It was recently revealed that Apple’s UK retail division only paid out £796,000 in tax last year despite making sales of £971.5m. The news will have shocked no-one, given Big Tech’s track record of seemingly not paying what it owes the taxman.
Apple’s tech rival, Amazon, avoided about $5.2 billion in corporate federal income taxes in 2021, according to the Institute of Taxation and Economic Policy (ITEP), forcing the ecommerce giant to defend its controversial tax structure.
The ecommerce and tech giant reported record profits of more than $35 billion (a whopping 75% higher than its previous record haul in 2020) and paid just 6% of those profits in federal corporate income taxes.
Similar cases have been found at some of the planet’s biggest tech companies including Google and Etsy, prompting governing bodies to ponder new ways of enforcing their tax structures and closing loopholes.
The global effort to curb the powers of Big Tech and tax-avoidance scandals first started in 2012 when public anger towards Apple, Amazon and Google reached boiling point.
The G20 called on the Organisation for Economic Co-operation and Development (OECD) to reform the global corporate tax system. A package of reforms known as the “Base Erosion and Profit Shifting” Project, or BEPS, was introduced as a result.
The OECD led the reform process and opened it up to developing countries after the initial package was unveiled. Over 125 countries are now involved in a group which is referred to as the ‘Inclusive Framework’.
While BEPS has brought a degree of stability to the global tax sector, Big Tech and multinational companies still deploy a number of strategies in order to avoid paying tax, with public distrust still high.
How do companies avoid paying tax?
For the most part, companies avoid tax by transferring funds to a tax haven, which allows them to escape the rule of law in which they operate, with minimal or no tax liability for their bank deposits. Some of the most widely used include: Ireland, the Netherlands, Switzerland, Panama, Bermuda, The Cayman Islands, Luxembourg.
However it isn’t as simple as just transferring capital overseas – the country’s tax system also has to allow for it. For example, the US system doesn’t tax profit obtained from a multinational’s foreign subsidiaries unless they are transferred to the parent company as dividends.
The term ‘Deferred Tax’ refers to the income tax a company will pay in the near future instead of immediately and occurs when there is a difference between taxable profits and accounting profits.
One of the biggest tech giants to make use of these loopholes is Apple. The Silicon Valley giant takes advantage of the system by transferring over 70% of its domestically obtained profit to tax havens Ireland and Luxembourg. This means those profits are then moved into the deferred tax category, therefore not owed all at once and can be pushed back to later dates.
Despite making full use of these laws, Apple claims to be the largest taxpayer in the world. In 2017, the company recorded it had paid over $35 billion in the last three years. However, in doing so, it also avoided paying nearly $78 billion through three subsidiaries in Ireland.
Last year the company paid out approximately $14.5 billion around the world on its reported sales of $378.35 billion. Apple does not disclose what portion of those payments were made in the US.
Who are the ‘Silicon Six’?
As part of ex-chancellor Rishi Sunak‘s strategy to clamp down on Big Tech tax avoidance, he called on world leaders to back a new tech tax coined the “Amazon Tax” ahead of the G7 summit last year.
A report by the campaign group Fair Tax Foundation (FTF) singled out Amazon, Facebook, Google’s owner Alphabet, Netflix, Apple and Microsoft as the ‘Silicon Six’. A group of multinational companies that it accused of inflating their stated tax payments by almost $100 billion (£70 billion) over the past decade.
The FTF claimed the six had paid out $96 billion less in tax between 2011 and 2020 than the notional taxation figures that were cited in their annual financial reports.
Fair Tax Foundation CEO Paul Monaghan says his group’s analysis provided “solid evidence that substantive tax avoidance is still embedded within many large multinationals and nothing less than a root-and-branch reform of international tax rules will remedy the situation”.
Big profits, big tax bill
A spokesperson for Amazon heavily disputed the allegations at the time, calling them “extremely misleading”.
“Amazon is primarily a retailer where profit margins are low, so comparisons to technology companies with operating profit margins of closer to 50% is not rational,” the company said.
“Governments write the tax laws and Amazon is doing the very thing they encourage companies to do – paying all taxes due while also investing many billions in creating jobs and infrastructure. Coupled with low margins, this investment will naturally result in a lower cash tax rate.”
Mark Zuckerberg’s Facebook (now Meta) has so far only paid around $16.8 billion in income taxes over the past 10 years, despite soaring profits of $133 billion and revenues of $328 billion. The tax paid as a percentage of profit was just 12.7%, the second-lowest of the six, after Amazon (the US typical business tax rate is around 35%).
A Facebook spokesman told the Guardian last year: “All companies pay tax on their profits, not revenues. Last year we paid $4.23 billion in corporate income taxes globally, and our average effective tax rate over the last 10 years was 20.71%, which is roughly in line with the OECD average.”
The difference between taxes owed legally and taxes owed morally
What a company owes according to law and what it eventually pays the taxman are usually slightly different.
This where the issue of tax morality comes in. Just because a company can make use of multiple loopholes and tax avoidance measures; that doesn’t mean it should.
Tax avoidance is a legitimate minimising of taxes and maximise of income, which businesses often do by claiming for all legitimate deductions and tax credits as well as by sheltering income from taxes by setting up employee retirement plans and other benefits – all legal and above board.
Operating in different jurisdictions makes it extra-difficult to calculate exactly how much a company should owe, and the Silicon Six all operate multi-nationally. This makes it especially tough to determine how much tax they would owe if they hadn’t employed any avoidance strategies.
What do companies gain from making the most of the loopholes?
In short, money. However, while the coffers are kept full to the brim, brand image is damaged as a result. Corporate spiel doesn’t sit well with consumers who are fully aware that, for the most part, multinationals are able to make use of the tax laws in different countries to bend the rules slightly.
Not only this but many companies work hard to offset the negative connotations that come with this ‘creative accounting’ by donating heavily to charities as part of a bid to appear altruistic.
Look at one side of the coin without the other and you will either get the image of a charitable multinational that spreads its wealth or a company that avoids its moral tax duty. When looked at holistically however, it presents a particularly hypocritical picture.
