Google, Apple, and Amazon Could Crash the International Tax System

The Financial Times takes a look at the under-reported international tax crisis, which could spiral into a complete meltdown due to cases involving Google, Apple, and Amazon:

The uproar about Google paying £130m in back taxes and raising the amount it pays in the UK by just £10m a year is merely a little local difficulty compared with what comes next. Apple could soon be instructed to pay billions, triggering a showdown between Europe and the US and a potential breakdown of the international tax system. This sounds apocalyptic but it is a decent bet.

If you doubt it, consider the following. From irate taxpayers and infuriated politicians to defiant bosses of multinationals, many are at the ends of their tethers about corporate tax. Countries in the Organisation for Economic Co-operation and Development have spent two years trying to fix the system; one of the first results, Google’s UK deal, has gone down terribly.

Apple disclosed on Tuesday that its minimally taxed pot of overseas cash has grown to $200bn. Tim Cook, chief executive, flew to Brussels last week to protest at the likelihood of being told by the European Commission to pay a chunk to Ireland, where it has operated since 1980. American politicians are angry at what some call “a direct threat to the interests of the US”.

In other words, the tech giants are getting mugged by cash-hungry governments with competing claims on their profits, all eager to loot the companies for not paying their “fair share” in taxes, even though none of them committed any crime for which they should be fined.

This conflict is driven by the insane U.S. corporate tax system.  Every executive in his right mind is looking for ways to move money into tax havens where greedy governments can’t get it.

This is an especially urgent imperative when the big-spending, beyond-bankrupt nations of the West are all teetering on the edge of fiscal collapse.  Left-wing politicians pump out a lot of hot air about how everything’s fine, deficits are nothing to worry about, and Utopia can be reached with one more load of “free” goodies for deserving constituents… but watch what the smart people with inside knowledge, and a demonstrated ability to take the long view, are actually doing with their money.

Look at it this way: the American Ruling Class assures us our bankruptcy engine cannot be fixed.  Everything is unreformable, big spending is set in stone, no constituency can be deprived of its taxpayer-funded lollipops, cutting back the size of the State is unthinkable… and the Democrats’ 2016 heartthrob, Bernie Sanders, is talking about $20 trillion in new spending, plus $10 trillion in new taxes.  If you have capital, you’d be a fool — and derelict in your duty to shareholders — not to run like hell from that horror show, before they start shooting people who try to escape.

The Financial Times sees America’s Looney Tunes tax system as the great destabilizing agent of an archaic, corrupt global system that can’t handle the challenge of multinational tech giants like Google and Apple:

We face a historic moment. The tax system formed under the League of Nations in 1928 relies on the idea that companies should be taxed largely where profits are created, not where they sell their products and services. It could soon fall apart and what happens then is anyone’s guess, although it will not be pretty and will probably resemble a global tax war.

Multinationals, especially US corporations subject to America’s dysfunctional tax laws, stretched rules to the point where the result appals taxpayers. They did so with the aquiescence of offshore havens and countries such as Ireland and Luxembourg.

The European taxpayer in the street might just credit the idea that Alphabet or Apple create, design and manage their products and services from California, and so the US should receive a larger share of its profits than Italy or the UK. This is the intended outcome of international tax treaties.

Why, though, should he or she accept that intellectual property can be shifted to any convenient spot, according to which jurisdiction levies the least tax? Google’s search engine was not invented in Bermuda and Apple did not develop the iPhone in a tax-advantaged entity sitting between Ireland and the US. Such structures obey the letter of the law but they are nonsensical.

That’s not a bad summary of the great political argument in the United States during this election, echoed in different ways across the European Union: the letter of the law is nonsensical.

On the one hand, people complain about well-connected players with deep pockets manipulating the law to their own benefit, while the little guy is hung out to dry.  They want good sense to triumph over corrupt law.

On the other hand, the exercise of raw power against the framework of law is tyranny.  The fantasy of the lawless strong man who can fix everything by discarding gridlocked representative houses and ignoring inconvenient statutes is incredibly dangerous.  It’s also very bad for business, because business strategies revolve around following clearly-established laws to the letter.  The lessons of history clearly advise those who own capital to become very nervous when law is made subordinate to the “popular will,” which dictators always claim to be the incarnation of.

The Financial Times touches on this point by imagining Apple’s CEO, Tim Cook, leaping out of his chair to protest being treated like a criminal “tax dodger,” and suffering the penalty of retroactive tax raids, when his company scrupulously followed the laws as written.  When a rich and powerful man tells people to change the law instead of punishing the law-abiding, as FT imagines Cook doing, the answer from populists is always, “Easy for you to say – you have enough money and connections to make sure the law is written to your liking!”

Now add the drama of the U.S. and European countries scrabbling bitterly over tax revenue from nimble multi-national Internet giants, and populism fuses with nationalism to become something ugly and menacing.  (All the more so because the politicians in every nation will do anything to deflect allegations of selfish lust for other peoples’ money.  They will demonize and destroy anyone they have to, in order to retain their image as selfless tribunes of the people, who only want the best for their oppressed constituents.)

If the struggle grows bitter enough to make multi-national operations impossible, even in cyber-space, the people who routinely savage Big Business, without also savaging Big Government, may find themselves missing Big Business when it’s gone… and learning just how much more businessmen do to improve the life of the Little Guy than politicians.