Thursday, October 21, 2010

Not being evil? Google pays 2.4% tax rate

Jesse Drucker at Bloomberg is on form again. This time, it's a startler: Google 2.4% Rate Shows How $60 Billion U.S. Revenue Lost to Tax Loopholes. (Note: we just blogged Martin Sullivan explaining how Microsoft has shielded billions from U.S. taxation.)

In each case, it is this trick of transfer pricing (or mispricing) being used to shift profits around the world, in order that profits are realised in the low-tax or zero-tax jurisdictions, while the losses are shifted to the "onshore" higher tax countries, where they can be heaped on the shoulders of unsuspecting populations.

We won't repeat any of the article here, as it can quite ably speak for itself. Read it. It also has a nice little interactive graphic, exposing the disgracefully artificial profit-shifting Google has been up to (the graphic is similar to one in Drucker's similarly excellent Lexapro article recently.)

And then read our discussion of the notion of corporate responsibility - a particular issue for a company whose motto goes, or at least went, "Don't be Evil." This goes contrary to what Irving H. Plotkin, a senior managing director at PricewaterhouseCoopers LLP, had to say.
“A company’s obligation to its shareholders is to try to minimize its taxes and all costs, but to do so legally."
Well he would say that. He makes his living, presumably, from helping companies do exactly that. And this seems like a reasonable thing to say, except for one thing: a company's obligation is not only to its shareholders. Companies get their licence to operate from the societies in which they are embedded, and whose facilities, from the educated workforces to the rule of law, they depend on. As Joel Bakan puts it in his best-selling book The Corporation:
The state is the only institution in the world that can bring a corporation to life. It alone grants corporations their essential rights, such as legal personhood and limited liability . . . Without the state, the corporation is nothing. Literally nothing.’
(See the philosophical underpinnings of this too, here.) Once you understand this, you understand that corporations are accountable not just to shareholders, but to a wider set of stakeholders. Once we understand that, then we understand how the accountancy profession's distorted world view has become corrupted in the service of narrow interests, against society.

Note also that all of these shenanigans may do wonders for Google's share price (one analyst reckons it has put $100 on Google's $600-odd share price) - but they do absolutely nothing to add value in global markets: what is given to Google is taken away from somewhere else, either in terms of higher taxes or lower spending. This is just a subsidy, via a tilted playing field, distorting markets and consequently making them less efficient.

Anyone concerned about the power of multinational corporations, either generally or in specific cases like this one, needs to pay attention to transfer pricing.

This is why we are, bit by bit, gearing up to move our transfer pricing project forward. Read more here.

Update: Google isn't always evil.


Blogger Peter Reilly said...

The motto of the tax advisor industry comes from an old case :Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant. Judge Learned Hand

Google's tax advisors have a duty to minimize their taxes

8:32 am  
Anonymous TJN said...

Riles, you have fallen into the old trap of believing that what the tax advisers tell you is true. What is legal is not necessarily what is right - think slavery in its day. Or Apartheid. Corporations get their licence to operate, not to mention the healthy and educated workforces, the rule of law, the roads and ports, and so much more, from nation states. As Joel Bakan notes: "Without the state, the corporation is nothing. Literally nothing."

As we noted elsewhere, Tax is not a cost, but a distribution out of profits. That puts tax in the same category as a dividend - a return to the stakeholders in the enterprise. This reflects the fact that companies do not make profit merely by using investors' capital. They also use the societies in which they operate, whether that is the physical infrastructure provided by the state, the people the state has educated, or the legal infrastructure that allows companies to protect their property rights. Tax is the return due on this investment by society from which companies benefit. Moreover, tax is properly due to the state in which a company generates its profit, not to that state to which it can relocate its profit for taxation purposes.

Tax avoidance may be legal, but it is wrong. Quite wrong. It undermines the very social contract upon which nation states are built, and undermines faith in the rules and systems that promote the public interest. In this light, it is a form of corruption of the international economic system.

12:58 am  
Anonymous Dan said...

Implying equivalence between slavery and tax avoidance is disingenuous. It is not the responsibility of companies to determine what they think is a fair amount of tax to pay in return for the services and infrastructure provided by the government. It is their responsibility to follow the taxation rules set out by the government. Perhaps those rules need improvement, but do not accuse companies of unethical behavior for following the rules.

While it is reasonable to expect companies to pay for transportation an legal infrastructure, they are already paying for an educated workforce, by means of wages.

6:45 pm  
Blogger Unknown said...

Goodness Dan, yOu must be kidding. You go right back to Riles' argument, i.e. that it doesn't matter what you do as long as it's within the law. It doesn't help either that Google gets to help write the laws; that they get to negotiate with the IRS on the specifics of how they pay. It's pretty well documented that the IRS gives breaks to almost everyone but the middle class and the poor; them they go after with a vengeance.

Also, they aren't paying for the educated workforce. The states do through taxes (mostly regressive). Google gets to sit back and enjoy the ripe pickings at everyone else's expense. It doesn't hurt to mention that they only make money because of advertising which in itself is a huge fraud shouldered by the public against the public.

So a company whose only advantage is in having a good algorithm, compliments of public funding, is making billions off of companies trying to brainwash others into buying their goods (and a tax write off because of business 'costs').

12:47 pm  

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