When you think of tax avoidance, you’re probably thinking of the big Starbucks scandal, or other massive global companies that seem to always get away with it.  ‘Multinational corporations’ (MNCs), some may call them.

Most multinational businesses are not set up as a single company, but as a group of companies, only some of which will be operating in the UK. In broad terms, companies are required to pay corporation tax in the country where the economic activity occurs that generates their profits, not where their customers are located. Many elements contribute to a multinational business’s economic activities: sales, employees, technology, physical assets and intellectual property. Whether it’s the tax experts they can all afford to hire, or the government just turning a blind eye to all the money they don’t pay, innumerable MNCs are able to avoid paying billions of pounds of corporation tax. 

In fact, if you spend $120 dollars on a pair of Nike Air Force 1s, you’ll be paying more to Nike than they have payed in US federal corporation tax in the last 3 years. The Biden administration recently proposed an increase in corporation tax to 28% - this misses the point, 55 of America’s largest corporations payed no federal corporation tax at all on 2020 profits.

Yet, some argue that calling it ‘tax avoidance’ is misleading. After all, if you have complied with all tax laws, then what exactly are you avoiding? Presumably there is an amount of tax that MNCs ‘should have’ paid, which is 25% of their profits in the UK as of Rishi Sunak’s new budget from 2023. ‘Tax avoidance’ has no fixed legal meaning, although courts have sought to elucidate it in some cases and, for example, to distinguish tax avoidance from tax planning or tax mitigation, yet it remains legal. This indicates that the businesses in the spotlight for paying less tax than we all think they should, are not in the wrong, and it is up to the tax laws to be clearer and more concise. But would this achieve anything? If the loopholes are not eradicated, then there is no point changing the laws. The global companies who are raking in billions of dollars a year in revenue can afford to hire the experts who know the tax systems to the extent that they can work a way around it - any change must be holistic.

Others argue that sales do not lead to profits. What this means is that the hundreds of thousands of global sales MNCs make every month or even week, does not directly translate into profits. The current corporation tax law indicates that the tax is to be paid on a business’s profits. This is where the big loophole lies. Even though there are evidently millions of sales per annum, their cash flow statement claims that a lot of this revenue is lost through outflows from paying staff wages, the cost of renting a building or the cost of using their brand. How is it that by paying all of these, a profitable business ends up reporting to officials as making a loss, and hence pays no tax?

For the many companies that still make amazingly high amounts of profits, even after claiming many business expenses, tax havens are their best friend. When a business moves its profits into offshore bank accounts where there is either reduced tax or not tax, it is called a tax haven. Bermuda or the Cayman Islands are where many of those tax havens exist and where the MNCs manage to report a majority of their profits, as these places have no corporate taxes. In order to claim that the business still operates there, many MNCs set up a small parent company there that conveniently charges the international businesses the total of their profits for ‘use of the brand name’. For example, if Amazon UK make £1 billion in 2020, Amazon Cayman Island will charge Amazon UK £1 billion in royalties for use of the Amazon name, meaning all profits are transferred legally to the Cayman Islands, and by extension no profits are made in the UK. Corporation tax is not only the easiest tax to avoid, as it is easiest to rearrange funds for, but one of the largest potential government revenue sources: In 1950, 35% of US federal revenue came from federal corporate taxes, which now stands at 7% today - this is no coincidence.

Let’s say for arguments sake that a business is genuinely at no fault for doing all this, and that it lies solely in the hands of the law for creating this loophole. Does a business not feel or understand the consequences?

Beyond the ethics, there is an economic imperative behind paying tax. In all countries, tax revenue makes up a significant proportion of a government’s inflows, which can lead to higher government spending on areas such as health care and education. The true impact on the loss of tax revenue, depends on what the government would have spent the money on or what it needs to money for. For example, it may be necessary public sector investment (repairing roads) or it could be to fund shortages in pension funds. In the current climate, with the billions that many governments have amassed in debt, this inflow from tax revenues is vital. The effect of Covid-19 on the economy will fully reveal itself after the deaths and cases reduce to nearly none but one thing is clear: It will. Surely in times like these, shouldn’t businesses be contributing more so that the government will be able to inject more into the economy?

You may be thinking that this is all contemplation, but Amazon provide a valuable case study. In 2019, the retail giant was accused of avoiding enough tax to pay for nearly 2,400 nurses. The GMB trade union, estimated that in the previous year, the MNC should have paid £103 million in corporation tax, yet paid just a measly £14 million. The so-called ‘missing’ £90 million could have paid for 2,368 nurses, 1,721 paramedics, or 4,496 care workers. These figures really do hit us all a bit deeper after the way that this past year has touched us all. The deep strain put on the NHS was felt by us all and this could’ve been relieved by these extra nurses, paramedics or care workers.

It is pathetic that these big companies, whose CEOs are multi-millionaires if not billionaires, are avoiding taxes in times like these when ‘every little helps’ could not be a truer statement. They rake in the profits for themselves and don’t care about government funded operations that are keeping the country running. What’s worse, is that it is these companies who have been ousted as not declaring their full profits and paying the full tax, are also those who have been mistreating employees. Again, Amazon crops up after going through a full investigation in 2019 about the working conditions of their employees in warehouses. An investigation has revealed numerous cases where Amazon workers are left to suffer after sustaining workplace injuries, leaving them unable to work, deprived of income, and forced to fight for months to receive benefits and medical care. In 2018, an ambulance was called to a UK Amazon warehouse every other day. Ironically, it is the companies that pay so little in tax that rely on free healthcare, generous in work benefits and statutory sick pay to underpin their business model, all publicly provided services payed for by taxation.

Do these massive, global giants have no morals? Or do they think they can get away with anything because they have a large market cap and hence considerable influence? Whatever they tell themselves, it is disgusting.

Tax avoidance is very much a part of reality, we could only wish that it was a myth. Whether it is called that or not, in the basic sense of the phrase, tax avoidance is exactly what it is and most of the time it is always the bigger businesses who have the money to spend that do it. Isn’t it ironic how the same companies that claim to be making a loss, are able to hire experts that demand to be paid millions just to shift their profits around and into tax havens?

What can be done to stop, or at least cut down on this? There is of course the obvious solution of legislative changes, but for these billion-dollar Fortune 500 companies, with new legislation comes new loopholes they will exploit. More hands-on policies should start being put in place. With a policy such as putting a cap on how much expenses you claim or a gradual system where for every 1000 employees in a country, a certain amount of money is allowed to be claimed as expenses. Another way could be to put in place a policy for which a certain percent of sales should be happening in a country to be able claim profits there, hopefully reducing the usage of tax havens. Last but not least, the best thing to do for the bigger, more developed countries would be to have similar corporation tax rates - a concept recently proposed by US Treasury Secretary Janet Yellen as a worldwide ‘Minimum Corporate Tax Rate’. Not only would this mean that the incentive for businesses to rearrange profits and assets would be greatly reduced, but this would also reduce the incentive for governments to lower corporate tax rates to attract MNCs, hence preventing what Yellen coined as a “Race to the bottom’ which leaves everyone worst off. Consequently, MNCs would be a lot less likely to resort to tax havens, as the benefits would be reduced.

As with any fiscal reevaluation, there will be trade offs. But overall, with all these policies a great benefit would be the reduction in tax avoidance and an increase in tax revenues for the government, which would be much appreciated for any government, especially in the current climate.

 Lahari Paladugu