Here is how Google avoided paying its share of taxes in 2011?it set up a few subsidies in Bermuda, which has no corporate tax, very legally funnelled royalty payments from across the world to that subsidiary and in the process saved more than $2billion globally. Similarly, Amazon last year used Luxembourg, which charges only 6% for earnings through intellectual property, as a way to massively cut taxes on all Europeans earnings. Then there is Starbucks, which reported profit to investors and loss to UK taxman, and in doing so paid only ?8.6 million in taxes since 1998. And virtually all significant American corporations?this includes Citibank, AIG, Morgan Stanley?have subsidiaries in the Cayman Islands, the famed tax haven for North American multinationals. In fact, an American political action committee report noted that between 2008 and 2010, 30 of the Fortune 500 companies paid no income tax, despite the American corporate tax rate at a towering 35%, whereas corporate tax rate as a share of GDP, at 1.2%, fell to its lowest since the 1940s.
The two most common mechanisms for such avoidance are transfer pricing, especially for technology companies, and loopholes that allow companies to not report earnings abroad. The former would often have subsidiaries selling intellectual property and other rights to each other at low prices (since they are so hard to price), and thus, transfer most earnings to places with little taxes and low earnings (and losses) to places with higher taxes (Google, Starbucks and Amazon all have used this method). Otherwise, loopholes would allow companies to keep their money abroad, and in many cases not report it?a favoured method of the Manhattan and City of London banks. Had the American corporate tax rate been levied properly between 2008-11, additional $78.3 billion in revenue could have been generated. But can we blame the corporations? If the system and the rules are skewed, then corporations are bound to take advantage of it?if only because their competitors will. So policymakers must pull up their socks, and ensure that there are no hidden routes through which money can slip.
