believes that fiscal harmonization is a way to achieve it.
The statistical agency Eurostat provides a map of the benefits by countries, including those of multinationals.
Zucman dissected the data to see how many benefits move from where sales occur to countries with low taxation or tax havens.
In addition, they have taken information from business records. With figures from 2016, they conclude that multinationals move 36% of their profits to these jurisdictions. These include countries such as Ireland, Puerto Rico, Luxembourg, Singapore, Switzerland or the Netherlands.
They are also able to calculate the disruptions that these money transfers cause: on average, the affected countries lose 9% of tax collection.
How do they do that? Especially with the payment of “royalties”. The subsidiary of a multinational company, located where the activity takes place, is contractually obligated to pay a lot for these rights to the parent company located in a low or no tax territory.
Thus the benefits are artificially transferred. The prices of intragroup purchases are also manipulated to take the profit where it is paid less. It used to be done through loans between subsidiaries, whose interests are paid in the country with the highest taxation to obtain a deduction on the tax bill.
If the real investment of these companies is examined, their distribution by countries has remained the same in recent years, and so has been the personnel employed by territories. But what has sunk are the benefits declared in those places with high rates.
Companies like Google, Facebook or Nike hardly declare benefits in public records, Zucman says.
The solution to the tax diversion to tax havens is not, as Bernie Sanders and Elizabeth Warren propose, to force corporations to pay more taxes, by force.
There must be a national structure in each country that stimulates investment while promoting the reinvestment of the wealth generated in each country. For this to happen, there must be collaboration on the part of multinationals, which instead of hiding their benefits, should help develop the countries in which they operate. Today, this does not happen even in the most capitalist country in the world: the United States.
Corporate tax diversion is red, white and blue
According to Eurostat statistics, one can examine country by country in how much the profit is before taxes for each dollar spent on salaries. Its model compares with the same proportion in local businesses. It is observed that multinationals always have lower salary cost benefits than local ones, except in countries considered tax havens.
In Ireland, for every dollar spent on staff, multinationals show a profit of $16. On the other hand, in Germany, they only declare a profit of 20 cents for every dollar dedicated to staff.
Such differences are used to calculate how many profits are displaced. This methodology has been endorsed by the most prestigious academic journals.
The trend has accelerated in recent years. And it coincides with the number of subsidiaries gained by US companies in tax havens.
And why don’t tax agencies do more? The reason given by Zucman is that authorities seek to maximize the efforts to collect more taxes at the local level, but never have the guts to require multinationals to pay more.
Companies do not discuss these claims. However, when the way in which the benefit has been transferred to a low tax country is questioned, companies fight it with their lawyers until the end, and they often prevent the collection of taxes from being executed.
According to Linkedin, there are about 230,000 people worldwide working in the aggressive tax planning industry; what experts call transfer pricing, a discipline that allows the country to move benefits artificially. Thus, curiously, Ireland never appears in the statistics of disputes between tax agencies.
These practices distort business competition, reduce income of affected countries and, ultimately, increase inequality.
Having reduced both capital and wealth taxes, corporate income tax is the only way to make the corporations have minimal taxation. Especially since they often retain their benefits within companies to avoid payment.
It is important to note, once again, that taxing for the sake of it is not the way to go, especially because governments are the least capable entities to deal with large amounts of money.
It is also important to point out that if corporations were to pay more money for the benefits of operating in a country, such payment would not cut into their benefits, because the money that is laundered into tax heavens does not go to corporate accounts, but to individual accounts.
All that wealth goes into the pockets of people, not corporations, which, put simply, are a façade for them to accumulate billions each year. That is how they are later able to, with the power of their accumulated wealth, exercise influence everywhere, in politics, economics, and geopolitics, to cite a few areas.
The reality presented above is no conspiracy theory but seen from a different perspective, those corporate owners are what some people like to call, the cabal, the bankers, the shadow government, and they are not wrong at all. They are invisible, except when pocketing large amounts of wealth on the backs of the working class.
But don’t they benefit the growth of economies and create employment and moderate wealth? Shouldn’t they be celebrated for their ingenuity?
You be the judge.