Corporate tax evasion 'crackdown' more bark than bite

"I am proud to be paying taxes in the United States," radio DJ Arthur Godfrey once said. "The only thing is, I could be just as proud for half of the money."

That's certainly been the attitude of many companies of late. In a banner year on the stock markets,multinational corporations seem to haveredoubled their effortsin 2013 to keep as much of their profits from the taxman as possible.

And the rules governing how and where multinationals pay their taxes seem set up to help them do that.

"Some rules were built on the assumption that one country would forego taxation because another country would be imposing tax," theOECDsaid ina recent paper on international tax evasion. "[But]vast amounts of money are kept offshore and gountaxed."

U.S. think-tank the Public Interest Research Group recently calculated thatthe amount of profits being held in Bermuda by America's 100 largest companies was more than 10 times the island nation's entire GDP.For decades, multinational corporations have used tax havens like the Cayman Islands, Bermuda, the Isle of Man and Luxembourg to shield profits from tax authorities without running afoul of the law. More and more, real profits derived from real business activity are shifted around the world through numerous local subsidiaries to take advantage of specific tax loopholes.

In one famous case uncovered by the Guardian newspaper,the cartel that controls two-thirds of the global trade in bananas banked more than $50 billion US in sales in one five-year period. But by the time the accounting was done, the total profits on those sales amounted to only $1.4 billion, on which the three members of the oligopoly paid a mere $200 million in tax.

Research firm AuditAnalyticssaid recently the amount of profit being moved offshore by U.S. companies has risen by 70 per cent in the last five years and hit nearly $2 trillion in 2013.

The scale of profitshifting can be jaw-dropping. In 2012,the Cayman Islands received more foreign direct investment than Japan, World Bank data shows.

The amount of genuine economic activity happening in Japan is almost certainly exponentially higher than in the Cayman Islands, but yet there's more money passing through the latter.

A recentU.S. government report found that afive-storey building in the Cayman Islands, whose only actual tenant was a law firm,was in fact the mailing address for 18,857 foreign companies.

Tech companies amongworst offenders

In 2013, much of the coverage of corporate tax evasion focused on two giants of the technology industry: Apple and Google.

Apple CEOTim Cookwashauledin front of a Congressional hearing in May to explain how his company managed to avoid paying U.S. tax on at least $74 billion in profits between 2009 and 2012.

Cook retorted that with a $6 billion tax bill in 2012 alone, Apple likely paid more U.S. tax that year than any other company, but the bad optics were hard to ignore.

Google, for its part, employed two curiously named techniques known as a "double Irish" and a "Dutch sandwich" to book most of its foreign profit through a subsidiary called Google Ireland Ltd. and avoid paying $6billion intaxes last year, regulatory filings show. (See the sidebar on the right for anexplainerof how they did it.)

Even boring old General Electric booked $108 billion worth of its profits overseas, outside the reach of U.S. tax laws.

With eye-popping numbers like that, tax authorities say they are cracking down.

OECDtakes aim at profit shifting

Last summer, theOECDpublished the results of its latest research into profit shifting. TheAction Plan on Base Erosion and Profit Shiftingoutlines how developed nations could collaborate to thwart some of the more egregious attempts to move profits around for no other reason than to avoid taxes.

The document is full of high-minded ideals but lacks teeth.

Experts say most of the tax evasion-related measures announced last year amounted to well-meaning statements that lack real enforcement."There's a lot of inertia to keep the statusquoin place," said Richard Murphy, a U.K.-based accountant and economist at the forefront of a global charge to close tax loopholes. "However you try to fix a bad system it's still bad, and theOECDis trying to make a bankrupt international tax system work just a little bit better."

"At least the mood music has changed, but the simple reality is a lot of these efforts have no power to implement real change," Murphy said.

• Global plan to curb tax evasion unveiled atG20meeting
• Offshore tax dodgers coming under greater pressure

Allison Christians agrees. She's a lecturer in the Faculty of Law atMcGillUniversity in Montreal, and she, too, doubts the latest "crackdown" will be any more effective than previous ones.

"It's the same old international governance problem," she says. "Rich countries write vague statements to agree to on paper, but then they default to the same old policies they always have."

Most countries turn a blind eye

Subsidiaries of multinationals colluding to shift money around to avoid tax "should be the situation in which everyone concerned pounces on it and says 'You can't do that',"tax lawyer Michael Durst told a November 2012 conference aimed at closing tax loopholes.But the fact is most countries play along, and as long as even onecountry finds it in its best interest to kowtow to a multinational corporation, tax havens will continue to exist.

"Canada doesn't have a lot of multinationals, and we'd like to have more," Christians said. "How are you going to do that if you're taxing them out of step with everybody else?"

South of the border, there is already a movement afoot to drop the corporate tax rate dramatically to compete with low-tax jurisdictions. Democratic Senator MaxBaucusof Montana is sponsoring a bill to that effect, and while such a cut wouldcost Uncle Sam a lot of money up front,Baucushopes to recoup some of that bylimiting the amount of profit that American companies can keep overseasand still be allowed to do business in the world's largest economy.

"MaxBaucusthinks the U.S. can act alone to close global tax loopholes, but I have my doubts," said Christians.

It's worth noting that corporations have lined up in opposition toBaucus'sproposal curious given that the reform he's proposing would ostensibly see their base tax rates come way down.

Public must drive change

The real hope for substantive tax change, Christians says, lies in the rising public awareness ofthe issue and the kind of protests seen in Britain in 2012 when people questioned why companies like Starbucks were allowed to skimp on taxes at a timewhen individualtaxpayers were facing harsh austerity measures.

"You're seeing regular people out in the streets with protest signs," she said. "People are starting to locate decision-makers, and they're seeing the real source of the problem isn't Google or Starbucks or HSBC. It's governments doing this, and[people are]not used to that.

"NGOsare taking on tax issues as human rights issues, and that gives me some hope some things are changing."

There are other green shoots of hope, too. The European Union recently passed legislation requiring country-by-country financial reporting from its banks. In April, it approved similarlaws for the resource industryto ensure that more of the benefits of resource extraction stay close to where the resources were extracted.

The law says big mining companies have to disclose tax payments "in all the main countries in which [they] operate," but even that wording allows a lot of leeway, Murphy says.

"They don't tell us about the Cayman Islands or British Virgin Islands," he said, "They tell us what they're doing in the places we know they already are."

Some companies, most notably Vodafone,have made overtures toward transparency by breaking downhow much they're spending on taxes and where. ButVodafone'sgestures came only after scrutiny of how little tax the telecommunications giantwas paying in its home country of Britain.

None of these measures will amount to much until developed economies demonstrate they have the political will to enact binding legislation. And that, most likely, is going to come from taxpayerstelling them to do so.

Until that happens,even theOECDacknowledgesthere's going to be "a perception that the rules for the taxation of cross-border activities are regularly broken and that taxes are paid only by the naive."