LAHORE: The leaked Panama Papers might just be instrumental in compelling most countries to draw a distinct line between tax avoidance and tax evasion because all low-tax jurisdictions on the planet officially and legally help wealthy clients cut their tax bills in completely legitimate ways, research conducted by the Jang Group and Geo Television Network shows.
Many tax experts, irrespective of the country they are based in, would thus agree that practically, tax avoidance is the art of dodging tax without breaking the law. It may be ironic, but that is the reality of the world we are living in!
So, if there is any fault with these famous and safe tax havens like Switzerland, Netherlands, Ireland, Luxembourg, Liechtenstein, Isle of Man, British Virgin Islands, Jersey (United Kingdom), Bermuda, Mauritius and Delaware (United States) etc, it lies with their respective governments, which legally and officially offer foreign individuals and businesses little or no tax liability in a politically and economically stable environment.
Tax havens also provide little or no financial information to foreign tax authorities. Every affluent man with a healthy wallet would love to buy that privilege too. Simply speaking, tax havens refer to countries that have an ideal system of financial secrecy in place and, when that happens, corrupt rulers and drug lords can also legally stash their ill-gotten wealth there to benefit from the “equality of law.”
Therefore, it is a mere misconception that offshore business is all about evading taxes and hiding money from the governments. Tax experts in every country would certainly know that are innumerable legitimate ways to structure business interests overseas and realise significant benefits from an asset protection standpoint — as well as the tax-standpoint. These tax wizards call it “tax management,” and not tax avoidance.
Many global corporations relocate their headquarters in tax havens through a process known as “Inversion” to avoid paying higher corporate income taxes in the countries of their origin.
This process of “Inversion” often requires these large corporations to acquire a company based in these tax havens so that they could legally park their earnings offshore without the fear of being heavily taxed at home and face painful evasion/concealment charges to end up paying fines or languish in jails as a consequence.
To overcome this grave issue, governments all over the world would have to agree on the principle of international tax equity---which is seemingly more of a dream right now but one hopes that the Panama Leaks would surely teach some lessons. Right now, everything is happening under their nose and in front of their eyes.
In one of its May 2013 reports on the subject, had viewed: “The ethical argument is simple. Taxes on profit should be considered a partial payment for the many services which governments provide: protecting property rights, providing an educated workforce and generally holding society together. An unfairly low tax payment is no different from unfairly low wages, unfairly high prices or unfair disregard of environmental damage.”
However, those who term tax avoidance as something extremely immoral and unethical, call it “tax shamming.” In relatively modern history, as stated earlier, many top corporations of the world have set up factories, services, distribution hubs and even their regional headquarters in low-tax territories.
During the last few years, many American and British corporate giants such as Google (2015 revenue: $74.54 billion), Apple (2015 revenue: $233.7 billion), Coca Cola (2015 revenue: $44.29 billion), PepsiCo (2015 revenue: $63.06 billion), Messrs Vodafone (2015 revenue: 42.22 billion British Pounds), Messrs Amazon (2015 revenue: $107 billion), Nike (2015 revenue: $30.6 billion), General Electric 2015 revenue: $117.4 billion) and Face book (2015 revenue: $17.928 billion) etc have reduced their outstanding tax liabilities in totally legitimate ways.
On October 6, 2015, Fortune (a New York-based multinational business magazine published by Time Incorporated) had carried a “Reuters” news agency study report on its website—according to which--Fortune 500 firms had held $2.1 trillion overseas to avoid taxes.
The report had revealed: “The 500 largest American companies hold more than $2.1 trillion in accumulated profits offshore to avoid US taxes and would collectively owe an estimated $620 billion in US taxes if they repatriated the funds. Nearly three-quarters of the firms on the Fortune 500 list of biggest American companies by gross revenue operate tax haven subsidiaries in countries like Bermuda, Ireland, Luxembourg and the Netherlands. Technology firm Apple is holding $181.1 billion offshore, more than any other US Company and would owe an estimated $59.2 billion in US taxes if it tried to bring the money back to the United States from its three overseas tax havens. The conglomerate General Electric has booked $119 billion offshore in 18 tax havens, software firm Microsoft is holding $108.3 billion in five tax haven subsidiaries and drug company Pfizer is holding $74 billion in 151 subsidiaries.”
