First off, I am no tax expert. And secondly, this topic definitely requires more than an off-the-top-of-head blog post on a Wednesday morning.
However, the news of late has been dominated by much political outrage over the low taxation paid by the big multinationals: Starbucks and Apple and so on. Only yesterday, Tim Cook was testifying in front of Congress; and to commemorate that event, some staff writer at Bloomberg Businessweek wrote this wildly opinionated article:
Now I love a good and well-argued opinion. But I have no patience for an opinion built on rhetoric, platitudes, and general exhortation. This article was the latter. I don’t think that the writer had even read the Apple statement to Congress. So after I’d spent 20 minutes arguing with people in the comment section – not over opinion, but because they clearly didn’t even know the facts of the story – this post began writing itself.
Why Do Governments Get To Tax Us?
If I were a libertarian and believed that Governments are the root of all evil, then I would say that Governments get to tax us because they’re bullies. And that taxation is actually theft. But I’m not a libertarian, so I get to believe that taxation is appropriate and a moral necessity. Here is why:
- If old-school governments didn’t take the initial responsibility for building highways and street-lighting and the public waterworks, then it would have taken us a really long time to get anywhere. In my view, when that public infrastructure was built, there was far too little return on offer for any free market agent to have undertaken the construction on their own initiative.
- More that this, even if private companies were providing this services – rather than pay multiple monthly retainers to all the different providers of these types of public goods, I would prefer to pay a fee to a central entity that then manages the organisation of those various enterprises.
- That central entity is “the government” and the fee is “tax”.
- I like to think of tax as paying rent for living in a country.
At this point – the argument usually descends into one of whether you should be taxed to pay for services that you’re not using*. For example – I don’t get to have public housing built for me – so why should I pay for it?
That’s a whole different debate – and one for which there are no easy answers. But my general response would probably sound like: “everything is inter-connected – you could argue that the housing of the poor frees up some of their discretionary income, which means that they’ll start consuming more products, which means that there will be more trucks on the road distributing products, which allows for economies of scale in logistics, which lowers the overall prices of goods that you buy at Woolworths.”
There is also the argument for the appropriateness of using taxation as a transfer mechanism to redistribute income from the rich to the poor. But even in that scenario, I’d probably go back to the counter of inter-connectedness.
Putting these arguments aside, if we can accept that the primary intention behind taxation is to fund the supply of public goods, then that has some implications for where I should pay the tax.
Who Gets The Tax?
Normally – this answer is easy. Let’s say I work for a bank in London. If I live in London, then I am getting British public goods. I have the benefit of their police force alongside the national protection provided by the British Army. I get to watch the Queen’s jubilee regatta in person and enjoy the streets festooned with taxpayer-funded garlands. There is an inefficient immigration office to prevent non-EU foreigners from coming to take my job; the highways get speed limits to prevent general chaos; and someone puts up signs to advise me of “snow ahead” to prevent unexpected death.
So I pay tax to Her Majesty’s revenue collection service.
But now, let’s say that I get sent on a work assignment to Kenya to help establish a new bank branch in Nairobi, and I am there for six months. Which tax authority should I be paying?
Some might say “both” – but politicians generally agree that it would be unfair for a person to pay both British and Kenyan tax on the same salary. So most governments will enter into Double-Taxation Agreements (DTAs) where they decide, in advance, who should get to collect the tax in situations where the answer is unclear. And in the case of the Kenyan assignment, given the duration of my work visit, I’d probably pay Kenyan tax on six months of salary, and UK tax on the balance**.
And this does make sense. Because for half the year, I get the (arguable) benefit of Kenyan public goods, and the rest of the year, I have the benefit of British public goods. Sure, it doesn’t entirely balance out – but the principle seems pretty fair.
Which is Why It’s No Different For Multinationals
Multinationals are not a single company in the legal sense of the term. Multinationals are usually made up of multiple companies that are all owned and controlled via a group holding company. It’s almost like having clones of myself with slight cultural variances working in both Britain and Kenya all year through – receiving general instructions about spending habits and hygiene from my original self here in Johannesburg.
So with Apple, for example: the main Apple holding company is an American corporation (the original). And that Apple corporation will own an American “operating” company (a clone) that will do all of the research and development, distribution and sales of Apple products in the US. But Apple won’t use an American company to run its British operations. It makes much more administrative sense for Apple to start a British company to do that. And that applies to almost all of Apple’s overseas operations.
Thus, the American company will pay tax in America, the British company will pay tax in Britain, the Irish company will pay tax in Ireland.
So Where Is The Debate
Apple, as a group of companies, does not pay very much tax. It has constructed its overseas operations so that they get to benefit from low tax rates in countries like Ireland.
But Apple’s American company (the one that does all the selling and distribution of Apple products in the States) pays an effective tax rate of 30.5% to the US Treasury. Which is a very high company tax rate. And fun fact: for every $40 collected by the IRS last year, $1 of that was Apple cash.
But the public opinion discontent seems to say that the low tax rates paid by the overseas operations of Apple are somehow robbing the American public of their just due.
The overseas profits of Apple should be taxed overseas because that is where those sales took place – and it was in those jurisdictions that Apple got to benefit from their public goods (in the form of regulation and rule of law, etc).
You can’t have it both ways
Even if America wanted to play this card: on the basis that somehow, because Apple has its headquarters in Cupertino, then all of its profit earned anywhere should be taxed in the US… Then the same logic must apply to China. And India. And the Middle East. And every other country that exports goods to America for sale.
And the United States, that mass importer, will have to allow the tax on those goods to be collected by Beijing. Which is a bit counter-productive, don’t you think?
I am all for making American residents (companies, individuals, etc) pay their taxes in a manner that makes sense. So is Apple (Tim Cook said so). But chasing after the taxes that are rightly being collected by other governments?
Now is the appropriate time to talk about bullies. And, possibly, theft.
*Well – it also turns into a rant about corruption and inefficiency. But again that’s not really an argument about principle – it’s an argument about implementation. So I’m choosing to delicately step around it.
**In order to correct for differences in tax rates, it usually works by the British Revenue Authority saying to me: “declare your full year’s worth of income, calculate the full tax owing, and then we’ll reduce that amount owing by the any foreign tax that you’ve already paid in Kenya – AKA the foreign tax credit”