Tax Evasion: A Serious Problem

Tax Evasion: A Serious Problem

The United States of America, labelled as the land of opportunity by some, is currently in the midst of the pre-election lunacy that takes place every four years; with outrageous statements by a man, whom I shall not name, taking the internet by storm far too regularly. Whilst the likes of Hillary Clinton, Bernie Sanders and others, as well as those running on the other side of the political spectrum are occupied with “winning” the televised debates, the world still continues turning and thus life goes on; even in the White House. There actually is quite a pressing matter to be worried about by American politicians; aside from the current situation in the Middle East with ISIS and the refugee crises, as well as of course the ever so prominent gun-control debate stupidly defended by the second amendment.

In 1982 it all started with McDermott. This was an American construction company that relocated to Panama, while previously being set in New Orleans, all in attempt to outsmart America’s Internal Revenue System (the IRA). Since then, there has been a trend for American firms to relocate abroad; all in the eye of greed. You see, business is business, and most of us will agree that if we are able to complete a task for less money if it is done elsewhere, this would seem like a good idea. So too do the high-rank officers in many of the largest companies that (used to) know the US as home. Taxes are the real issue here. Corporate tax is a tax that most countries impose on corporations on the income or assets of the firm. There is no universal tax rate and thus there are opportunities to decrease the amount of tax a company pays. The United States actually has one of the higher corporate tax rates with a federal tax of 35% on taxable income amounting to anywhere upwards of $18,333,333. The percentage could amount to even more due to state level taxes as well. Thus, it is not unlikely that an American company would want to go through efforts to reduce the amount of tax they pay.

To most of you the name “Pfizer” will ring a bell, metaphorically speaking of course. Being a multinational American pharmaceutical company you may also be familiar with some of their products; Viagra (hopefully only by name considering our audience) and Xanax (a somewhat prominent phenomenon in popular culture). Pfizer came in the news in the last months of 2015 due to the reverse takeover with Ireland-based pharmaceutical Allergan in a deal of about $160bn; making it the 3rd largest merger in history. The merged company will continue under the Pfizer name and the current Pfizer CEO, Ian Read will be the head of the fusion. Allergan CEO Brent Saunders will be second in charge. Most importantly though is the fact that this allows Pfizer to relocate to Ireland.

Aside from the obvious benefits of expanding the product range, the largest talking point concerns taxes. The United States and Ireland have very different corporate taxation laws, making it extremely beneficial for Pfizer to relocate to Ireland. Unsurprisingly, it is not the first case of such a relocation. Ireland operates a 12.5% corporate tax rate, unlike the 35% corporate tax rate in place in the United States for if the taxable income is anywhere upwards of $18,333,333, which definitely is the case of Pfizer ($12,240,000,000 pre-tax income in 2014). Effectively Pfizer paid a 25.5% tax rate (due to not only being located in the U.S.) in 2014, amounting to $3,120,000,000. Thus, the relocation could save Pfizer some serious amounts of money in taxes.

Pfizer of course isn’t the first to undergo such a reverse takeover; pharmaceuticals in general have been especially keen. Over the years many companies have set an example by relocating to various tax havens; in particular over the last 15 years, amounting to hundreds of billions of dollars lost in potential tax revenue. Where in the 90’s and early 2000’s the trend was to move to tax havens in the Caribbean (Cayman Islands or Bermuda), in recent years the trend has been to relocate to European countries. Other household brand names such as Chiquita and Burger King have also made similar moves abroad.

In reality though, the issue isn’t really relocating itself, but rather the larger motif of tax evasion. Companies go through great lengths just to ensure that they don’t have to pay quite as much tax as they are expected to. This is not just the case for companies relocating but also for those remaining in the United States. Apple, a company known all around the world for its overpriced products, is also known for its complicated tax-evasion scheme. The same is the case for Google as well as other large corporations such Amazon and Starbucks. They have set up what is known as a “Double Irish” with a “Dutch Sandwich”, which involves multiple subsidiary companies and great knowledge of various foreign tax laws. I could do my best to explain it myself and leave you all questioning my sanity, or I can just let someone who is actually able to properly explain the basic idea instead. I therefore suggest watching the following video by Youtube channel: The Reflective Prof

Although it sounds extremely sketchy and possibly morally wrong, this is a perfectly legal method exploited by many large corporations. The morality of it all of course is a different question entirely; especially from the viewpoint of the United States government. According to Business Insider in 2012 Apple managed to avoid paying approximately $9 billion in taxes on its “foreign base sales income” which amounted to approximately $25 billion. This means Apple managed to save about $25 million on those sales, daily.

Every time a firm moves abroad or engages in a tax evasion scheme, it results in a decrease in tax revenue for the government, which ultimately affects the people of the U.S.. Multiple American politicians have already voiced their opinions over the matter. Being a nation with a national debt of over $18,000,000,000,000 (yes, that is 18 trillion US$), the United States could definitely use the tax income some will argue it rightfully deserves. Is it therefore unpatriotic of American companies to go through serious efforts of reducing the amount of tax they owe? This is a question that has and will continue to spark much debate between politicians and company executives for the foreseeable future. Legislation is an obvious solution, but in a government where the two-party system clearly is not a recipe for quick and efficient action, it’ll be difficult to say how fast they can take appropriate action. The question then still remains as to whether or not banning the evasive maneuvers with the “Double Irish” and “Dutch Sandwich” alone is enough. Ultimately, the United States should possibly consider employing a reduced tax rate so that there is significantly less motivation to engage in reverse takeovers as Pfizer has recently done. Additionally, the social pressure put on large multinationals by the public once they are more and more educated about these although legal, very questionable tax evasion schemes, can further discourage other companies from engaging in tax evasion.

 

Sources

http://www.economist.com/blogs/economist-explains/2015/08/economist-explains-9

http://time.com/money/3378719/corporate-tax-inversions-leaving-america/

http://www.forbes.com/sites/mikepatton/2015/04/24/national-debt-tops-18-trillion-guess-how-much-you-owe/#2715e4857a0b2bbc33c45ebd

https://www.washingtonpost.com/apps/g/page/business/american-companies-that-have-incorporated-overseas/1238/

http://www.forbes.com/sites/leesheppard/2013/05/28/how-does-apple-avoid-taxes/#2715e4857a0b4a6539b7d6f7

https://www.youtube.com/watch?v=nHC_BEqN0qY

Michiel Stolwijk
Michiel Stolwijk

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