For large global businesses, the naming and shaming has just begun.
Apple Inc., Microsoft Corp., Hewlett-Packard Co., Starbucks Corp., Google Inc. and Amazon.com Inc. have already experienced very public interrogations of their tax strategies by legislators in the United States and Britain.
On Thursday, Europe's top regulatory official went a step further: He said he intends to oblige all large companies to reveal exactly how much they pay in taxes to each country where they do business.
Faced with severe budgetary gaps of their own, governments are pushing tax avoidance by corporations into the international spotlight. The most recent example came on Tuesday, when Apple's chief executive officer had to answer questions about how the firm managed to sidestep taxes on billions of dollars in profits at an Irish subsidiary.
While the tactics employed by Apple and other multinationals don't appear to be illegal, they are unsettling in an era of large government deficits, high unemployment and rising taxes for individuals. That in turn is generating pressure to close loopholes and revamp antiquated tax rules.
At a summit in June in Britain, the Group of Eight industrialized nations is expected to consider the issue. "We need global rules that prevent tax evasion and aggressive avoidance, and enable government to collect the taxes they are owed," wrote British Prime Minister David Cameron in an editorial published earlier this month.
Changing current laws will be difficult, especially in the U.S., which is experiencing a crippling period of political paralysis. But there is a growing consensus that the current tax code is not suited to an increasingly global economy, and politicians on both sides of the spectrum – among them U.S. President Barack Obama – have called for an overhaul.
"In an era of deficits, it's attractive to think about closing loopholes," said Kimberly Clausing, an economist at Reed College in Oregon, who studies international tax issues. "Having these dog-and-pony shows is a way of building public support."
Companies have long employed creative means to reduce the taxes they pay, often by shifting profit from countries with higher taxes to those with lower taxes, such as Ireland, Switzerland, Bermuda, Luxembourg and the Netherlands. In 2008, U.S. companies reported that 43 per cent of their overseas profits came from those five countries, yet those places accounted for only 4 per cent of their foreign employees and 7 per cent of their foreign investments, according to a recent report by the Congressional Research Service.
The quest for low-tax strategies got a boost from loopholes inserted into the U.S. code in the 1990s, experts say. That prompted companies to redouble their effort to pay not just minimal taxes, but if the circumstances permitted, none whatsoever.
"That aggressiveness, combined with the easing of regulations, has made this game more serious in recent years, but it has been with us for a long time," Prof. Clausing said. She estimated that profit shifting by U.S. companies costs the U.S. government more than $100-billion (U.S.) in tax revenue a year.
She added it was hard to blame companies if their actions weren't illegal. Their attitude is, "If you've opened this loophole for me, I'm going to drive a truck through it," she said.
Exposés in the media in recent years have also helped propel the issue forward: In 2011, The New York Times reported that General Electric Co., which had worldwide profits of $14.2-billion in 2010, managed to pay no U.S. taxes at all that year.
Bloomberg News provided details of complicated profit-shifting strategies with names like "Double Irish" and "Dutch Sandwich" that Google used to pay minimal taxes overseas.
Mihir Desai, a professor at Harvard Law School who does research on international tax issues, said these problems are knotty ones to solve since solutions call for a high degree of co-operation between countries.
Such co-ordination is "easy to talk about, but when the rubber hits the road it's very hard to do," he said. Somehow, the world still ends up with "a high supply of low-tax jurisdictions."
Still, with Europe moving to require companies to disclose exactly how much tax they pay, the status quo is shifting. "So much awareness has been created now, nothing short of real change will satisfy the public," said Richard Murphy, an accountant who heads Tax Research LLP in Britain and has helped lead a campaign against tax avoidance.
"This is a pro-smaller business agenda," he added. "It is delivering a level playing field for honest business."
MINING THE LOOPHOLES
An investigation by the U.S. Senate showed this week that the maker of iPads and iPhones had paid just 2 per cent tax on income of $74-billion (U.S.) over the past three years, largely by exploiting an unusual loophole in Ireland's tax code. Ireland has said it is not to blame, and Apple has defended its practices, which are legal. But the Senate report has added to the furor surrounding tax avoidance by major companies.
Despite generating $18-billion of revenue in Britain from 2006 to 2011, the Internet search giant paid only $16-million in taxes to British authorities. Google says it does not have a sales presence in Britain and therefore cannot be considered resident for tax purposes, lowering its obligations. An investigation by Reuters has found that some of the 1,300 people employed by Google UK Ltd. are engaged in sales-type work or have titles that suggest involvement in sales and marketing activities, but Google says it hires people with a sales background even if they are not directly involved in selling. The British Parliament has called Google executives before a hearing to try to learn more about its activities.
Starbucks came under criticism last year after Reuters revealed that the coffee chain paid only £8.6-million ($13-million) in taxes on £3.1-billion of revenues since 2000. Starbucks has said it comes down to where the company books its profits. Accounts filed for its British, German and French units, which make up 90 per cent of European revenues, show a loss of $60-million in 2011, hence very little tax. However, Starbucks told investors that its European businesses were actually profitable, making $40-million in 2011. The gap is all down to clever tax planning and exploiting loopholes.
The Internet retail company runs the bulk of its European operations out of Luxembourg, allowing it to minimize the amount of tax it has to be pay on revenue generated in other European countries. But the tax avoidance mechanism has also allowed Amazon to dramatically cut its U.S. tax bill, an investigation by Reuters has shown, with the company paying a tax rate of around 5.3 per cent over the past five years. U.S. tax authorities have asked Amazon to pay back taxes totalling $1.5-billion, a demand that the company has said it will "vigorously contest."
Vodafone Group PLC
The world's largest mobile phone operator has managed to gradually reduce the amount of tax it pays in Britain over the past decade by using legal tax avoidance schemes, including registering profit in other jurisdictions, such as Luxembourg. A Reuters examination of statutory filings by Vodafone across Europe over the past 16 years shows that the British taxman has frequently gone empty-handed, losing out on perhaps has much as £1-billion ($1.51-billion) in revenue.