The “Reuters” study report had further disclosed: “At least 358 companies, nearly 72 per cent of the Fortune 500, were operating subsidiaries in tax haven jurisdictions as of the end of 2014. All told, these 358 companies maintained at least 7,622 tax haven subsidiaries. Fortune 500 companies hold more than $2.1 trillion in accumulated profits offshore to avoid taxes, with just 30 of the firms accounting for 65 per cent or $1.4 trillion of that amount. Some 57 of the companies disclosed that they would expect to pay a combined $184.4 billion in additional U.S. taxes if their profits were not held offshore. Their filings indicated they were paying about 6 per cent in taxes overseas, compared to a 35 percent US corporate tax rate.”
It is imperative to note that in 2013, there was a huge US Senate investigation that had uncovered the fact that Apple had parked about $187 billion in offshore tax havens like Bermuda, Ireland and Luxembourg.
Meanwhile, on December 23, 2015 or just a couple of months after this “Reuters” study report was posted on Fortune magazine’s website, the Apple CEO Tim Cook had appeared on an American television programme “CBS's 60 Minutes” and had defended the world's largest corporation's record of sheltering profit overseas to avoid US taxes.
Tim Cook had held: “I would love to bring the company’s money home but it would cost me 40 percent. This is a tax code that was made for the industrial age, not the digital age. It's backwards. It's awful for America. It should have been fixed many years ago. It's past time to get it done.”
More examples of off-shore operations:
Messrs Starbucks Corporation (2014 revenue: $16.447 billion), an American coffee company, sources its UK coffee from a wholesale trading subsidiary in Switzerland.
Microsoft sells its software out of Ireland and all Amazon's European sales are conducted out of the tiny country of Luxembourg.
While Microsoft had allegedly saved $2.4 billion tax in 2011, Starbucks had paid on taxes £3 billion ($4.8 billion) in three years of UK sales.
In a similar move Burger King, an iconic US fast food company, had concluded a merger that allowed it to move its headquarters to Canada. And Google operates in Bermuda and Ireland too.
The “International Business Times,” a New York-based online news publication comprising seven national editions and four languages, had also reported in October 2015 that the UK staff of social media network Facebook had taken home an average of £210,000 in pay and bonuses in 2014, leading it to file a £28.5m loss and paying less than a £5,000 in tax.
The “International Business Times” had stated: “It (Facebook) doled out shares worth £35.4million to its 362 London staff that led to an accounting loss of £28.5million during the period, according to the company's official figures, as questions still linger over tax avoidance by online companies. Including wages and other cash payments and bonuses, Facebook's UK-based staff took home £76.2million last year, which means its staff's average annual wage is £210,497. Facebook paid the taxmen just 4.327 Pound Sterling– only slightly more than a worker on the average UK salary of £26,500 is charged in tax (£3,180), but less if national insurance (£2,213) is taken into account.”
The publication had gone on to write: “Facebook is understood to generate as much as 10 per cent of its global revenue in the UK through its trading with UK-based media agencies and, although less so, direct with advertisers. However, although the company has an office in London's Euston, it is officially headquartered in Ireland and has tax arrangements in the Cayman Islands. Rules introduced by the Organisation for Economic Cooperation and Development (OECD) are now set to stop large corporations, such as Google, Apple, Vodafone and Amazon, shifting official headquarters and trading bases to tax havens and low-tax territories, such as Luxembourg and Switzerland. The rules will be enforced on companies to reveal how much revenue it generates in each territory and will tax the corporation accordingly."
Citing a "Citizens for Tax Justice" Reportin its July 22, 2014 edition, renowned British media outlet “The Guardian” had divulged: “Only 55 Fortune 500 companies disclose what they would expect to pay in US taxes if these profits were not officially booked offshore. All told, these 55 companies would collectively owe $147.5billion in additional federal taxes. To put this enormous sum in context, it represents more than the entire state budgets of California, Virginia and Indiana combined.”
The newspaper had opined: “It’s clear from the report that companies are shifting their earnings from the US to tax havens like Bermuda and the Cayman Islands. The report found that subsidiaries of US companies reported earning $94billion in Bermuda, which has a Gross Domestic Product of just $ 6billion. That doesn’t compute. US firms reported earning another $51bn in the Cayman Islands, where GDP is about $3billion. Ugland House, a five-storey office building in the Caymans, is the registered address for a whopping 18,857 companies, the Government Accountability Office found in 2008.”
Few more examples of tax avoidance allegations:
In May 2013, Google, Starbucks and Amazon (an American electronic commerce and cloud computing company), had come under fire for avoiding paying tax on their British sales.
