Thursday, 23 May 2013

Tax evasion is a crime. Tax avoidance is a .... ?

In the good old days, this was an easy cliche. Tax evasion (breaking the law) was a crime. Tax avoidance (minimising paying the tax within the law) was something you were duty bound to do. Whether you are an individual, company, whatever. Period. Now it isn't so clear cut an answer.  And that says something about our times.

Witness the case of Apple. It does aggressive tax planning (all within the law). It has a big subsidiary in Ireland and has done a deal with the government there for a low tax rate. It does not bring overseas profits into the US, because it is double taxed then; so it leaves all its overseas profits overseas. All very legitimate. And yet there has been a huge outcry and a Congressional hearing where Apple is accused of not paying "its fair share of taxes".

Similar accusations are levied on Amazon, Google and Starbucks in the UK and indeed in many other countries. Nowhere are the authorities claiming they broke the law. They are just angry that these companies pay a low or zero tax despite large businesses in those countries.

From a public's point of view, there is no difference between evasion and avoidance. The expectation is that all companies must pay lots of taxes irrespective of the law and facts. Equally all rich people must pay big amounts of tax even if the law does not require them to do so. But for each individual himself, it is perfectly OK to evade tax (breaking the law). Queer set of values.

Almost everybody in India breaks the law when it comes to taxes. And before you protest too much, please answer if you have disclosed your savings bank interest as income in your tax return and if you have done no cash transactions above Rs 10,000. The less said about professions like lawyers, doctors and the like, the better. The salaried class is one of the worst offenders - their salaries are caught by the taxman under the withholding tax regime. Everything else, in the eyes of the salaried man or woman is not to be disclosed as after all they are paying "lots of tax" on their salaries.

Why does this work like that. Why is it OK for us to evade tax, but not for others even to avoid it. Is it just pure jealousy against the rich ? Is it just one law for everybody else and one law for us ? What is going on ?

For corporates and rich individuals, there is an expectation of  social responsibility at play here. It is not enough to follow the law. It is now required to be seen as "being fair to society" everywhere. This is a woolly concept ; after all what is the concept of fair.  But each company has to make its own "contract" with society. The more successful you are, the more demanding the contract.

Social responsibility has gotten an altogether new meaning, A far more challenging meaning. Companies have to be seen as "good citizens, whatever that means. Notice that the public's definition of a good citizen is "I break the law, but you shall do over and above the law". "

Its a tough world out there.


Prats said...

Absolutely true... The hue and cry over avoidance is uncalled for.

As a matter of fact in India we are one step ahead as the government goes and retrospectively amend laws to penalize avoidance; CIP- Vodafone

Sriram Khé said...

I was pretty confident you would blog about this. It was only when. Thanks for affirming my image of you, Ramesh ;)

I find it very fascinating that by and large the American political left has been silent on this Apple tax avoidance. I mean, hey, it is no small #, but $30 billion over four years by a (shell) company with no employees should be like honey to which the lefty ants will be drawn right away. Think about how they went after the oil companies' profits, which compared to Apple have very, very low profit margins.
I suspect it is because the left has been one serious Apple products worshipper. So, to paraphrase LBJ, Apple may be a sonofabitch but is "our" sonofabitch!

As Matt Yglesias points out, at least Apple paid some taxes. "By contrast, Citizens for Tax Justice has compiled a list of 26 major American companies that paid no taxes whatsoever from 2008 to 2011. That includes Boeing, Verizon, GE, and a slew of electrical utilities like PG&E, Pepco, and ConEd."

I remember how much folks, including me, railed against the zero-tax GE. (I rail against the cash-mountain Apple too. I am an equal opportunity railer!)

Yglesias says we should a well abolish corporate taxes. I am not so sure ...

These persons ought to be jailed. Oh, wait, how do you jail a corporation even though it is a person? hehehe ;)

Ramesh said...

@Prats - Yes, Vodafone case is the worst example , where even the government considers it OK to do this.

@sriram - Aha. At last an issue we can seriously disagree on.

My friend - its is immaterial how big a company is or what tax rate it pays, as long as it follows the law. By all means prosecute if they are breaking the law (do you think the IRS would have let this happen if there was even a small chance of levying a demand on these companies. We all know how intrusive the taxman is). If the companies are not breaking the law, it is immoral to rail against them. If you believe that this is not a fair system of taxation, then change the law by all means. But don't condemn a company for paying zero tax.

The same tax breaks are available for you and me too. We all claim deduction on mortgage interest - that's as bad as any of the so called corporate loopholes.

