Global corporate taxes are a good move – Twin Cities
Usually, international finagling between the rich and the corporate to minimize the payment of taxes, legally or illegally, is not visible to the naked eye.
Sometimes it is. On a trip to Switzerland, my wife and I went for lunch in the neighboring country of Liechtenstein. We started in Chur, a pleasant regional town in Switzerland in the Rhine Valley. An impulsive question from a hotel clerk told us that all we had to do to visit another country was drive 20 miles on the freeway, turn right at the big McDonald’s sign, cross the bridge, one on the left, one on the right and we would be in the heart of business in Vaduz, the small capital of Liechtenstein.
A neat town the size of Redwood Falls, its only notable difference from a Swiss market town was an area of six or eight blocks on two streets cluttered with neat little office buildings adjoining others. Each had small brass plaques next to the doorbell, 20 in one case. These are the Liechtenstein “headquarters” of hundreds of international companies.
I had seen similar plaque-decorated buildings in Barbados on a much smaller scale. Still, I don’t think I’ll see any in Sioux Falls, although the South Dakota legislature is planning similar ventures.
All of this is linked to a recent positive development: the agreement between 130 countries to coordinate corporate taxation, including a minimum overall tax of 15%. This can reduce legal contortions, which benefits brass plate engravers.
Let’s step back a bit: the general problem is that the world has some 200 countries, each sovereign over laws considered best suited to meet the needs of the country, its citizens, and its residents. This can include earning a few million dollars or euros by writing laws that in turn save businesses in other countries billions in taxes. It’s a little different from Liberia and Panama which offer quasi-free regulatory registration of commercial vessels for a low price.
There are thousands of businesses, most of them incorporated, doing legitimate business in multiple countries. There are also thousands of rich people. Of course, they try to minimize the taxes owed. This may include juggling funds between countries to reduce the total taxes owed or paid.
It can be, and generally is, legal – at least within the limits of the law. It is called “tax avoidance” and it is not much different from what accountants might tell us.
There is also “tax evasion” or fraud, in which the laws are broken. Sometimes it comes from otherwise legitimate companies. Other times it hides dirty money from government corruption, criminal activity, or simple personal crime.
The recently concluded global deal aims to reduce the avoidance strategies of legal businesses, not crime, but the incentives and mechanisms of legal avoidance overlap with those of illegal acts.
For example, Medtronic of Minnesota has its “legal headquarters” in Dublin, Ireland, although its “operational headquarters” remains in Fridley. Johnson Controls is another large American company nominally headquartered in Ireland. And hundreds of other companies still legally based in this country have branches in Ireland. It’s part of the Celtic boom that propelled Ireland from poverty to prosperity.
Many may also have wholly owned subsidiaries in Liechtenstein, Panama, Bermuda, Bahamas, or similar havens. Often these have an innocuous name that gives no indication of the true owner. Transfers between branches of a business in multiple countries can transfer money so that little or no income taxes are paid.
In 2017, Google reportedly transferred $ 22 billion in revenue to a Dutch company which transferred it to an Irish company, but with a subsidiary in Bermuda. Bermuda has no income tax. The Bermuda entity can “lend” funds to Google’s head office in California, funds on which no US corporate income tax has ever been paid. All the entities involved were 100% owned by Google and were under their sole control.
So how do you transfer money this way? Usually, this is thanks to an old dodge known as “transfer pricing” which was already common and legal when most multinational companies were in the manufacturing sector.
For years, my favorite surplus machinery outlet in South Minneapolis had dozens of metal pads marked “Return to Ford, Taubate BR.” Ford’s St. Paul Highland Park plant used four-cylinder engines produced at one of Ford’s Brazilian plants. Ford do Brasil is a separate chartered Brazilian company wholly owned by the Michigan-based parent company.
So when Ford-Brasil sells to the American Ford, the money has to change hands, but at what price per engine? There is no market price for these as is the case with the Cargill soybean trade, for example.
Set that transfer price high and it increases Ford’s profits in Brazil but reduces them in the United States. Ford as a whole has more income here and less in Brazil. Engine prices are low and Ford’s profits in Brazil are falling, but Ford’s in the United States are rising.
There are limits to this with physical products. An engine is not worth $ 1 million or $ 100. But with software or intellectual property or purely service-based businesses, the sky is the limit. What does one subsidiary charge to another for the design of an implanted medical device, but not the device itself? Writing advertisements and designing logos for hamburger packaging? Writing code for a search engine or a social network? Accounting and legal services?
For years, McDonald’s, using the “double Irish with a Dutch sandwich” scheme so beneficial to Google, shifted revenue from franchise fees to corporate overhead to cut taxes. Everything is legal, and business transfers between subsidiaries based in a myriad of locations will remain legal. Countries will retain control of their own tax laws, subject to the new provision that a multinational company will have to pay a 15% corporate income tax to a country. There will inevitably be hiccups, but “progress, not perfection” applies here.
The recent leak of the “Pandora Papers” revealed how South Dakota changed its trust laws at the behest of the law firms specializing in this work, to make it a favorable location for their establishment in this state. As for Liechtenstein or Bermuda, there is nothing illegal about that. But in either case, such favorable rules can attract illegal as well as legal money. An American state or a sovereign nation can gain in economic activity and jobs, but society as a whole loses.
St. Paul’s economist and writer Edward Lotterman can be contacted at [email protected]