The May 21, 2013 report of the “BBC News” had reported: “Starbucks, for example, had sales of £400 million in the UK last year, but paid no corporation tax. It transferred some money to a Dutch sister company in royalty payments, bought coffee beans from Switzerland and paid high interest rates to borrow from other parts of the business. Amazon, which had sales in the UK of £3.35 billion in 2011, only reported a "tax expense" of £1.8million. And Google's UK unit paid just £6 million to the Treasury in 2011 on UK turnover of £395million. Everything these companies are doing is legal. It's avoidance and not evasion.”
The “BBC News” had added: “But the tide of public opinion is visibly turning. Even 10 years ago news of a company minimizing its corporation tax would have been more likely to be inside the business pages than on the front page. Amazon, Starbucks and Google are by no means unique in minimizing their UK tax liability. And individuals often try to lower their own tax bill by exploiting rules in inheritance tax, or gifting to charity.”
In September 2013, not fewer than 124 of United Kingdom’s elite firms were accused of failing to comply with the law and disclose subsidiaries that could be used as an offshore means to avoid tax.
The September 7, 2013 edition of “The Independent” had also rung the alarm bells: “More than 100 firms on the Financial Times Stock Exchange (FTSE)-350 Index were accused of “systematic and widespread” failures to comply with the “most basic” requirements of the law. A Companies House investigation, triggered by claims that dozens of leading firms were hiding profits offshore to avoid paying UK tax, led to a demand for 290 of the top 350 index to disclose details of their subsidiaries.”
“The Independent” had quoted Chris Jordan, the tax campaigns manager of Action Aid (an international non-governmental organization whose primary aim is to work against poverty and injustice worldwide) as saying: “Tax havens are frequently used by big companies to deprive developing countries of vital tax revenue that could be used to build badly needed schools, hospitals and roads.”
The prestigious British newspaper had maintained that a Department of Business, Innovation and Skills was busy reminding the 124 companies of their responsibility to provide the desired information.
Research further shows that on October 21, 2010, “Bloomberg” (a privately held financial software, data and media company headquartered in Manhattan, New York City) had reported that Google had cut its taxes by $3.1 billion in the last three years (2007-2010) by using a technique that moved most of its foreign profits through Ireland and the Netherlands to Bermuda.
“Bloomberg” had asserted: “Google’s income shifting -- involving strategies known to lawyers as the “Double Irish” and the “Dutch Sandwich” -- helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five US technology companies by market capitalisation, according to regulatory filings in six countries. Google, the owner of the world’s most popular search engine, uses a strategy that has gained favor among such companies as Facebook and Microsoft Corporation. The method takes advantage of Irish tax law to legally shuttle profits into and out of subsidiaries there, largely escaping the country’s 12.5 percent income tax.”
The credible US media house had more to say: “The earnings wind up in island havens that levy no corporate income taxes at all. Companies that use the Double Irish arrangement avoid taxes at home and abroad as the U.S. government struggles to close a projected $1.4 trillion budget gap and European Union countries face a collective projected deficit of 868 billion Euros. Facebook, the world’s biggest social network, is preparing a structure similar to Google’s that will send earnings from Ireland to the Cayman Islands, according to the company’s filings in Ireland and the Caymans and to a person familiar with its plans.”
Quoting Kimberly Clausing, an economics professor at Reed College in Oregon State, the “Bloomberg” had noted: “The tactics of Google and Facebook depend on “transfer pricing,” paper transactions among corporate subsidiaries that allow for allocating income to tax havens while attributing expenses to higher-tax countries. This income shifting costs as much as $60 billion in annual revenues to the US government.”
The eminent American media outlet had held: “Google’s transfer pricing contributed to international tax benefits that boosted its earnings by 26 percent in 2009. Google’s annual reports from 2007 to 2009 ascribe a cumulative $3.1 billion tax savings to the “foreign rate differential.” Such entries typically describe how much tax US companies save from profits earned overseas.”
Few years ago, there were reports in Western Press that an American global pharmaceutical corporation Messrs Pfizer (2015 revenues: $ 48.85 billion) was holding $74 billion of its profits offshore.
Americans for Tax Fairness (ATF), a diverse campaign of 425 US national, state and local organisations united in support of a uniform tax system for all Americans, had alleged that Pfizer had been using accounting gimmicks for many years to systematically shift its profits to its offshore subsidiaries.
The organisation had argued: “While Pfizer officially declares that it has $74 billion in earnings offshore for tax purposes, its real offshore cash could be as much as $148 billion based on its deferred tax liabilities declared in the company’s annual financial report. This means that Pfizer could get away without paying an estimated $35 billion in taxes on this enormous stash of offshore earnings if it is allowed to complete its planned inversion.”
