An Amsterdam Starbucks location. Photo by Flickr user Naberacka
Centuries before you and I watched the birth of a movement calling itself the Tea Party, its namesake event grew out of a dispute over British taxes on tea imported to America. Centuries from now, similar disputes will probably still be with us.
And yet multinational corporations currently find themselves caught in a tug-of-war. America doesn’t want to let them go, and Europe wants them to stay only if they pay their fair share.
What everybody is trying to do, though no one will admit it, is to export part of the burden of running a modern welfare state to foreigners by way of taxing multinational corporations.
I have written before about the Washington’s attempts to keep American-based companies from jumping ship to escape tax treatment that is uniquely harsh by international standards. The government continues to discourage and challenge inversions in an attempt not to let multinational taxpayers defect overseas.
Recently, several European governments have started applying pressure to corporations from the other side of the Atlantic, going after multinationals for structuring their businesses in ways that the governments believe are unfair or abusive. France is currently pursuing a tax battle with Google over an assessment that could exceed $1.25 billion, according to The Wall Street Journal. The proceeding has not yet reached court, but discussions between the French tax agency and Google are ongoing. The French Tax Authority is also looking at Facebook, Apple, Amazon and others.
European countries are fighting, even among themselves, over which country can tax cross-border corporate earnings. And if there’s anything European countries hate, it is tax competition. Seeing big companies go to Ireland, the Netherlands or Luxembourg in pursuit of a more favorable tax climate has proven a bitter pill for Europe’s large economies. The New York Times reported that Luxembourg had inward foreign direct investment of $2.4 trillion for 2012, which exceeded the combined intake of Germany and France. The eurozone’s two largest economies are not amused by the tax policies of their tiny neighbor.
European Union authorities recently accused the Netherlands of going so far in its tax treatment of Starbucks that it had effectively extended illegal state aid to the company. If EU regulators succeed in making their case, it could open Starbucks to hefty tax liability and back taxes. Regulators are also looking into Apple’s tax treatment in Ireland and Amazon and Fiat’s treatment in Luxembourg.
Pascal Saint-Amans, the director of the Center for Tax Policy and Administration at the Organization for Economic Cooperation and Development, told The Times that “The international tax system is outdated, and we’re bringing it up to date.” His organization is attempting to create proposals at the request of the Group of 20 countries in order to coordinate tax reform across borders. But that is much easier said than done, given competing national goals and interests.
Meanwhile, companies are left trying to find a clear path amid the ongoing arguments of the governments looking over their shoulders. Apple, Amazon, Fiat and Starbucks have all defended the legitimacy of their tax practices. Google, as it has done elsewhere, has sought to appease French authorities by boosting its investment in the country. This has produced an engineering hub in Paris, a cultural center positioned to cooperate with local cultural institutions and university grants.
Yet while such goodwill gestures, called “charity business” by French senator Philippe Marini, may have bought Google time, they did not kill the resolve of French authorities to sniff out what they believe they are owed. Google’s experience has shown that trying to demonstrate goodwill to governments and, in certain cases, settling by paying more money than is technically owed are only temporary solutions at best. Much like diners consuming a meal, governments eat their fill of revenue but then find themselves hungry again. They return, but this time their neighbors tag along, also eager to line up at the buffet.
We can understand why it bothers French and German officials to see Google make huge amounts of money in advertising sales to their citizens but pay only a fraction of that in taxes, or to see big multinationals flock to a country like Luxembourg, with a population of only about 500,000. It was something of reverse tea party when, in 2012, the United Kingdom grilled Starbucks over allegedly not paying sufficient tax while selling its tea and coffee. The company didn’t surrender altogether, but did voluntarily pay 20 million pounds (about $32 million) in UK taxes over two years as a result. We will have to wait and see how Starbucks and other companies fare under the current round of EU regulatory scrutiny.
Rather than fighting endlessly over how to tax the profits that companies like Google and Starbucks earn within their borders, it would make a lot more sense for countries to just directly tax the citizens within their borders who consume these companies’ products and services. This is why most countries outside the United States have national value added taxes. As long as those taxes apply equally to foreign and domestic vendors, there is no free trade issue. Taxing consumption makes both the cost of the tax and the obligation to pay it perfectly clear, and it would ensure that governments collect whatever they think is the appropriate tax revenue from commerce conducted on their territory.
Unfortunately, politicians in democracies never like to raise taxes on their own people. They much prefer to raise them on foreigners, such as multinational shareholders, instead. As a result, we are likely to see more metaphorical tea dumped into the harbor for a long time to come.