On June 17 and 18, the so-called Group of 8 (G8) nations met to discuss a variety of issues. One of the issues that received a lot of attention was that of tax avoidance. Following the news that major companies like Apple and Google have been taking advantage of tax laws to avoid paying what many contend is their “fair share,” countries are looking for ways to encourage corporations to better report their earnings so that they can be taxed.
It’s not just the United States, either. The United Kingdom is complaining about missing revenues as well. Some estimates put the total cost of tax evasion by major companies at right around $3 trillion a year. In order to avoid paying taxes, many companies find ways to make it appear that their revenues are earned in countries with lower tax rates, which is what Apple does with Ireland.
Because it’s the United States and the United Kingdom missing out on tax revenues to a large degree, it’s little surprise that these are the two countries leading the charge. But the rest of the G8 appears ready to fall in line as well.
Automatic Information Sharing
The G8 countries — United States, United Kingdom, Canada, Japan, Italy, Russia, France, and Germany — issued a joint statement at the close of the summit (hosted in Ireland by David Cameron) that promised to fight tax avoidance. As part of the plan, automatic information sharing would be used to help identify companies reporting revenues from countries where sales and staff are rather low.
Additionally, a number of proposals aimed at changing the rules that allow companies to move their profits to different countries were set forth. All of the rhetoric and hand-wringing sounds good, especially when played back home in the United States where the public was outraged by the revelations of the way some of the world’s most profitable companies get away without paying as much tax as they “should.”
But will anything actually be done?
Politicians and Tax Reform
The United States, though one of the leaders in the effort to use cooperation to reduce tax avoidance, often gets flack for the fact that Delaware is a tax haven itself. Many U.S. companies incorporate in Delaware to avoid state taxes and to take advantage of the less restrictive regulatory environment.
Besides, all countries try to provide favorable tax conditions because they want to lure businesses to their soil (or at least lure the paperwork to their borders). Countries like the Netherlands and Ireland can benefit by enjoying the tax revenue that comes from these companies, and the corporations like paying the lower tax rate — even if the profits “earned” in those countries are more a trick of accounting than they are of actual sales.
For now, tax avoidance by some of the world’s most successful is high on the list of priorities. And, if more efforts are made to share information and crack down on these practices, there is a chance that some of these countries will no longer have places to hide their profits. They may soon have to report their true earnings — and pay what they owe in taxes.