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Apple, Google, and Facebook have evaded taxes for years

The world's most powerful and wealthy countries have decided to take seriously the problem that has deprived them of billions of dollars for years — taxation of digital companies whose products are difficult to account for, and therefore the largest corporations pay tax on profits from their sales where the rate is lower. For a long time, Google, Facebook, Apple, Amazon, and the like managed not only to save big money but also to squabble among the world's leading economies, unable to divide the tidbit of the pie. But now they have united for the common goal of making recalcitrant merchants pay. The latter suddenly say they are only too happy to cooperate with the authorities.

At the Cornwall Summit in London, the G-7 countries (USA, Canada, UK, Germany, France, Italy, and Japan) decided to introduce a new tax that will soon be applied to the profit of IT companies. According to preliminary agreements, the minimum amount of tax will not depend on a particular country and will be 15 percent, but it can be increased in the future.

The decision has already been approved by more than 130 countries (a little more than two-thirds of all UN-recognized countries), but it is too early to consider the issue resolved. To fully implement the plan, there are still many instances to go through, the first being the July summit of the G20 finance ministers. However, many economists and officials are happy that the matter has been moved forward. British Finance Minister Rishi Sunak called the initiative historic and said that his country will now be paid fairly by “the biggest multinational technology giants.

International taxation has long been a sensitive topic for the global economy. Major companies from around the world register in countries with low rates (not necessarily the classic offshore) and are in no hurry to return some of their earnings to their home countries. Many have resorted to complex schemes using several jurisdictions at once. For example, the “double Irish with a Dutch sandwich” involved (until it was liquidated last year) the connection of two companies from Ireland and one from the Netherlands: the latter acted as a “spacer” through which profits to the parent structure were transferred in the form of royalties for the use of the intellectual property.

U.S. corporations, unwilling to share with the government, have kept profits from overseas for decades in the accounts of local subsidiaries — some estimate about $2.7 trillion as of 2017. U.S. laws allow it to be freely invested or diverted to develop the unit without paying tax until it returns home.

To turn the tide, former President Donald Trump introduced sweeping reform in 2017, part of which was the introduction of a special tax on the repatriation (return to U.S. banks) of foreign income. Instead of the standard 35 percent income tax, such transactions are now subject to a one-time payment of 15.5 percent or even 8 percent (depending on the type of assets in which the returned funds were invested). Moreover, all new foreign profits are now taxed only at the state level. But even this measure did not have much effect: instead of the expected $4-5 trillion, companies returned only a few tens of billions, most of which were spent on share buybacks — an alternative way to share profits with investors.

In a special position

IT companies have always been in a special, more advantageous position. An ordinary firm selling its own or someone else's products, in any case, has to pay taxes at the place of the transaction — in the country where the branch or subsidiary is registered. The head office can move to a jurisdiction with preferential treatment, but it will apply only to those funds that can be collected from the units around the world — through dividends, interest, or complex schemes. However, this money will in any case be taxed somewhere else. This manifests the principle that many economists and top managers consider unfair: what a company earns is actually subject to tax twice — in the form of profits and dividends (interest on loans).

But the products of IT companies are too specific. These days, they are less and less available on physical media and more and more sold online — through licenses, patents, and just individual files. There's nothing stopping Google from selling a song or album by a copyrighted artist from anywhere in the world. The buyer will be able to simply download them to their device from a server, or get unlimited access to the source. It does not matter where he will be at that moment, because the seller is not a branch of the company in his country, but the head office (or a regional one for many countries at once). According to all the formalities, the profit is generated at the place of registration of such a branch, which means that taxes are to be paid there as well.

It makes sense to locate offices in countries with low taxes, especially if they are respected members of the European Union and are not associated with semi-legal offshore companies. This is exactly what American technology giants such as Google and Apple, Facebook, and Amazon did — together they got the acronym GAFA, which many governments associate with fraud and non-compliance. They entered into special secret agreements with the Irish authorities. For example, Apple agreed with Dublin back in 2007 that its effective (real) income tax rate would be just 1.9 percent — while in the United States, companies were required to pay 35 percent. The deal was worked out in an elaborate scheme in which the corporation set up several subsidiaries in Ireland and Bermuda.

All of them were called “head offices” but in reality had little or no activity other than Internet meetings, no premises, and no staff, which did not prevent them from transferring intellectual property rights to each other and paying compensation under inter-company agreements (which counted as expenses deductible in the bottom line). Only the main office in Ireland, which covered all of Europe, the Middle East, Africa, and India, really worked. Sales of iPhones and other devices, including in Russia, were conducted through licensed intermediaries with no legal connection to Apple.

Nevertheless, this was enough to comply with Irish laws, which allow a company not to be considered a resident (and thus exempt from tax) if it is run from another country. For example, in 2011 one of Apple's Irish subsidiaries, Apple Sales International (ASI), made 16 billion euros in profits, but transferred almost all of it to one of its “head offices. Only 50 million remained in Ireland, from which the tax was paid at a higher than usual rate of 20 percent. The other local “subsidiaries” also “lit up” only a small part of the income, taxing them at the full rate. As a result, the effective tax rate was less than two percent, and Ireland's regular terms are already the most forgiving in Europe: 12.5 percent.

12.5 percent is the corporate income tax in Ireland, one of the lowest in the EU

Facebook resorted to similar tricks (it transferred to the Irish subsidiary almost all of its earnings) and Google. The latter, however, claimed that it says “the overwhelming majority of the tax due” at home, that is, in the U.S., on an equal basis with everyone else. The global average effective rate, according to executives, was 26 percent in the mid-2010s. But journalists were able to find out that over the years, the corporation took most of its profits not only to Ireland but also to other countries in Europe, with whose authorities were able to negotiate, as well as offshore. For example, in 2017, Google paid 3.4 million euros of tax in the Netherlands — at a multibillion-dollar profit.

Numerous investigations were carried out not only by the media but also by the European Commission. In particular, it found that in 2014, the effective tax rate on profits from Apple's European operations was a paltry 0.0005 percent. Under pressure from the EU authorities, Ireland had to give up its special relationship with world-renowned companies and even closed a loophole for the use of the famous “double Irish with a Dutch sandwich” scheme. In 2016, Apple was charged an additional 13 billion euros, which Brussels estimated it had underpaid to the European budget over several years. But four years later, the court reconsidered the decision and canceled the fine, agreeing that there had been no development and therefore no full-fledged activity in Europe.

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