Joe Biden has a plan, a big, brave and certainly controversial one, sadly one that has a slim chance of working at best, but ten out of ten for effort.
He wants a global standard rate of corporate tax for the biggest multinationals, you know the names, Google, Amazon, Apple, Nike, Starbucks and the roster of the usual suspects.
These global behemoths have become rather adept at squirrelling their profits away, or whizzing them around the globe, hunting out lower tax regimes in order to make sure that they LEGALLY pay as little to the tax man as possible. It’s an important distinction between tax evasion, illegally swerving your responsibilities, and tax avoidance, using legal means to legitimately minimise your tax liability. Indeed in many jurisdictions legal fiduciary responsibilities to shareholders demand that companies make sure they do this…. And they certainly have.
Here is a hypothetical example. A coffee company has cafes all over the UK and sells a lot of coffee for a lot of money. Let’s say they make 500 million in profit. The UK chancellor wants 20% of that so 100 million. In Holland the tax rate is 10%. Why not set up a shell company in Holland, have them bill the UK coffee company for the use of the brand name, logos etc and why not make the bill out for ..say… 500 million. Voila. Coffee company UK has now made zero profit, so owes no tax, but coffee company Holland has made an instant profit of 500 million, and now owes the Dutch government 50 million instead of the 100 they would have paid to the UK. Genius. There are of course a myriad more convoluted schemes, and if I was an expert in them, I wouldn’t be writing on a page in The Islander, I’d be flicking through it’s pages looking for a yacht with just one more swimming pool.
It’s clearly not cricket, but it is legal. The differing tax rates around the world, coupled with the speed with which money can be moved means that it is child’s play to run rings around national regulations, effectively rendering them useless.
Why does this matter? Partially it’s about being fair. Big coffee companies can reduce their tax to next to nothing, but the family-run Italian cafe next door doesn’t have the scale to do that, they just have to pay the going rate. Amazon not only out competes the high street in terms of overheads and convenience, but again their tax bills are tiny compared to their competition. Mostly however it’s because governments are missing out on an eye watering amount of tax, and they are going to need it, right now.
Economists estimate that global tax coffers are nearly 450 billion dollars short thanks to these practices, white the companies themselves post equally eye watering bottom lines in their annual reports.None of this is any kind of revelation of course, and the solution of a globally agreed fixed rate isn’t exactly rocket science, so why now? This seems to be an idea whose time has arrived, perhaps.
The Covid pandemic is a rare phenomenon, in that it is happening everywhere, seriously, and at the same time. Most economic crises hit a sector, or a region, or a country, but almost never everyone at the same time. The national solutions are also similar, borrow a ton of money, and give it to people and businesses that are idle or closed to keep some sort of spark in the economy and worry how to pay it back when this is all over. The global debt mountain is into the multi trillions.
Biden’s plan is to marshall 135 countries into agreeing a common rate of tax, and enforcing that tax should be paid in the country where the sales are made. These regulations will cover the top 100 companies, many of them American.
It’s a great idea and if it works it may change the global economy profoundly. It will face opposition of course, from powerful business lobbies, domestically politics in the US, and internationally as the rates of corporation tax vary wildly and those countries that benefit from having a lower rate, attracting the migrating profit margins, stand to lose out big time. If it works, we could see a levelling of the playing field for small business, we could see money flowing into government coffers and reinvested back into the economy providing growth stimulus. On the flip side, we could see large reduction in profits from the mega corporations lowering dividends and stock prices with the knock on effects to stock indices world wide. We could also see tax accountants hatching more convoluted schemes to put us right back how we were.
The President’s idea is a big one, and you do want your leaders to think big, especially at times like these. The fear is of course that global negotiations will stutter and a weak compromise will be found if any is found at all. The proverbial designing a horse by committee. I wish him well, this one deserves to work.
By Phill McCoffers – The Islander Economics Correspondent
