In the recent news it was uncovered that Microsoft owes Denmark 5.8 billion Danish Crowns (Around $1.015 Billion) in back taxes as a result of Microsoft’s acquisition of Navision in 2002.
According to the Danish tax authorities, following the acquisition, the Navision’s money making assets were sold to Microsofts Irish subsidiary below market value. That company is in turn owned by companies in Bermuda and the British Virgin Islands. Which is why Microsoft is often targeted by tax authorities worldwide, as their network of affiliated companies worldwide makes it extremely easy for them to channel profits into tax havens where the corporate tax is virtually non-existent.
The same can be said of other tech giants such as Google and Facebook. For instance in the case of Google, it was recently reported that their revenue levels in Finland for the fiscal year 2011 were €5.1 Million and in 2010 - €3.2 Million. However according to market analysis, the estimated “real” turnover generated from Finland is closer to €100 Million. This means that Google is transferring over 90% of their revenues to Ireland. Oh and let’s not forget that Google also received its fair share of public funding as they received Tekes grants in 1997, 1999, 2003, 2004, 2005, 2006 and 2011. The latest of them being €149 997.
Facebook is not an exception either, as they paid only around €3.4 Million in taxes on their European profits of more than €900 million. Again, all the companies advertising on Facebook outside of US are forced to pay Facebook Ireland. A large proportion of those profits were again moved to the Cayman Islands in licensing and royalty payments. The poor Irish subsidiary was forced to report an annual loss of €17 Million despite generating over 40% of total Facebook revenue.
The most common tax avoidance schemes are the “Double-Irish” and “Double Irish With A Dutch Sandwhich”. The Dutch Sandwhich scheme allows to escape the already generous Irish Corporate Tax by making sure that the Irish authorities never see the full revenues.
Of course this is all done “legally” and is simply a flaw in the taxation system. To fight this, some governments such as the US are trying to reevaluate the taxation laws on tech companies specifically. Why should they get special treatment? The all too famous agility.
Tech companies can basically generate revenue globally, while allowing workers to work remotely from anywhere in the world. This means that they can shift payroll costs to anywhere they want while getting income from pretty much any country they like. In addition many assets of tech companies such as IP are intangible, so they can shift that around in clever licensing and royalty schemes.
However this does not only happen on the global scale. Our region is also very susceptible to similar schemes thanks to the Estonian corporate tax which is only due once the profit is distributed. This allows both large corporations and start-ups to open holding companies in Estonia, allowing for transfer of profits to our Baltic neighbor.
As Google put it, they are simply being capitalistic. Pushing the boundaries of the law, while still not breaking it. In my personal view, this is not a problem of the corporations and start-ups but that of governments.
On the one hand, you could impose special laws and taxation systems on tech companies, normalizing the taxes and making sure they pay a much more significant share of the profits inside the country.
On the other hand, one could submit to the market pressures and try to think of ways by which the government could decrease the tax levels while providing incentives for companies to pay taxes locally. After all some tax revenues are better than none at all.
Since in most countries the taxation laws predate the digital and globalized age, it is not far fetched that we will soon see laws which will force companies to pay taxes and distribute costs based on the IP location of their customers and employees.
How would you solve this issue or does it even need solving? Let us know in the comments.
Image Courtesy of Shutterstock: Taxes