And by the way it is erroneous to claim that tax laws are so fixed because of lobbyists and the power corporations have. That is simply not true to a large measure. The reason why these breaks exist is because the US is in competition with other countries. That's why overseas operations of Apple are headquartered in Ireland because that's the most favourable tax regime. The more you remove the breaks, the more business will flow to other countries.

By the way, the corporate tax law in the US is such that profits out of business in the US has to be paid in the US. Sure there are deductions available, but you can't hide the profits anywhere. The hullaballoo is all over overseas profits and we can even argue ethically as to why the US should get any tax revenue if I buy an iPhone in India.

Itching for a fight :):):)

The Million Miler said...

Iphone bought in NZ, assembled in China with Taiwanese and Malaysian Components, brought to Auckland on a Panama Registered Indonesian ship, manned by an Indian/Pakistani/Filipino crew, stevedored by a Singapore company's branch, unloaded at Tauranga port by a crew consisting of Tongans and Samoans, sold a Westfield Mall (yep Aussie Mall. Pray tell me why should any part of my payment go to Uncle Sam??

Anonymous said...

Watching the Battle Royale from the sidelines. Will pitch in when it becomes a "free-for-all" :D.

@The Million Miler, the R&D costs, you could say, entitle US to tax payments. If you disregard R&D and IPR, then Pharma majors shouldn't be granted patents on life saving drugs either

Ramesh said...

@Kiwi - Yes, but some portion should go (one for R&D as Anon says and the other is reward for shareholders). But all these countries you mentioned actually complain that companies pay too much in terms of royalties to the holding country - this is precisely the objection of the UK to Amazon, Starbucks and Google.

@Anon - Don't watch; wade in !!!

All subsidiaries pay royalties for IPR - in fact as I replied to Kiwi, the complaint from this end is that royalties are too high. The issue often is that the royalties are routed through low tax jurisdictions (Ireland in the case of Apple). The claim is that when the IPR was originally transferred to these low tax jurisdictions it was undervalued - the US does receive tax on this, but are arguing that it is undervalued. That's a matter for the tax authorities and courts - till date no major company has been "convicted" of undervaluation

So, we come back to the central argument. If the companies meet the law, we should shut up. However, as I am stating in the post, this is not practical and the CSR of companies will now require a social contract with the communities they operate in.

Sriram Khé said...

It appears that Ramesh and I do agree on one thing, which is not what the Kiwi is keen on:the social contract that the multinationals--Apple, in this case--have with the American people has to be reworked. The disagreement is on how to rework it.

I planted that "persons" and "jail" argument there because I knew I would come back to it. And Ramesh's points provided me with that thread.

A John or Jane Doe in Gary, Indiana, are single-nationals. They have only one citizenship, which is American. Their expectation is that an American company means that the company has a set of obligations to the US. They have, in other words, a certain understanding--however incorrect it might be--of a social contract in place.

It then shocks John and Jane Doe to find out that these corporations do not have the kind of allegiances that they have. Unlike them, these corporations have multiple passports and can flash any one of them when convenient.

A few years ago, I think it was, Joseph Stiglitz said that this is one heck of an uneven situation with tremendous political, public policy implications. I am willing to bet that most politicians, too, were fully aware of this even back then. But, as politicians always do, they preferred not to even discuss this important public policy issue. After all, what real power do John and Jane Doe have?

So, of course, John and Jane Doe will be shocked, and are, to find out that an American company, and a darling at that, has "hidden away" a stash of money, more so when they have lost jobs and are struggling away to maintain their middle class life.

Now, academically speaking, economic geographers have always referred to the footloose characteristic of multinational corporations. We have known for way too long that corporations are not tied down to the geography, which means to the communities--small tow, state, country, whatever--unlike people who are. The social contract, of which corporate tax policies are merely one, has never, never been re-written to reflect the changes.

Meanwhile, as "persons," corporations have gotten even more powerful within the social contract, when even the Supreme Court--the ultimate enforcer of contracts--granted unlimited "freedom of expression" to these abstract entities that do not have any allegiance to the very country whose constitution grants them that freedom of expression.

Thus, to me, this Apple issue is not merely about profits or R&D, or the complex web of shell companies, or intellectual property. Instead, it is one loud reminder that the social contract is in tatters.

Of course, we are not going to agree on how to re-work and re-word a new contract. But, the shame of it all is that while a bunch of us folks from different parts of the world are talking about it here, the ones who should talk about these--the Congress--will stage some dramas, take a few photos, and then go home to screw people up some more.

Ramesh said...

