While Syria dominated most of our news last week, the leaders of the G-20 economies were meeting last week in St. Petersburg, Russia to discuss re-shaping international regulations and practices that would stem corporate tax evasion, among other things.
Consider these two stories reported in a Canadian Business press over the weekend and you’ll see why this was such a big agenda item at the G-20 Summit:
Apple has paid little or no corporate tax on some $74 billion in income over the past four years. That’s because the tech giant oversees all of its business outside the Americas through a number of units in Ireland. These subsidiaries are virtually tax-free because America doesn’t tax companies incorporated outside the U.S. and Ireland exempts locally incorporated companies if they are managed abroad.
Under U.S. tax law, citizens and permanent residents must file and, if applicable, pay income taxes, even if they don’t live in the U.S. and have no U.S. sources of income. Some time ago, the IRS fined an American retired widow who’d been living in Canada for 30 years $75,000 for failing to file U.S. tax returns. The penalty was 25 per cent of the woman’s $300,000 in savings held in a U.S. bank account.
The tax treatment of Apple when compared to this widow seems unjust to say the least. But that’s not the only reason why international leaders are interested in corporate tax reform for the U.S.
The main reason is this: The IRS has no recourse against legal even if morally questionable corporate tax practices. It can, slam individual taxpayers who commit forgivable, and often unintentional, infractions. But there is nothing to be done for legal corporate tax dodgers..
According to the U.S. Congressional Research Service, estimates of how much corporate tax avoidance costs Uncle Sam range from $10 to $60 billion a year. For individual tax evasion, the range is $40 to $70 billion. Both are a hefty drain on government coffers, but cracking down on individuals, well it seems it’s just easier.
“Most provisions to address profit shifting by multinational firms would involve changing the tax law,” reads the CRS report. On individual tax evasion, on the other hand, the IRS has found ample margin to tighten the screw simply by stepping up enforcement, changing practices and increasing information sharing with other governments — in other words, without amending the law.
Of course, catching and punishing individual tax cheats is a good thing. But anecdotal evidence suggests the IRS’s tighter net is trapping lots of small fish, average-middle-class taxpayers who simply missed the fine print. And there are many of them among the hundreds of thousands of Americans living in Canada and Canada-U.S. double citizens.
In the G-20 Declaration on global corporate tax loopholes, the Organization for Economic Development and Cooperation noted: “When tax rules permit businesses to reduce their tax burden by shifting their income away from jurisdictions where income producing activities are conducted, other taxpayers in that jurisdiction bear a greater share of the burden.”
Eliminating loopholes and opportunities for legal arbitrage by international corporations might reduce the pressure on tax agencies to go after people who were obviously unaware
The published Tax Annex of the G-20 Leaders’ Declaration states: “Base erosion and profit shifting (BEPS) relates chiefly to instances where the interaction of different tax rules result in tax planning that may be used by multinational enterprises (MNEs) to artificially shift profits out of the countries where they are earned, resulting in very low taxes or even double non-taxation. These practices, if left unchecked, undermine the fairness and integrity of our tax systems. They fundamentally distort competition, because businesses that engage in cross-border BEPS strategies gain a competitive advantage compared with enterprises that operate mostly at the domestic level. Fair, transparent and efficient tax systems are not only key pillars for sound public finances, they also provide a sustainable framework for dynamic economies. For these reasons, G20 Leaders identified the need to address BEPS as a priority in their tax agenda at the Los Cabos Summit in June 2012. Additionally, we must achieve better international coordination on taxes. In this regard, we must move forward in fighting BEPS practices so that we ensure a fair contribution of all productive sectors to the financing of public spending in our countries.”
To read the full published G-20 Declaration click here: http://en.g20russia.ru/news/20130906/782776427.html
One final note: The IRS does wave or reduce penalties for individuals in some cases, and the woman from the anecdote here might have been spared — but horrendous IRS fines remain an ordeal for many average U.S. taxpayers and apparently the world is watching with interest to see what we are going to do about these injustices.