The parallels, differences and ethical considerations of tax avoidance versus tax evasion have been the subject of debate for decades.
But probably nothing has added as much fuel to this controversial topic as the recent practice of Big Business opening subsidiaries in countries that levy a far lower tax rate than their primary countries of operation. It is the often cited as one of the downsides of globalization in an increasingly interconnected world.
The Internet search engine giant Google is in the news for this very reason.
Lisa Carrol of the UK’s Guardian newspaper recently crunched the numbers of Google’s European business, showing how Mountain Views uses its branches in Bermuda and Ireland (Dublin) to pay less tax.
As Tom Foremski of Silicon Valley Watcher points out, the ‘savings’ are huge. To be sure, Dublin already has one of the lowest corporate tax rate in Europe at 12.5%. But Google goes even further to levy an enormous administration charge through its subsidiary in Bermuda, thus reducing the taxable amount in Dublin.
To put this in perspective, Google Europe had revenues totaling 7.9 billion Euros in 2009. Of this amount, the gross profit was 5.5 billion Euros. However, this was slashed to an operating profit of just 45 million Euros after a 5.467 billion Euro license fee paid to its Bermuda office.
In the end, Google effectively ended up paying just 2.4% in corporate tax for its European business.
While it would be tempting to bash Google for moving money around ostensibly to avoid paying heavier tax, the reality is that a substantial proportion of the largest corporations in the world have gained notoriety for doing the very same thing.
Considering that governments and cities often bend over backwards to lure large corporations on the pretext that the presence of these corporations will lead to direct and indirect job creation, the fact that such corporations pay so little tax to the communities they operate in is a sobering fact indeed.