How Google and Apple Make Their Taxes Disappear; the British Government Says It Knows How to Tax the Profits Google Earns. It's Simple, Elegant and Probably Won't Change Anything

By Johnston, David Cay | Newsweek, December 26, 2014 | Go to article overview

How Google and Apple Make Their Taxes Disappear; the British Government Says It Knows How to Tax the Profits Google Earns. It's Simple, Elegant and Probably Won't Change Anything


Johnston, David Cay, Newsweek


Byline: David Cay Johnston

Around the world, countries are desperately seeking ways to stop multinational companies from earning profits within their borders without paying taxes on them, while stashing trillions in tax havens like the Cayman Islands. The British government, after a search, says it knows how to tax the profits Google earns in the United Kingdom. Its solution is simple and elegant, and it probably won't change a damn thing.

The proposal has come because Britain and many other countries are tired of getting just the table scraps after companies enjoy what tax lawyers call Dutch Sandwiches washed down with a Double Irish. Those are popular names for tax strategies that let companies earn profits in countries with high taxes, but report profits where little or no tax is paid, such as Ireland. The people charged with enforcing tax laws say that is cheating, and some officials and pundits in Europe have invoked what President Ronald Reagan said in a 1983 radio address about tax cheats: "When they do not pay their taxes, someone else does--you and me."

Four years ago, Bloomberg News reporter Jesse Drucker revealed how Apple, Google, Microsoft and other big companies duck taxes on European profits, which set off ongoing coverage of the issue in Europe, where most individuals and small businesses are heavily taxed. Google pays as little as 2.4 percent tax on its offshore earnings, compared with the official 35 percent tax rate on American profits and the 21 percent rate in Britain, its second largest market. Google's worldwide pretax profits grew 72 percent from 2009 to 2013, but profits booked offshore grew more than five times faster, from $7.7 billion to $38.9 billion.

Google's executive chairman, Eric Schmidt, says it complies with all relevant laws. He laid out his position last year in an open letter that has been mocked for suggesting that the answer is simple: Governments should lower the tax obligations of domestic companies to match those paid by multinationals. (Google declined Newsweek's request to comment directly on this matter. Adam Cohen, who manages its government affairs for economic policy issues in Europe, including taxation and competition, offered to discuss the company's position on condition that he would not be quoted and his remarks would not be linked to the company in any way. Newsweek declined his offer.)

European politicians know their constituents are angry that Google and other big companies get an almost tax-free ride. On December 3, George Osborne, Britain's chancellor of the exchequer, told Parliament that a bill would be introduced to stop companies from funneling untaxed profits to those havens. "That's not fair to other British firms," he said. "It's not fair to the British people either. Today we're putting a stop to it."

He announced that Parliament will be asked to offer companies a choice between a 25 percent tax on "profits generated by multinationals from economic activity here" and a 21 percent tax on profits kept in the country. The hope is that companies will pay the 21 percent tax and reinvest the profits in Britain rather than pay the higher tax.

That sounds smart and fair, but it probably won't work because (1) expensive tax lawyers and accounting firms continually devise ever more clever techniques to shift profits to tax havens, and (2) many European governments, as well as the U. …

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