Maximizing Returns or Unethical Tax Avoidance?

By Curtis C. Verschoor, CMA

The furor over the extensive tax avoidance measures used by technology companies such as Google and Apple has reached new heights in both the United Kingdom and the United States. Government members from both countries recently accused the two tech giants of scheming to avoid paying taxes. When this kind of news breaks, most companies respond by saying they must do everything possible to maximize net profits for shareowners, but the countries that miss out on the tax revenue based on profits they believe were generated within their borders argue that these companies are being unethical and possibly skirting the law. Critics maintain that high taxes on repatriating profits to the United States exacerbate the problem and encourage overseas investment to the detriment of employment at home.
 
During a Parliament committee hearing in the United Kingdom, Margaret Hodge, chair of the Public Accounts Committee (PAC), accused Google of "devious, calculating, and unethical" behavior. Hodge alleged that the company marketed its product in the United Kingdom but used "smoke and mirrors to avoid paying tax" there. "You are a company that says you do no evil, and I think that you do do evil," Hodge told Matt Brittin, Google's vice president for sales and operations in northern Europe.
 
Google vigorously denied it avoided taxes by disguising the real nature of its business in the United Kingdom. The company asserted that it did pay tax on profits from its services provided to affiliated entities, but that the profits on the bulk of its business  sales to UK retail customers  were actually transacted in Ireland and that it didn't sell product from London. The head tax partner at Ernst & Young, however, told the hearing that an Irish resident company could be deemed to be trading in Britain if UK-based employees had habitually concluded deals on behalf of an Irish company. Hodge replied that "if sales activity is taking place in the UK . . . you are misleading both Parliament and the tax authorities in suggesting that is not happening."
 
In the United States, the Senate Permanent Subcommittee on Investigations (PSI) held hearings at which Apple CEO Tim Cook defended the company's practice of paying no US income tax on Apple operations outside the country. Cook strenuously asserted that the company paid its tax bill in full for all of its domestic operations. In the case of foreign operations, however, Apple utilizes avoidance provisions in the Irish tax law to the full extent, as do many other companies. As hard as it is to believe, Apple has been able to create corporations that pay no income tax to any taxing nation. This is possible because Ireland doesn't assess income tax on entities that are managed from outside the country, and the United States assesses taxes based on the country of subsidiary incorporation only.

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