The global corporate tax fraud

International tax avoidance has become big news, with reports of hundreds of global corporations using complicated legal and accounting structures to channel profits into tax havens.

Just how big is the global tax rort? And why are politicians suddenly talking about it?

A cache of documents, uncovered by the International Consortium of Investigative Journalism (ICIJ) and released on 5 November, has exposed secret tax agreements between Luxembourg authorities and 343 multinational corporations that have allowed the latter to slash their global tax bill by billions of dollars. Five hundred and forty-eight pre-tax agreements, totalling more than 28,000 pages, were issued by the tiny EU state between 2002 and 2010.

‘Magical fairyland’ for corporate tax dodgers

The ICIJ investigation named PricewaterhouseCoopers (PwC) as one of several of the world’s largest accountancy firms that had negotiated the tax rorts on behalf of hundreds of corporate clients. Behind each deal was a PwC accountant who advised companies on how to establish a network of loans between sister companies to shift profits from one part of a corporation to another, thereby keeping profits off the radar of tax authorities across Europe, the Americas, Asia and Australia.

For example, the Memphis-based FedEx Corporation established two Luxembourg subsidiaries to shift earnings from its Mexican, French and Brazilian operations. According to the ICIJ, FedEx moved profits from Mexico to Luxembourg mostly as tax-free dividends, whilst paying in tax only one quarter of 1 percent of its non-dividend income under an arrangement with Luxemburg authorities. In other words, 99.75 percent of FedEx’s profits shuffled from Mexico to Luxembourg were tax-free.

Stephen E. Shay, a Harvard Law School professor of international taxation and a former US tax official, told the ICIJ that Luxembourg is like “a magical fairyland” for corporate clients seeking to avoid paying tax.

More than $140 billion a year in company profits were siphoned through the tax haven under agreements signed by Luxembourg tax office chief Marius Kohl, according to an 8 November report in the Australian Financial Review. “On a good day”, wrote AFR journalist Neil Chenoweth, “[Kohl] would sign up to 39 of these tax agreements with foreign companies. In a 12-hour day, that’s one signature every 18 minutes.”

$140 billion a year is a staggering figure. Ending global poverty would cost $30 billion per year, according to the United Nations. Providing basic education to all children would cost $26 billion annually, according to UNESCO. And bringing clean water and sanitation to all would cost an additional $10 billion a year, according to the World Health Organisation’s Water Supply and Sanitation Collaborative Council.

If we do the maths, a 30 percent corporate tax rate applied to the profits of these 343 corporations could have both ended world poverty and provided sanitation and safe drinking water for every person on the planet over the last decade. And that’s just based on the hidden corporate profits exposed in these 548 secret tax deals: most likely they are just the tip of the iceberg.

Who’s dodging what?

Among the culprits in this global rort are major banks and financiers such as Deutsche Bank, JPMorgan Chase, Blackstone and the Carlyle Group; insurance company American International Group (AIG); household goods manufacturer Procter & Gamble; food processing company Heinz Group; pharmaceutical corporation Abbott Laboratories; and retail giant Amazon. Dozens of Australian companies, including construction company Lend Lease and banks AMP and Macquarie Group, have also taken advantage of Luxemburg’s low-tax “magical fairyland”.

One of the most brazen is the Australian subsidiary of furniture retailer IKEA. According to the AFR, IKEA Pty Ltd earned an estimated $1 billion in profit over the last decade, but exported almost all of it tax-free to Luxembourg and the Netherlands. Documents obtained by ICIJ, according to the AFR, detail secret agreements brokered by PwC that allowed IKEA’s Australian stores to hide $4.76 billion in revenue from the Australian Tax Office (ATO) between 2002 and 2013.

$2.67 billion was paid in supply fees to another IKEA entity and $904 million more was paid to IKEA companies in Luxembourg and the Netherlands. The company paid just $30.7 million in tax to the ATO on its declared pre-tax profit of $103 million, while its sales surged 500 percent over the same period. Having hidden 90 percent of its earnings from the ATO, it paid tax in Australia of just 3 per cent on its gross earnings.

This massive rort has been repeated over and over again in the 24 countries in which IKEA operates its 264 stores. Being the sole proprietor of its intellectual property, the IKEA parent company can charge its national subsidiaries a hefty mark-up on its products, each time shielding a share of profits from tax authorities around the world.

A rotten apple?

Also rorting the ATO is IT giant Apple. A 6 March article in the AFR revealed that last year Apple declared pre-tax earnings in Australia of only $88.5 million after sending an estimated $2 billion of its Australian sales income offshore to Ireland via Singapore, where it had negotiated a secret tax deal.

Accounts obtained by the AFR from Apple Sales International indicate that, over the last 12 years, Australians spent $26.7 billion on Apple products, yet Apple paid only $193 million (equivalent to 0.7 percent of revenues) to the ATO. According to the AFR, $8.9 billion was shifted to its Irish subsidiary, Apple Sales International, supposedly as payment for intellectual property rights.

Apple Sales International has reported more than $112 billion of profits in the last five years, according to the AFR. Yet Apple’s accounts show it has paid less than 50¢ in tax on every $1,000 of income.

And there are plenty more bad apples in the barrel: Google, Amazon and Starbucks have all been called before US congressional committees for channelling profits through tax havens such as Bermuda.

These rotten apples are not just depriving us of funds to pay for our schools, hospitals and infrastructure. They are also up to their ears in exploitative labour practices and environmental vandalism.

In 2010, several suicides at Foxconn, one of Apple’s major suppliers in China, led to scrutiny that exposed harsh working conditions that breached health and safety standards and exceeded legal limits on overtime. These allegations have continued to plague Apple.

In March last year, China Labor Watch reported that employees at three Chinese factories of another major Apple supplier, Pegatron, had suffered from excessive overtime (calculated as more than 60 work hours per week) and low wages. The report described management abuses, pollution issues and recruitment of underage workers.

Of course this kind of plunder is of little concern to our politicians and their business backers. What needles them more is the outcry from Australian businesses that lack the muscle to take advantage of global tax havens. As Taxpayers Australia spokesperson Mark Chapman told the AFR, “[Apple’s tax evasion] is all legal but decidedly unfair. Domestic businesses don’t have the opportunity, the resources or, in most cases, the inclination to set up these kinds of complex transnational structures.”

Capitalism is a dog-eat-dog system. Businesses must compete for market share; those that don’t soon hit the wall. Indeed, corporate tax evasion in Australia is nothing new. In 1987, the ATO’s annual report documented 6,688 cases of Australian companies involved in what had become known as “bottom of the harbour schemes”. They were stripped of assets and accumulated profits, leaving them unable to pay their tax bills. In 1998, Chris Corrigan tried the same trick with Patrick Stevedores before sacking the company’s maritime workforce.

In January this year, Tony Abbott told World Economic Forum delegates in Davos that “taxes need to be fair, as well as low, in order to preserve the legitimacy of free markets”. What he meant was that bigger corporations need to contribute something in order that the whole capitalist system – geared as it is towards accumulating profits, not meeting people’s needs – won’t be brought into disrepute.

Next time Hockey tells us that we all need to get into some “heavy lifting” for the good of the country, we should collectively point the finger at those corporate robber barons whose ill-gotten wealth has been squirreled away in the tax havens of Ireland, Bermuda, Luxembourg and the Cayman Islands.