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Get off Googleís tail

By Jonathan J. Ariel - posted Monday, 28 May 2012


Taxes are the price we pay for a civilized society. Oliver Wendell Holmes Jr., Associate Justice of the Supreme Court of the United States, 1904

On Wednesday, the Australian Financial Review continued the conversation that began two days earlier by Opposition communications spokesman Malcolm Turnbull who drew the public’s attention to how little tax is paid in Australia by giant technology multinationals in the face of eye-popping revenues. Mr Turnbull alerted the community to the $74,000 paid by Google Inc. to the Australian Taxation Office from a revenue base of $1.1 billion last year. David Pratley, a partner at MinterEllison elaborated on the complexities involved when addressing the issue in an op-ed.

In response to the AFR articles, Google stated that: “(It) complies fully with all relevant tax rules in all the countries in which it operates, including in Australia.”

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Nobody said what Google was doing was illegal, even though sound bites insinuated as much. But clearly what Google is doing isn’t to Australia’s advantage.

Mr Turnbull’s comments were supported by Yahoo!7 chief executive Rohan Lund who lamented that “It is frustrating to face competitors with no geographic borders, who are advantaged by paying less tax and may not be as regulated.”

You’re right Mr Lund, but don’t blame Google for complying with the law. Complain to the lawmakers.

Sadly neither Mr Turnbull nor Mr Pratley offered a solution or even an approach to a solution. But Australian taxpayers are not alone in feeling cheated. It’s clear that lawmakers elsewhere too have crafted legislation that allows multinationals to decide just how much tax they want to pay. Many times they decide to pay zero.

Can you blame them?

The United States also suffers from corporations’ nimbleuse of accounting. From 2005 to 2010 GE made US$26 billion in profits, but paid not a cent in U.S. Federal Income Tax. In 2009, the world’s biggest oil company Exxon made a profit of US$19 billion and you guessed it, paid zip U.S. Federal Income Tax. Recently Her Majesty’s Treasury was placed under pressure to investigate Apple Inc. after it emerged the US-based technology giant paid £10 million in British tax in 2010 while generating an estimated £6 billion in revenue.Online retailer Amazon is under investigation by the same Treasury for recording about £8 billion in revenue in Britain over three years without paying a brass razoo in tax.

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While such behaviour by global corporations is perfectly legal, it is clear that they are also economically indefensible assignment of profits to subsidiaries in low-tax jurisdictions.

A sound perspective on this aspect of creative accounting, known as “Transfer Pricing” was offered in July 2010 by the economist Martin A. Sullivan, Ph.D in his presentation to the Committee on Ways & Meansof the United States House of Representatives.

In the context of the United States as the market, Sullivan examined the profitability of foreign registered affiliates of U.S. multinational corporations in five low-tax countries. In all these jurisdictions the average effective tax rate of U.S. affiliates was under 10 percent. These are all tiny jurisdictions, but amazingly they together account for a whopping 24 percent of foreign profits of U.S. multinationals. While there is no perfect way to measure profitability, but by almost every measure these five tax havens have surprisingly high rates of profit. These figures strongly suggest U.S. multinationals are readily able to secrete profits into tax havens and thereby significantly reduce taxes properly owed to the United States and other industrialized nations.

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About the Author

Jonathan J. Ariel is an economist and financial analyst. He holds a MBA from the Australian Graduate School of Management. He can be contacted at jonathan@chinamail.com.

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