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Apple, hypocrisy and stakeholder tax

22 May 2013 By Edward Hadas

Apple is the latest multinational to feel the heat on cross-border tax management. The news that the tech giant used Irish law to lower U.S. tax payments should not have been surprising. After all, “Do no evil” Google had no second thoughts about recording what were essentially British sales as Irish, for the sake of a lower tax rate. It’s hardly likely that Apple, which has cultivated a certain anti-establishment air, would have hesitated.

Indeed, until a few months ago, I don’t think there was a corporate treasurer anywhere who would have taken justice into account when deciding on tax strategy. At most, there might be worries about bad publicity, but the well-established corporate practice of tax dodging had generated little attention.

And who would complain? Lower taxes on profit bring benefits to most people connected with companies; the money that doesn’t go to the government goes to workers, customers and shareholders. Besides, most experts who understand the arcane rules of international taxation are paid to use them to keep payments down.

In theory, politicians could be indignant about the government’s lost revenue. But legislators approved the tax laws and almost never objected to aggressive interpretations. Although corporate lobbying certainly played a role in these political decisions, there is a reasonably strong economic case for letting companies engage in guerrilla tax-shopping.

Taxes on profit provide a relatively low portion of the total government take – 9 percent in the United States – and new or retained jobs and investment usually generate far more new tax revenue than is lost by lower taxes on profit. For small countries such as Ireland and Luxembourg, the choice is often between luring companies that can provide a little tax revenue and receiving nothing.

Politicians are now complaining. Hypocritical? Sure, but in the maxim of François, duc de La Rochefoucauld, the 17th century French moralist, “hypocrisy is the tribute which vice pays to virtue”; and fair corporate taxes are really virtuous.

The ethical argument is simple. Taxes on profit should be considered a partial payment for the many services which governments provide: protecting property rights, providing an educated workforce and generally holding society together. An unfairly low tax payment is no different from unfairly low wages, unfairly high prices or unfair disregard of environmental damage.

Traditionalists reject the idea that corporate managers should balance the legitimate interests of all stakeholders, including governments. They think that managers should first of all serve shareholders, whom they call “owners”. However, that piece of economic theory is unrealistic, because in the long term shareholders only gain if everyone else does. It is also unjust, because in reality shareholders, who should be known as “residual financial investors”, are only one of many important constituencies, and rarely the most important.

If everyone thought in global terms and for the long term, there would be no problem introducing a fairer regime: a reasonable portion of profit paid as taxes in the country where they were earned. After all, any losses from higher corporate-tax payments would eventually be compensated somewhere with gains from lower non-corporate taxes.

Back in the real world, conflicts are inevitable. The complexity and variation of national tax codes will inevitably slow progress, and even if governments agree on the principle of international tax equity, they won’t rush to change their own regimes. Ireland and other tax havens would almost certainly balk, and the United States would resist abandoning its tax on profit earned in other countries.

I see three encouraging precedents. Many countries sacrificed immediate self-interest in agreeing to tariff cuts in the decades after World War Two. A combination of shame and political pressure has worked wonders in the campaign against jurisdictions which give individuals legal protection against foreign taxes. Most recently, shame alone is bringing higher safety standards in garment factories.

The shame weapon has already been unleashed in the new battle against corporate-tax manipulation. Bad publicity of the sort that Apple is now receiving can be effective, since companies respond to public opinion. Still, while Starbucks buckled in the UK, Apple has shown no sign of repentance and Fiat Industrial is planning a tax-motivated headquarters move, from Italy to the UK.

As with tariffs, individual taxes and factory safety, substantial progress requires a group effort. No single participant has enough clout to dictate rules, but if enough big players agree, the pressure on laggards is irresistible. The tax agenda is straightforward. First agree on key definitions: where sales take place and what price is fair for intra-company international transactions. Then ban letter-box legal entities.

Negotiations have not even started, but I think they can succeed, especially with unrelenting pressure from the public. While corporate-tax injustice is not the global economy’s most serious problem, it is easy to see and relatively easy to solve. Please, politicians: don’t be foolish enough to waste this opportunity.

 

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