Do you ever wonder how European newspaper associations are so successful at convincing politicians to support them in punishing Google.
The answer is that they all use the same argument about tax evasion. The problem is that these big US companies are all channeling most of their profit to countries with low tax rates, causing European politicians to feel like they are not getting the taxes that their countries deserve.
So newspaper organizations approach the European politicians with the notion that punishing Google is a way to get some of that money back. This is then backed up with positive posts about how politicians are trying to stop evil US companies from cheating Europe, and negative stories about how tax evasion by US companies is bad and unfair.
Here is an example from the German association of magazines publishers (roughly translated):
The campaign by Google against the introduction of a neighboring right is a delusion.
It is preposterous that the search engine company, with its tax avoidance strategy largely elude financing of government and public infrastructure, uses its dominant position for its own economic goals. The scaremongering by Google is without merit. The claim the search engine company makes that the search and retrieval of information in the network is made difficult by an intellectual property right is untrustworthy. The private use, reading, linking and quoting remain possible as before.
Did you notice how they added that bit about tax evasion? That's what is called lobbying.
Isn't it also curious that when you read articles about Apple, Google, Facebook, Twitter, Amazon, Starbucks they are mostly negative (in European press) ... especially the ones about Google, Facebook and Amazon who are all disrupting the monopoly of the traditional press.
Here is one from the Guardian:
David Cameron: We'll ensure foreign firms pay their fair share of tax
David Cameron accused the likes of Starbucks, Amazon and Google of lacking 'moral scruples' for seeking to trim their tax bill.
Notice how they are, once again, using tax evasion as the main point, combine with a positive endorsement of the politician. Again, this is lobbying
Now, we can all agree that tax evasion is a problem. It removes a huge amount of money from entering the market, which, in turn, raises the tax level for everyone else.
Amazon, for instance, paid only $3.7 million tax on $6.5 billion sales in the UK (which is misleading since taxes is paid on profit, not revenue). Apple has $144.7 billion in cash, of which $102 billion is in offshore accounts.
Tax evasion should be stopped. It's just wrong on so many levels!
But there is another side to this as well, one that we never hear about from the press. It's the reason why we have this problem to begin with.
Why are all big companies doing this?
Many people believe, especially after reading about in the press, that it's caused by greed and lack of moral scruples. But that's not really true. That is what it has turned into, but it's not why it started.
The reason why it happens is simply because that you have no choice as a global company. Tax evasion is the only way that you can prevent Governments from double or even triple taxing your income.
Take Google as an example:
Google is a US company. For various reasons they have set up Google Europe in Ireland, and in the UK they have sale/consulting office.
So let's pretend that Google paid taxes the way the European politicians want them to do it. What would happen?
We start in the UK.
If Google was to do it the way the politicians want, they would have an effective tax rate of 66%.
Yes, tax evasion is wrong, but being triple taxed by greedy Governments is much worse.
The ones who are without moral scruples are the Governments who believe that global companies should be taxed again and again on the same money. Is it then really that surprising that these global companies try to avoid this? Wouldn't you do the same?
Back in 2012, I wrote about my own problems with foreign taxes. Because I'm a Danish citizen and I'm selling my books via Amazon (a US company), the US Government wants me to pay 30% income tax on my profit before the Danish Government wants me to pay another 41% in Danish income tax.
I'm being doubled taxed because I'm global, causing my effective tax rate on my books to be 58%.
In other words. A book selling for $12.5 only generates an income of $2.4. The rest (more than $10 per book) is eated up by taxes or fees (including local sales taxes, which in Europe is 15-25%).
It's just insane.
The way tax laws work today is that each Government believes it is entitled to a piece of the pie, and that the size of that piece has no relation to how many other pieces you have to give to other Governments.
So the solution is obvious. We need to change the tax laws so that the effective tax rate is fixed regardless of how many countries a global company operates with.
Let's say it should be fixed at 30%. Then, in Google's case, they pay 30% in the country a product was sold (but not anywhere else). It would work like this:
$100 million sold in the UK
Same as if they sold for $100 million in Italy:
That would be a fair way to do it, right?
Another way could be that Google should pay taxes based on their operations, like this:
Meaning that their tax rates would be:
Again, this would be a fair model. The effective tax rate is still fixed at 30% of Google's total profit, but each Government gets their piece of the pie in relation to the size of the operations.
Or we could simply leave it up to the corporations to decide where to pay taxes, by saying that 30% of your profit must go to taxes in any one of the countries of which you operate. Often this would then be the home country of which the company was founded.
This would encourage competition between countries, which is always a good thing.
And, again, this would be a fair model.
Or even better, let's get rid of corporate tax altogether and instead create laws that force corporations to share their profit with their employees. Take Apple as an example. They have 72,800 employees globally, and made $41 billion in profit last year.
But instead of giving their employees all that money, it is now sitting in an offshore bank account. If we were to say, for instance, that 80% of a corporation's annual profit must be shared with its employees, each Apple employee would get an annual bonus of $450,000.
If that was how it worked, we would never have a financial crisis ever again. That's 72,000 people who suddenly have an extra $450,000 per year they could spend in their local stores (and that's just Apple's employees).
Just think about that for a second...
Of course, none of this would ever happen as it requires the world's Governments to agree on a global tax law. And that is the essence of the problem. The reason why tax evasion exists is because each Government is still operating within the notion that the world ends at the border.
When you start to operate in more than one country, you are faced with the dilemma of either having to be double taxed, or having to use some form of tax evasion. It's the only way to avoid having to pay an unfair amount of taxes to greedy Governments who don't understand the global world.
Of course, that doesn't make tax evasion right. It's wrong, and it should be stopped. But we have to solve the cause of the problem, not the result.
We live in a globally connected world, but our tax laws are based on a local and disconnected market. If we sell a product with a global mindset, we should also pay taxes with a global mindset.
That's the real problem that we have to solve.
BTW: If you want to see just how absurd this whole tax evasion problem is, I invite you to watch the UK Government's select committee on tax evasion, when they interrogated Google, Amazon and Starbucks.
It's three hours long, but it demonstrates the politician's complete lack of understanding of both tax laws and the globally connected world. On the other hand, Starbucks, Amazon and Google did a very poor job of explaining it (especially Amazon), so we are back to the status quo.
But it's an enlightened view into a world of opposites.
Update: Eric Schmidt (from Google) responded to the increasing level of misinformation in the UK with "At Google we aspire to do the right thing. So we welcome a debate on international tax reform": http://goo.gl/LU1L6
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"Thomas Baekdal is one of Scandinavia's most sought-after experts in the digitization of media companies. He has made himself known for his analysis of how digitization has changed the way we consume media."
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