Welcome to episode 1 of our News series, explaining to you what something is all about, basically. We’re starting here with the fiasco between Google and the effective tax rates that corporations such as Google actually pay.
Due to the recent deal that Google made with the UK government this year, Google’s effective tax rate of the last decade is lower than 3%, compared to the effective tax rate of 20% in the UK which other large businesses pay each year.
As we have already explained in the principles series so far: we have a clear distinction between the real economy which involves local and small business, and the shadow economy which encapsulates the global reach most large businesses possess. With this story of a single company in the case of Google, we can see that things are not exactly balanced fairly between some companies that are able to operate at a global level and others that not.
Governments seem to be always playing catch-up. Larger businesses such as Google in this case actually hold more power and authority over elected governments. Another example of this can be seen in the BBC story that I have already linked you to in this post. In 2013, the value of Google’s sales were £3.8 billion. It paid a grand total of £20.4 million in taxes to the UK’s HMRC. This is an effective tax rate of 0.54% per year.
Google is just a single corporation, although this story is indicative of the larger difference in rules that companies are permitted to follow.
In 2014, Starbucks paid £8.6 million towards a stretch of up to 14 years. As the value of Starbucks’s sales were £3 billion since 1998, this can be calculated to show an effective tax rate of 0.28% per year. They achieved this simply by transferring their profits from the UK to another company within the Starbucks group abroad, and claimed not to be operating at a profit in the UK.
This process of transferring profits to avoid paying specific tax rates is called profit sharing. The reason of which it is possible can be found in a final report on the subject, which described this process as being not the result of a single rule for making profits “disappear” for tax purposes. According to the BBC in regards to this report, rather it was the “interplay among different rules… domestic laws and rules which are not co-ordinated across borders, international standards which have not always kept pace with the changing global business environment and an endemic and worrying lack of data and information”.
This phenomena of profit sharing is one that is available exclusively only to those firms when they reach a certain level of size, power and ability to exploit a modern, globalised economy; and much like the difficulties involved in tackling climate change – caused by a failure of cooperation and compromise, with an excessive emphasis on competition between states on an international level.
This begs the question. Is this fair? Providing that you are principally opposed to taxation, then this state of affairs could maybe a sign of progress. Providing that you accept taxation and the existence of a public sector and public ownership, the answer is no. It is not fair. To develop a system of incentives or governance which rectifies this and at least makes sure that these large corporations pay a similar amount of tax each year in proportion to their revenues and profits in a specific country is a matter of fairness. To implement policies which ensure progressive levels of taxation are applied to these corporations is a matter of tax justice.
As you can probably analyse in the principles series, my personal opinion is a little pessimistic on this matter. It would require either a level of global governance or international cooperation that has never been seen before. In the case of global governance, this solution has a particular tendency towards tyranny, or to edge away from being a totally democratic process by centralising power. My post titled ‘Decentralisation’ explains this argument and proposes an opposite resolution. Essentially, by ensuring a devolution of powers to local governments, focussing exclusively on building communities of local businesses in the real economy which play by the rules (of progressive taxation and tax justice), we can rectify this problem by building from the ground-up in a completely decentralised and democratic manner.
This way, we can guarantee that those with the broadest shoulders will carry the greatest burden.