Google boss Eric Schmidt said last week that he had a duty to shareholders to pay as little tax as possible. “It’s called capitalism,” said Schmidt. “We are proudly capitalistic. I’m not confused about this.”
He was defending the measly £6 million that the company paid on its £2.5 billion sales in Britain.
The government takes tax avoidance in its stride because, contrary to the rhetoric, it is not some aberration. It is the normal practice of the world’s biggest firms.
To see how the system works, look at Volker Beckers, the newest non-executive director at HMRC, the tax office. He was appointed last month after standing down as boss of energy giant Npower.
Npower made £766 million profit in 2009-11, but paid just £5 million tax in Britain.
The government has been making a lot of noise about clamping down on tax avoidance and evasion. But it works hand in glove with the companies most responsible.
There exists a revolving door between the top levels of HMRC and the “Big Four” accountancy firms that advise corporations and the rich on how to pay as little tax as possible.
These firms provided advisors to help write changes to tax law—then used their knowledge of that law to help their clients find loopholes.
A recent report by parliament’s public accounts committee found “what look like cases of poacher turned gamekeeper, turned poacher again”.
For example staff at KPMG, one of the four, advised the government on changes to the patent law that governs corporation tax on intellectual property.
KPMG then issued leaflets saying that patent law was an opportunity to pay less tax.
“Those seconded don’t even change their email addresses when undertaking government business,” explained Richard Murphy on his Tax Research UK blog, “which means that we now have the absurd position that government business takes place through the file servers of the Big Four.”
A series of documents leaked in recent months has revealed that former HMRC boss Dave Hartnett was willing to bend over backwards to accommodate bosses reluctant to pay tax.
By 2011 HMRC was in dispute with 2,700 companies for £25.5 billion of uncollected tax—more than the government’s whole secondary education budget.
Hartnett tried to close this gap with sweetheart deals, allowing firms to close the dispute by paying just a small portion of what they owed.
In an email to a colleague he said that a deal letting Goldman Sachs off up to £20 million would save the government “embarrassment”.
Some of the deals were much larger, often involving several billion pounds at a time. Vodafone only had to pay £1.25 billion of arrears worth up to £6 billion.
At the same time the government was merrily laying off the HMRC workers who chase down the tax avoidance. HMRC is projected to have shrunk from 97,073 workers in 2005 to an all-time low of 56,100 workers by 2015.
The fiction of tax havens
Around £4 trillion has been squirreled away from tax collectors in overseas territories and crown dependencies belonging to Britain.
These are mostly tiny islands—in the Cayman Islands, there is over £18 million of bank assets for every inhabitant.
David Cameron is going cap in hand to the official rulers of these islands to ask them to cooperate in stopping tax evasion. He puts on a good show, but it’s all smoke and mirrors.
The curious collection of quaint colonial throwbacks that run the tropical islands and feudal relics in charge of the Channel Islands and the Isle of Man are no more real than Apple’s ghost firms (see left).
They are islands populated by British citizens, with Britain’s government in charge of defence and security.
Their nominal independence exists for one purpose only—to help the rich wriggle out of paying their taxes.
Just where are you based?
Google’s sales in Britain are worth £2.6 billion. But these are registered not to Google UK, but Google Ireland.
Officially, Google’s arm in Britain only exists as a service to an operation in Ireland, where corporation taxes are lower.
Almost £7 billion of Google’s worldwide sales are classed as taking place in Bermuda—allowing it to dodge £1.4 billion in tax.
Starbucks redirects its British profits through Switzerland, and Amazon through Luxemburg.
Apple boasts of being the largest US corporate taxpayer, but it has been exposed as being one of its largest tax dodgers in an explosive congressional investigation last week.
It has a global web of affiliate and subsidiary companies existing only to scam the taxman.
It sells its own products cheaply to Apple Sales International in Ireland, which then sells them on at inflated prices to Apple retailers.
So products that go straight from factories in China to shops in the US are counted as profits generated in Ireland.
Another £21 billion of profits was registered through Apple Operations International. That’s a legal fiction of a company so audacious it went five years without registering any country as its tax residence.
‘Morally wrong’ to dodge taxes
It’s no surprise the Tories are reluctant to chase the legal tax dodgers. Chancellor George Osborne and two other ministers use legal loopholes to avoid tax themselves.
David Cameron branded the tax avoidance scheme used by comedian Jimmy Carr “morally wrong”. But it was also used by hedge fund manager George Robinson—who gave the Tories more than £250,000.
‘Cut taxes to stop dodgers’
Ukip leader Nigel Farage, the Taxpayers’ Alliance and the bosses’ institution the CBI have a novel solution to tax avoidance.
They all argue for making taxes in Britain so low that companies won’t bother to pretend that they made their profits elsewhere.
But corporation tax in Britain is already set to fall next year from 23 percent to 21 percent. It was 35 percent under Margaret Thatcher.
Cartoon villains for Ed Miliband
Labour leader Ed Miliband last week advised Google to be good capitalists like Willy Wonka rather than “irresponsible” ones like Mr Burns from the Simpsons.
Shadow chancellor Ed Balls’ plan for tax avoidance centres on the vague notion of “Intelligent Transparency”.
Labour may say they’ll stop tax avoidance—but they don’t want to scare the bosses into thinking they’d actually do it.