Understand the tricks Multinationals use to avoid paying tax

Multinational Tax Avoidance

It’s time to get real on Multinational Tax avoidance. In case you don’t know, many of them of have the pleasure of only paying 1% tax on their revenue. Some pay next to nothing in Australia, but you can bet all of them pay less than you and me. Their ‘so called’ profit numbers are much lower than you’d expect them to be based on their revenues. So low, that you’d probably close down the business if your profit to revenue ratios ever got that low.

While we all use the products and services of multinationals. While many of us work for them and sell to them, what they are doing is totally unethical and we need to eradicate it now. It’s simple, they do not pay their fair share, they profit from the use national infrastructure and avoid tax. Tax which could pay for services of national importance. Things like Schools, Hospitals, and Roads. Don’t be evil hey?

The way they do it is with a term known as Related Party Transactions. Oh, and a ‘Related Party’ is essentially ‘them’. Yes, a division of the same company in another country or jurisdiction. A jurisdiction where the tax rates are lower, think Singapore, Ireland, the Netherlands, the Cayman Islands. So let me lay out a few of the tricks from the Multinational Tax Avoidance Playbook. I’ll explain them in human terms and avoid accounting terminology like the Double Irish with a Dutch Sandwich – no, I didn’t make that up.

Tricks Multinationals do to avoid tax

Trick 1: Pay excessive amounts for rights to use brands names, intellectual property or other non physical assets the parent company owns. They have a subsidiary which controls these assets in a low tax country. The local division (say in Australia) pays back money to this subsidiary to use the assets. The rates are usually very high. Often high enough to remove any local profit for operations in higher taxed economies.

Trick 2: Make local digital transactions take place in lower taxed overseas market where the company has an office. Let’s say the customer is based in “Australia’ the transaction will be recorded as sale with say ‘Singapore’. Where the corporate tax rate 17%. (My monthly $5 gmail account is paid to Google Singapore)

Trick 3: Get inter company loans from other divisions of the same company at above market interest rates, pay back the interest to offset local market profits. Ensure money is transferred to low cost tax markets as a high cost tax market expense.

There are many other tricks in this playbook. But all of them involve shifting money from high tax rate markets to low tax rate markets. The Multinationals combine all the above in a menagerie of chicanery too difficult for any mere tax auditor to understand.

Another major trick is basing regional managers in these low cost tax markets to ‘approve strategy’ and ‘brand related’ decisions in order to justify the intellectual property rights payments and revenue shifting. They claim that market is the place where decisions are made. It’s really just window dressing, and all part of the elaborate scheme to avoid tax. Often working for a multinational in Australia involves creating the same packaging for all markets, and making an advertising campaign to be run in many of the Asian markets even though they are ‘inappropriate from a marketing perspective’. This is not done to save on production costs, but to justify the location of IP assets in these low tax regimes. The relative loss in sales through lower revenue is less than the gains made through tax advantages made.

They bury the above tricks in a number of transactions and layers which make it seem more arms length than it is. Add a few international trade agreements to hide behind and boom – 1% tax for you Mr Multinational.

In the simplest of terms this is what they do:

Multinationals take money they make in one country and give it to themselves in another country where they won’t have to pay as much tax.

So lets draw an analogy of what this behaviour would look like for a normal tax paying citizen.

Imagine you are earning a wage. You are a labourer digging holes. For the task you are getting paid $10 an hour. While it takes your entire body to do this work – your arms, legs, back, eyes and brain, these are regarded as very separate parts. They are not part of the one thing – this is your ‘body corporate’. You regard these body parts as ‘related parties’. However, according to you, they are not part of the same body. So your arms need to rent your eyes, and your brain gives your arms a loan of its cognitive abilities. They charge you an amount, which you’d never pay on the open market, at the rates they charge it would hardly be worth doing the work. Your eyes and brain charge your arms $9 an hour for the privilege of their use. Remember you only earned $10 an hour for the work. So your profit is now only $1 per hour. Now you only pay tax on the $1 your earned, because you are expensing the other $9 to your eyes and brain. You now pay 30c on $1 of actual revenue in your local market. You base your brain and your eyes where the tax rate is a low 10%. They pay 10% on the $9 revenue they get. So they pay 90c in tax. All told your new ‘Body Corporate’ has now only paid $1.20 tax on $10 of revenue. Just 12% in what would have previously been around 30% or $3. Boom! This is what the multinationals do.

If this sounds ridiculous, it’s because it is.

The reason Apple has more than $200 billion in the bank is that they can’t bring it back to the USA without tax implications. So they just leave it on the balance sheet and let the shares in the company appreciate by the increasing amount of cash reserves they hold. This then puts the tax burden on the shareholder when they sell their shares instead of Apple paying tax on the cash holdings..

Regardless of the reported Governmental challenges in stopping the multinational tax rorting we should never believe this problem can’t be easily solved and here’s why:

Multinational Tax Hoax 1: Never let the local Government trick you into thinking it’s out of their control. Governments are sovereign and can make whatever decision they want in their market regardless of international trade rule. Just look at how the Australian Government recently beat the Tobacco Industry in International courts with the move to plain packaging.

Multinational Tax Hoax 2: No Multinational Corporation will ever leave a country they can still make money in. They will always accept the lower amount when rules change and here is why: Companies profit and revenue needs to increase every year and CEO’s are judged on it. While a lower amount is not preferable, they’ll take what they can get, rather than pull out and have a bigger profit hole to fill. It’s basic human incentive. The claims by Multinationals that they’ll pack up and go home are simple bluffing techniques that rarely, if ever happen.

Multinational Tax Hoax 3: Lobbying shapes law more than voter desire. Let’s just call it what it is for once. Corporate bribery. A politician’s primary incentive is staying in Government, and they need corporate money to make it happen. Again, personal incentives shape behaviour. Outlaw lobbying, and we’ll go a long way to having a more equal income distribution and claw back the one percenter’s grip on the economy.

So what can we do about it? There are a number of simple solutions. But here’s the best one. Institute a ‘new wealth tax’ similar to land tax. The Government can call it whatever they want, but here’s a suggestion.

Multinational Company Value Tax – a tax based on the estimated company value of the local operations. This should fall outside of local reported revenue and or tax for the multinational. It would be a percentage tax payable on what the local government values the Australian subsidiary operations at.

This is exactly what happens to land holders in Australia. The Government says: “Here is what we value this land at, and here is your land tax bill.” A percentage of the value. No accounting or chicanery can overcome the tax. The government makes the valuation, and sets the rate payable. No further discussions are entered into. Pay your tax – the end.

The Government should do the same things for Multinational tax avoiders. ‘Here’s what we value your Australian operations at, and here is your tax bill”. Pay your tax – the end. Tax tricks become irrelevant – this sits on top.

Here is the kicker. This would be the easiest voter sell in political history. This is something 99 percent of the world can agree on. We’d rather companies pay their fair share, than the GST rate go up or social infrastructure suffer.

It’s time we took a stand on this issue. Yes large companies are an important part of the social and economic fabric, but we need to make Multinational tax avoidance socially unacceptable. Like we’ve done with Environmental damage caused by corporations. Like we’ve done with marketing unhealthy food to children. We’ve done it before, and it is time we did it again.

You should totally read my book – The Great Fragmentation.