G20 Countries Plan To Change Tax Rules In The Next Two Years

When looking at this whole issue, its worth understanding some history and background. The current system of tax treaties and international structuring arose from a desire by many national governments to try and maximize the tax revenue they collect. They did this by recognizing that there are constantly situations where an international corporation may be obligated to pay tax to several jurisdictions on the same revenue (aka double taxation). Of course, this would result in no net revenue and the corporation going bankrupt.

Therefore in order to attract the good or service to their jurisdiction; try to get as much tax revenue as possible; and try to encourage the corporation to set up some of its physical structure and work force in their jurisdictions, countries like the US, UK and Ireland set up tax treaties between themselves and other countries. It is key to understanding this underlying motivation for the current system. This system arose not out of some noble desire to relieve taxpayers of the "unfairness" of double taxation or even at the bequest of the lobbyists of those taxpayers. It came out of a logical self-interest of various governments.

With this background in mind, let's look at Apple, Google and Starbucks (which are all under fire in the international media for their tax planning).

-Many US politicians and citizens want these three companies to pay US tax on its WORLDWIDE income, including income earned from foreign customers. They argue that while this may not be legally correct, it is MORALLY correct because all three companies were a) Founded, IPOed and has their headquarters in the US; AND b) The citizens of the US are suffering in a financial downturn and "deserve" this money;

-Many foreign politicians and citizens want these companies to pay more tax on the revenue generated from customers in their country. They argue that while this may not be legally correct, it is MORALLY correct because a) The company is deriving income from tax resident individuals and corporations; AND b) The citizens of these countries are suffering in a financial downturn and "deserve" this money;

-All three companies want to maximize their net revenues ("gross revenues" minus "expenses including tax" equals "net revenue"). Each company used the tax treaty network and international structuring regime to minimize their global tax burden. As part of this structure they may have to set up operations in places like Ireland; or assigned intellectual property rights to places like the Netherlands. However there are important differences between these companies;

-Starbucks needs to respond to this "Moral but not legal" obligation demand because a) It has physical facilities in the foreign country which could be picketed or damaged reducing sales; and b) There are many competitors in these countries who could easily service customer needs and decrease gross revenues. As a result, it is logical that Starbucks may consider paying more tax in the foreign country or the US than legally obligated in order to maintain gross revenues and thereby maximize net revenue.

-Google is different in that a) It does not have or need physical facilities in a given country to deliver its service; b) You can't picket everyone's smartphone, tablet and computer to ensure that no one is not boycotting the service; and c) With all due respect to other search engines, Google is not really realistically worried today about losing customers to its competitors. Therefore, the current controversy is unlikely to significantly reduce people from using its products and services. As a result, it is logical that they will not consider paying more tax anywhere than legally obligated;

-Apple derives gross revenues from various products (hardware and software) which has competitors. Some of the sales of their products and services derive from physical retail outlets and some does not. The big question is whether Apple products (with their hardware and software integrated) is unique enough to avoid a drop in revenues.

In summary, Starbucks sells a standard physical commodity which is readily available from other competitors and is clearly subject to pressure. "Search" is not a standard physical commodity today and whether through perception or reality, it is a far and away market leader. As a result Google is not motivated by self interest to pay more tax to maintain gross revenues. Where Apple considers itself (closer to a standard replaceable commodity or a unique product) will determine where they will respond and volunteer to pay more tax anywhere than they are legally obligated.

Revising the current international legal tax planning regime for individuals and corporations is not simple. First it requires that each country think about all of the possible/ probable reactions of corporations and individuals to any changes that come into being. Increasing a tax rate or taxable amount could result in the individual or corporation moving all or part of its operations/holdings outside of that jurisdiction. This means that not only is the anticipated additional tax revenue never materializing but jobs, VAT, and other economic activity associated with that taxpayer also disappear.

Second, as explained above, the current matrix of tax treaties and domestic laws was developed over the better part of a century. Domestic tax policy was put in place by local politicians acting in what they thought was the best interest of that country. Tax treaties were negotiated, signed, updated when both countries perceived a win-win for each of their countries.

The major problem in trying to achieve achieve changes that will increase tax revenue (that groups like Oxfam, Tax Justice Network and ActionAid are calling for) is that you need to change not only domestic rules but also the intertwining tax treaty network for each and every country in the world. Given the "Prisoner's Dilemma", it is HIGHLY unlikely that we will ever see a global "tax level playing field". Each country will continually claim special circumstances or financial emergencies as to why they are not immediately changing current policies.

In addition, as explained above taxing regimes do not have the same "leverage" over all corporations or individuals. With "global citizens" (i.e. Golden Geese who do not need to be in the country of their birth to make and maintain their wealth/income), cloud computing, and the pending revolution in 3D printers (which will turn more current tangible goods into intangible services/programs delivered on-line direct to the consumer), you will see more and more taxpayers who are more like Google than Starbucks.