Thursday, December 12, 2013

Facebook or Faceless!

Reading a summary of the financial position of Facebook Ireland recently, once again brought home to me the extent to which the activities of such well-known profitable companies clearly display a crass regard for any true ethical obligation with respect to tax liabilities.

According to the Financial Times, Facebook used a complex tax avoidance scheme to limit its corporation tax bill to €1.9 ml. in 2012 (based on a turnover of €1.79 bl.) That would work out as just a little over .1%!

However of the €1.79 bl. turnover a truly incredible €1.75 bl. relates to administrative expenses for the use of intellectual property. This money (i.e. royalty payments) is paid into a special holding company Facebook Holdings that is incorporated in Ireland but registered elsewhere for tax purposes. So the money in turn passes through this company on its way to subsidiaries based abroad. Many of these appear to be located in the Cayman Islands where no tax is payable.

Of course Facebook is not alone in this respect with Google and Apple (among others) using similar tax avoidance schemes.

And Ireland is clearly not the only country benefiting from such schemes with for example several  other European countries such as the Netherlands, Luxembourg and Switzerland offering especially attractive incentives.

Now these companies can still brazenly keep a straight face in maintaining that they conscientiously fulfil all their tax and regulatory obligations. When asked why they have located in Ireland they routinely provide gushing accounts regarding the quality of the work force (while opportunities for tax avoidance are never even mentioned).

Unfortunately we are presented here with stark evidence of the unacceptable face of capitalism.
Countries such as Ireland can derive considerable benefits through attracting key multinational operators like Apple, Google and Facebook into their midst. The whole national tax system is then deliberately skewed to the liking of these companies.

For example, though the Irish economy has been going through a deep recession since 2008 with domestic taxation rising and expenditure on services falling, not alone has there been a unanimous official agreement to maintain the low corporation tax rate (12.5 %) but additional incentives have been made available (e.g. tax concessions for top executives) to make the island even more attractive.

In many ways however the tax rate is used as a red herring to divert attention from the reality of how these companies  pay virtually no tax here through a seeming ability to declare any amount of revenue they wish as royalties. They then use the double Irish system of incorporating a holding company that is registered in a tax free haven elsewhere to then effectively screen all these revenues away from tax.

So theoretically for example in the case of Facebook, it does not really matter how high the official tax rate is here in Ireland if it can in effect declare all revenues as administrative expenses and then transfer this revenue to a tax haven registered in another country (where no tax liability applies)!

Thus everyone involved seems therefore more than happy to focus sole attention on the merits or demerits of the official corporate tax rate on profits, which effectively then acts as a smokescreen against looking at this deeper issue of how these companies effectively avoid paying almost any tax in Ireland.

Presumably the fact that are willing to pay some small amount of tax (regardless of how minuscule) creates the appearance of tax compliance (which again can be seen as the best tactical approach from their perspective).

Now the multinational companies play an increasingly important role in the Irish economy.

However you will scarcely ever hear any word of objection to the tactics which these companies employ as it would not be seen to be in our national interest.

For example yesterday we had the directors of a big charity here in Ireland rightly being grilled by the public accounts committee of our national parliament regarding the apparent misuse of its voluntary funding.

Now one might think that the activities of multinationals (such as Apple, Google and Facebook) are of much greater significance both in economic and ethical terms. However it is highly unlikely that a similar public grilling of its representatives would ever happen as the very attempt to seek accountability would be seen to run counter to our narrow self interest.

And we would not be alone in this regard! As competition for such international investment is intense, other countries where such companies might locate would be likely to behave in exactly the same manner!

Therefore if the ethical issues of massive tax avoidance are to be properly addressed, this will require an internationally agreed system of regulation (with every country willing to play by the same rules).

However by the very nature of capitalism this will not easily transpire while each country is still motivated to maintain its own competitive advantage (relative to others).

Indeed this is a huge weakness of capitalism which eventually could wreck havoc on the international system.

We have quickly moved in modern times to a system where genuine global co-operation is increasingly required on a broad range of fronts.

For example our climatic problems cannot be addressed while countries still seek to maintain a short-term competitive advantage with respect to others.

Likewise global financial problems cannot be solved while institutions seek to maximise returns for the benefit of their own executives and shareholders.

And the enormous problems associated with the manner in which multinational corporations wield so much power, cannot be dealt with while again individual countries seek to maximise their short-term advantage through turning a blind eye to the significant ethical issues involved.

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