How Are Global Nations Trying To Control Big Tech?

How Are Global Nations Trying To Control Big Tech?

The G7 nations recently met to address tax avoidance by big tech companies. Tech companies have been using ‘Tax Havens’ for many years to reduce their federal tax liability. Let’s have a look at how G7 decided to crackdown on tech companies and other MNCs doing tax avoidance.

Crux of the Matter

What is The G7?
Group of Seven is an informal group of world’s 7 largest developed democracies. The objective is to address issues regarding world economy. G7 includes United Kingdom, United States, France, Canada, Germany, Italy, and Japan.

G7 Summit 2021
G7 made a “historic” deal for taxing multinational companies. This deal was made to prevent tax avoidance by making MNCs pay tax in the country they operate. Countries will now charge 15% minimum corporate tax rate on the MNCs.

How Tech Giants Are Taxed?
They are taxed based on where they are headquartered. The international tax system, since pre-digital era, focused on labour, production and capital. In case of tech companies, no physical product is produced and thus identification of where economic activity is taking place is difficult.

Tax Havens
It is a place where tax rates are low. Tech companies set-up shell companies in such countries and channel their profits through them. Countries lose around $427 billion every year due to tax evasion (2019) whereas India lost around $10 billion due to similar evasion (2019).

Problems With The Proposal
Some countries rely on low taxation rates to attract foreign investments. Global minimum taxation rate will take away the tool which these developing countries have. This will slow down the economic growth of such countries.

Impact On India
It won’t affect the MNCs doing business in India as India’s effective corporate taxation rate is higher than the global minimum tax rate. India attracts foreign investment through cheap labour rates and large internal market instead of lower taxation rates.

War In India – Google Tax
Tech giants can avoid paying 6% ‘Google tax’ in India if they set-up an Indian unit. The new IT rules also compel tech companies to set up Indian units for grievance redressal. However, if they set up Indian unit to avoid Google tax or for grievance redressal, they will be taxed at a higher rate of 40%.

  • Originally called BRIC, the name was an acronym of the countries Brazil, Russia, India and China. The term was coined by economist Jim O’ Neill in 2001. South Africa joined the organization in 2010 officially and the acronym since then is BRICS.

On Apple’s Tax Case & Tax Havens Of The World

On Apple's Tax Case & Tax Havens Of The World

Apple won a €13 bn tax avoidance case against EU Antitrust Regulator. You might think that how famous and well known companies like Apple sneak out from under the government’s nose without paying any tax or seldom paying minimal? Tax havens are the key to do so. But do you know what are tax havens and how do they help corporations and individuals bypass taxes? Let’s demystify it here.

Crux of the Matter

Apple Lawsuit
Apple won a €13 bn tax avoidance case against the EU Antitrust Regulator that objected to the aid given to Apple by Ireland, where the company’s the base for Europe, Africa, and the Middle East is accused Apple of avoiding tax. The EU’s General Court annulled the decision in favor of Apple as antitrust regulators failed to present enough evidence to show Apple broke EU competition rules.

What Did Apple Do?
All US-based companies in Ireland functioned with two subsidiaries but as per the 1991 treaty signed between Apple and Ireland which was renegotiated in 2007, Apple functioned with one subsidiary with two branches. Thus, Apple Sales International (ASI) had 2 branches namely IRL1 and IRL2. IRL1 is an Irish registered company selling products to non–US locations from Ireland and IRL2 is “registered” in Ireland, but “managed and controlled” from a tax haven such as Bermuda.

Ireland considers Apple as a Bermuda based company because of IRL2, but the US considers it an Ireland based firm based on IRL1. Now the interesting part is that, because of this arrangement, Apple was neither taxed in Ireland nor the US, but in Bermuda – having minimal corporate tax rate – because of Irish Tax arrangement. So the EU considered this arrangement illegal and claimed that this kind of favored arrangement towards Apple is disturbing the competition in the EU market.

What Are Tax Havens?
A tax haven is any jurisdiction that offers minimal tax rates to foreign individuals and businesses. Moreover, tax havens do not require businesses to operate out of their country or individuals to reside in their country to receive tax benefits. Lack of transparency and no substantial activities are features of tax havens.

Tax Havens Good Or Bad?
According to the World Economic Forum, it cost $200 billion in the form of loss in global tax revenue. Moreover, 40% of multinationals’ profits or $650 billion are shifted to tax havens each year and 10% of the world’s largest multinational firms are responsible for 98% of this activity. Such tax evasion results in huge revenue loss for many countries across the world.

Caught Offside?
Many athletes have also been found using tax havens to protect their income. Cristiano Ronaldo was accused of evading €14.7 mn in taxes via shell companies based in tax havens. Lionel Messi and his father were alleged to have used shell companies in tax havens to protect royalties and licensing earnings from Spanish income tax. Radamel Falcao was suspected of using a web of shell companies in the British Virgin Islands, Ireland, Colombia, and Panama to avoid taxes on €5.6 mn of income. Angel di Maria was accused of not pay €1.3 mn to the Spanish tax authorities by giving up his image rights to companies based in tax havens.

Data Leaks – An Important Issue in Tax Havens
However, tax havens are not always safe for clients. Here are some of the major data leaks revealing critical information about tax havens and chain of shell companies:

  • 2013 British Virgin Islands offshore leaks – International Consortium of Investigative Journalists released a 260 GB database of 2.5 mn tax haven client files.
  • 2015 Swiss leaks – Le Monde released 3.3 GB data about a tax evasion scheme of over 100,000 clients and 20,000 offshore companies with HSBC Bank, Geneva.
  • 2015 Panama Papers – 11.5 million docs totaling 2.6 TB, detailing financial and attorney-client information for more than 200,000 offshore entities leaked.
  • 2017 Paradise Papers – 13.4 mn documents totaling 1.4 TB, detailing personal and corporate client activities of the offshore magic circle law firm, Appleby, covering 19 tax havens, were leaked.

  • The Double Irish is a base erosion and profit shifting (BEPS) corporate tax tool used mostly by US multinationals since the late 1980s to avoid corporate taxation on non-U.S. profits. It is the largest tax avoidance tool in history and by 2010 was shielding $100 billion annually in US multinational foreign profits from taxation.
  • New trade theory (NTT) is a collection of economic models in international trade that focuses on the role of increasing returns to scale and network effects, which were developed in the late 1970s and early 1980s. New trade theorists relaxed the assumption of constant returns to scale, and some argue that using protectionist measures to build up a huge industrial base in certain industries will then allow those sectors to dominate the world market.
  • The Apple Park is the corporate headquarters of Apple Inc., located at One Apple Park Way in Cupertino, California, United States. It was opened to employees in April 2017, while construction was still underway. Its scale and the circular design, by Norman Foster, have earned the structure a media nickname “the spaceship“.