@sriram - Oh bother ! I needle you and you make such sane and rational comments that I cannot ever rave and rant and yell at you in the name of an argument. Why do you deny an old man such small pleasures in life :):)

Completely agree, including the fact that we will not agree on the what and the how of the social contract. I am much intrigued by your point that since corporations do not have nationalities, how can they be treated the same as individuals and given the same rights - wasn't that point made in the Citizens United case ?

Another facet is that I think there are also individuals with multiple nationalities and allegiances. Witness double passport holders, and those who are citizens of one country, but still have their heart and passion only for the country they originally came from (the Tebbit test of which cricket team you support).

I don't think Congress needs to act, or even debate, about the social contract. Companies, by themselves, will renegotiate the contract simply out of self interest. Witness the huge leaps made in bringing up standards of factories all over the world (despite the Bangladesh happenings), which have largely been instigated by Western companies under pressure of their social contract. To the loony left who simply dismiss these improvements, my response would be "Go to any country and simply see one factory which supplies to Walmart and another which makes the same stuff but doesn't supply to anybody overseas"

Sriram Khé said...

Ahem, if you are an old man, then I am merely "old man minus two" ... so,am throwing my cane at you for calling me old!!!

I can't make heads or tails of the Citizens United thing. But, I had resolved a long time ago that I hate it ;)

Yes, companies might self-correct thanks to the pressures. But, wouldn't it be wonderful if we didn't have to wait for 1200 people to die? But, anyway, this social contract is with a different set of people--those outside the US--which is an entirely separate contract from the social contract that American corporations have with Americans.

On the Bangladesh happenings ... an interesting survey result ... in my classes, I asked the students how much they thought we consumers might have to pay, per garment, if we wanted to pay for the safety upgrades in Bangladesh. The lowest amount a student said was "one to two dollars" and most thought it might take five to ten dollars per garment. (some went as hight as 20)

They were, of course, shocked that all it would take is ten cents per garment, which they would gladly pay.

I believe there are lots of ways in which the social contract can be re-written that will actually be win-win-win. But, of course, ....

Deepa said...

Interesting debate. On Sriram's comment about social contract, I think this blog has many readers who hail from a different country and crossed borders looking for greener pastures. It is then very odd to expect businesses to think about social contracts when all they are supposed to do is maximize earnings for its investors. Moreover, if corporations are taking their profits to another business friendly countries (low tax regimes), one can also argue that it's doing a service to its country by pointing put the stifling tax structures. Individuals would never have that kind of influence.

Sriram Khé said...

Exactly, Deepa, the kind of points you write about are exactly what needs to be articulated via the social contract.

Corporations have an obligation to their shareholders, yes. But, what does it mean when a corporation like Apple claims it is "stateless" ... when so far we have only referred to real people, like the Palestinians as being "stateless"???

When you write that a corporation is doing a "service to its country" it is way too complicated: which country, especially when a corporation claims it is "stateless?" What is the "service" it does and to whom? When it operates in more than one country, how different can its "service" be in the different countries?

My point here is that there is a long list of such questions that we need to look at, and figure out whether we are ok with the responses. That process is nothing but the social contract that I am referring to.

In the old days--well, sixty years ago--a corporation like GM could claim that what was good for GM was good for America. That is nothing but a statement on the social contract that GM believed it had. People, by and large bought into that because they could experience that "good"--in terms of their own jobs and incomes and prosperity.

Even those who disagreed with GM's stance then might have to revise their opinions when they look at the landscape now when Apple claims it belongs to no country ... again, while we could disagree on what exactly Apple owes America and the people, I highlight the GM case to provide an example of the contrasting social contracts ...

Will get away before Ramesh re-loads up all the weapons he has, which he has been aiming at me ever since I blogged that we no longer have "charming men" ;)

Ramesh said...

@Deepa - Yeah, it would have been easy if we were one world and one set of laws, but alas, we aren't and maybe never will be. Companies have, I believe, no choice but to define their social contracts in each territory they operate. If they don't somebody else will do it for them and that may not be to their liking.

@sriram - Interesting you brought the GM analogy. Companies can perhaps explore the concept of whats good for the company is good for he world (and not one particular country). Maybe first baby steps to a truly globalised world - for after all, corporations are at the forefront of globalisation.

Vishal said...

Could not agree more, Ramesh! In fact, the whole issue of corruption/ black money/ back door politics seems to thrive on this very basic idea of its-ok-to-commit-the-crime-because-others-also-do-it!

Ramesh said...

@Vishal - Its even worse. Its OK for me to do the crime, but not OK for others to do it.

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