Tax evasion in the big league

POSTED: 02/19/13 12:34 PM

Here is some toe-curling news for tax-fundamentalists. Facebook and its 28-year-old founder Mark Zuckerberg made a hefty profit of $1.2 billion last year. But the company did not pay a penny in corporation taxes. Even better: Facebook got a tax refund of $451 million. And no, Zuckerberg did not break any laws to achieve all this.

That does not sit well with the finance ministers of Great Britain, France and Germany. They want to tackle tax evasion by large multinationals. They made agreements during a G20-meeting of the largest industrialized countries and the “European Union in Moscow. In September there is another G20, this time in St. Petersburg and then the super powers want to sign a global accord.

In the Netherlands there are approximately 23,000 letterbox companies. They generate between €1 and €1.5 billion ($1.3 to $2 billion) in annual taxes for the Dutch state.

The example of Facebook does not stand alone. Google, Amazon and Starbucks also use fiscal escape routes via the Netherlands to avoid paying taxes in Great Britain.

The American organization Citizens for Tax Justice announced this week that Facebook could still claim $2 billion in tax deductions in the coming years for last year’s stock market quotation. This makes it possible to deduct the expenditures related to stock-options for its managers from the company’s profit. Facebook is entitled to claim $3.2 billion in tax deductions.

In the United States a draft law is pending to put a stop to these practices, but congress has not approved the bill yet.

General Electric, Wells Fargo and Boeing are three other moguls identified by citizens for Tax Justice as companies that do not have to pay corporate taxes. “And all this while Americans with medium and low incomes have to pay more because of the crisis.”

The finance ministers of Great Britain, France and Germany say that international action is required to prevent multinationals from moving their profits from one country to the next. The current system is based on the principles of the League of Nations from 1920, so to say that these rules are outdated is a bit of an understatement.

Multinationals have turned internal payments for intellectual property, branding rights and royalties into a fiscal art form. The value of these assets is often debatable. Since 1970 the value of these payments has increased by a factor 170.

Many companies park these revenue streams in holdings in the Netherlands where they hardly have to pay taxes on them. The Volkskrant revealed last month that one hundred multinationals have pumped close to $77 billion through the Netherlands this way.

Comparing these practices to the tax woes St. Maarten is experiencing makes one realize that we’re not playing in the big league. That does not make tax evasion in our country less bad, because by comparison the effects on the national budget are probably worse. Still, this story is a nice wake up call for our politicians to examine who exactly is enjoying a tax holiday under the Caribbean sun and what the benefits of these arrangements are for the national interests.

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