Adobe Systems Incorporated (2015 revenues: $4.8 billion), an American transnational computer software company that makes the PDF reader and Flash software, had disclosed a couple of years ago that if it repatriated its offshore profits to the United States, it would have to pay about 27 percent federal tax rate.
In September 2015, the Coca-Cola Corporation had revealed that it may have to pay $3.3 billion in back taxes to the US government.
The reason for this tax hit was the company’s allegedly inappropriate use of transfer pricing to shift its intangible property out of the United States and into low-rate tax havens.
In 2014, the company had reportedly generated 43 percent of its worldwide revenue in the United States, but somehow that only translated into 17 percent of its income being in the US.
A 2014 report of the “Citizens for Tax Justice,” a progressive Washington DC-based advocacy and lobbying think tank, had found that Coca-Cola had at least 13 subsidiaries in known foreign tax havens, including three in the Cayman Islands.
In its September 18, 2015 report, the “Wall Street Journal” had written: “Coca Cola has said the Internal Revenue Service had notified it of a potential $3.3 billion federal income-tax liability, becoming the latest US multinational challenged over so-called foreign transfer pricing. Coke said the dispute relates to how it reports income from foreign licensing of manufacturing, distribution, sale, marketing and promotion of products in overseas markets. Such disputes, in which the IRS accuses U.S. multinationals of transferring profits to countries with lower tax rates, have become increasingly common in recent years. The IRS is believed to have filed hundreds of such cases totaling tens of billions of dollars, particularly in the technology and pharmaceutical industries.”
Coming to India, according to a July 10, 2015 report of the Press Trust of India, investigations by the Enforcement Directorate into the notorious Rs53.95 billion Hawala Scam had revealed that operators were also involved in sending 2G Scam money to tax safe havens such as Switzerland.
The $26 billion 2G Scam was an Indian telecommunications and political scandal in which politicians and government officials under the Indian National Congress-led coalition government had undercharged mobile telephone companies for frequency allocation licenses.
Evidences related to the routing of 2G scam kickback money to Dubai, Hong Kong and Switzerland via firms based in Surat city were found after a Dubai based businessman was arrested.
Interestingly, in November 2014, Vodafone India had won a rare case against the Indian tax authorities. The Bombay High Court had dismissed the government demand for the company to pay Rs30 billion (about $490 million) for a share transaction conducted in the offshore tax haven of Mauritius.
(References: The Wall Street Journal and The Hindu)
On August 21, 2008, Vodafone India had issued 289,224 shares at a price of Rs10 ($0.16) to a subsidiary of its UK parent company in Mauritius. At the time, Vodafone shares were worth Rs8,591 ($140.7). The Indian government had argued that Vodafone India – which was the country’s second biggest mobile phone carrier - was effectively giving a disguised loan to the UK owners but the courts have ruled that Vodafone did not owe the government anything since the shares had not been sold.
Vodafone had also been fighting another high-profile case with the Indian tax authorities – whether or not it should pay $2.9 billion in taxes for the original investment it made in the Indian mobile business in 2007. At the time, Vodafone, a UK company, had used a Dutch subsidiary to buy a 67 per cent stake in the Indian business operations of Hutchinson, a Hong Kong company, via a transaction in the Cayman Islands.
The government had claimed that since Vodafone had purchased an Indian company, it should pay taxes in India but the company said since neither Hutchinson nor Vodafone were based in India, so no tax was due. Vodafone had then taken the Indian government to international arbitration.
And quite recently, according to the Panama Leaks, former Miss World Aishwarya Rai, her father-in-law Amitabh Bachchan , real estate tycoon and developer K. P. Singh of the DLF group) , Sameer Gehlaut of the Indiabulls group, Omkar Kanwar, Chairman of Apollo Tyres, Vinod Adani of the Adani group, Goa-based industrialist Anil Salgaocar, Indian billionaire Zavary Poonawalla, the Mumbai-based Garware family were among the 500 Indians linked to offshore firms set up in tax havens such as British Virgin Islands and the Bahamas.
In one of its recent issues after the Panama Leaks, the “Indian Express” had said: “As per the Reserve Bank of India’s Foreign Exchange Management Act, no Individual was allowed to make a direct overseas investment until 2013. The central bank in 2013 amended the existing rules to allow direct investments in joint ventures or wholly-owned subsidiaries. But, the Indian Express investigation said that many of these companies were set uplong before that. Additionally, in 2004, the Liberalized Remittance Scheme (LRS) was introduced by the Reserve Bank of India, which allowed foreign remittances of up to $25,000 a year by Indian citizens. This limit is now increased to $250,000 a year."