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Sunday November 18, 2012

How low can the tax rate go?

Governments around the world must now be wiser against the greed of corporations and stop the damaging race to the bottom.

SOME of you readers are probably aware that I am involved in trying to find a solution to the plight of some 800 employees retrenched by Sanmina-SCI without prior notice. I am disappointed that our ministers and people’s representatives have kept a deafening silence regarding the matter.

In the course of my investigation and research, a striking issue came to the fore. Governments all over the world are bending over backwards offering low tax rates and breaks to attract multinational companies.

I am no tax lawyer and I do not for a moment suggest that the companies are breaking the law. The big question is why there are laws designed to allow certain corporate behaviour such as transfer pricing and tax avoidance?

The Economist, one of the world’s foremost economic magazines, in its latest issue stated that “higher rates discourage work and investment and encourage tax avoidance”.

I simply don’t buy this.

Let’s take the case of Apple. The world’s most profitable technology company has a handful of employees in a small office in Reno, Nevada, in the US. It doesn’t design iPhones, MacBooks or iPads there.

Apple’s headquarters is in Cupertino, California. By putting an office in Reno — just over 300km away — to collect and invest the company’s profits, Apple sidesteps state income taxes on some of those gains. It has avoided millions of dollars in taxes in California and 20 other states. The company paid cash taxes of US$3.3bil around the world on its reported profits of US$34.2bil last year, a tax rate of 9.8%.

California’s corporate tax rate is 8.84%.

Nevada’s? Zero.

This is one of the many legal methods Apple uses to reduce its worldwide tax bill by the billions. It has also created subsidiaries in low-tax places like Ireland, the Netherlands, Luxembourg and the British Virgin Islands — some little more than a letter box or an anonymous office — that help cut the taxes it pays around the world.

Almost every major corporation tries to minimise its taxes, of course. Corporate giants have taken advantage of tax codes written for an industrial age and ill-suited to today’s globalised economy.

In its defence, Apple states that it “pays an enormous amount of taxes, which help our local, state and federal governments”.

But shouldn’t it have paid more?

Not far from Apple’s Cupertino headquarters is the De Anza College, a community college that one of Apple’s founders, Steve Wozniak, attended from 1969 to 1974. Because of California’s state budget crisis, due in part to low tax rates and tax avoidance, De Anza has cut more than 1,000 courses and 8% of its faculty since 2008.

“I just don’t understand it,” the college president said in an interview.

“I’ll bet every person at Apple has a connection to De Anza. Their kids swim in our pool. Their cousins take classes here. But then they do everything they can to pay as little taxes as possible.”

So my point is, should California reduce its tax rate to zero to match Nevada’s so as to discourage Apple from avoiding tax?

But then, what is stopping Nevada to move to negative tax and pay incentives to big businesses?

Britain and Germany recently announced plans to push the Group of 20 economic powers to make multinational companies pay their “fair share” of taxes following reports of large firms exploiting loopholes to avoid them.

Britain’s Public Accounts Committee has started holding inquiries amid mounting public and political concern about tax avoidance by big international companies. The committee was astounded that Starbucks UK had managed to report 13 years of losses.

A Reuters report showed that Starbucks had paid no corporation or income tax in Britain in the past three years and had paid only £8.6mil since 1998. Over this period it sold £3.1bil worth of coffee.

“You’re either running the business badly, or there’s some fiddling going on,” Austin Mitchell, one of the MPs, said to Starbucks’ chief financial officer, Troy Alstead, who denied the company was shifting profits out of Britain.

But it was revealed that Starbucks UK remitted 6% of its turnover to its Dutch unit as the company had an agreement with the authorities of the Netherlands which allowed it to pay a “very low tax rate”.

It was also revealed that Starbucks’ Swiss coffee trading unit charged its own group of companies a 20% mark-up on coffee beans.

With a turnover of over US$1bil, this represents an income of more than US$200mil for the Swiss unit, which employs 30 people.

Why?

Switzerland charges effective tax rates as low as 5% for coffee trading. Alstead had denied that Starbucks, the world’s largest coffee chain, channelled profits through tax havens and said it followed the law in every country where it operated.

Likewise, Apple, in a statement, said it “has conducted all of its business with the highest of ethical standards, complying with applicable laws and accounting rules”.

The only way is for governments to come together to maintain similar tax rates so that companies would not be able to play countries off each other to push them to lower tax rates, as what has happened over the past three decades.

This has caused tax revenues to fall and governments to incur huge budget deficits that have compromised investments in infrastructure, education and development.

It also means that governments need to implement Goods and Services Tax (GST), transferring tax from income (and profits) to consumption that is pushing the impact upon those in the lower-income group even more than before.

I do not buy the claim that in Malaysia only 10% of the top earners pay taxes. They conveniently forget that whenever people buy motorbikes, they pay sales tax and excise duty.

When I watch the latest James Bond movie, I pay a 20% entertainment tax. When I drink a glass of whiskey, I pay a sin tax. And when I try my luck at the lottery with my last dollar, I also pay a 10% tax.

Governments around the world must now be wiser against the greed of corporations and stop this damaging race to the bottom. Otherwise they might end up paying taxes/incentives to big businesses, as happened in the case of Sanmina-SCI.

They leave at the end of their tax holidays.

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