Alongside the jobs auction, globalization has provided another, far more lucrative window of opportunity for the multinationals: escaping taxation by gaming the tax codes of various nations. Just as firms arbitraged the wage differences between labor markets, they also arbitraged governments.
The dispersal of production opened the door to complicated accounting strategies in which companies shifted corporate tax liabilities from high-tax to low-tax nations, taking the business deductions where tax rates were high and claiming the income where rates are low. No one has succeeded, so far as I could discover, in estimating the total revenue losses to governments around the world, hut it amounted to scores of billions of dollars, probably hundreds of billions.
BMW, for instance, claimed in 1993 that 95 percent of its profit (1.5 billion marks) was made overseas. From 1988 to 1992, BMW reduced its taxes paid to German authorities from 545 million marks to 31 million. Its chief financial officer, Volker Doppelfeld, bluntly told Der Spiegel: "We're trying to incur our expenditures where the taxes are highest and that is in Germany."20
American companies played the same game. IBM reported to its stock-holders that a third of its worldwide profits in 1987 were earned by U.S. operations, but it told the Internal Revenue Service that it earned almost nothing in the United States. By deducting its R&D expenditures against its U.S. income, IBM virtually wiped out its federal tax liability, despite $25 billion in American sales that year.
Intel, the leading semiconductor producer, treated profits from U.S.-made chips as Japanese income for U.S. tax purposes because "title" to the goods was transferred in Japan. Meanwhile, the tax treaty between the two countries explicitly required the Japanese government to treat the profits as American. The result, according to Michael J. McIntyre, an authority on international tax law at Wayne State University, "was to exempt at least half of Intel's export income from U.S. tax. That income became `nowhere income -income not taxable in any country."21
Foreign companies gamed the U.S. tax code, too. A 1993 Commerce Department study estimated that foreign multinationals evaded one half of their U.S. taxes, $30 billion a year by one estimate. An IRS study of 1989 tax data found that 72 percent of the foreign companies paid no U.S. taxes at all and, as a group, reported taxable income that was only .9 percent of sales, compared to 3.1 percent for American firms.22
Nissan paid 17 billion yen in tax penalties to the IRS ($170 million in 1993 dollars), but Japanese auto companies like Nissan and Toyota appeared to play the game in reverse, McIntyre observed. Though operating highly successful U.S. factories, they routinely claimed not to make a profit on their American transplants. They were accused of shipping their profits home, even though that meant facing higher tax rates in Japan. The apparent motivation was that reporting higher corporate profits in Japan stimulated higher stock prices.23
The more a multinational dispersed itself to many countries, the more opportunity it had to avoid taxation. The evasions involved the complexities of intrafirm trade in which the company, as both buyer and seller, decided for itself the "price" of goods moving between its subsidiaries and assigned the "costs" of overhead and debt deductions to suit its own convenience. Tax collectors struggled to unwind the manipulations of so-called transfer pricing, but without much success.
One study of two hundred U.S. corporations found that "the average multinational firm with subsidiaries in more than five regions uses income shifting to reduce its taxes to 51.6 percent of what they would otherwise be." American companies with subsidiaries in low-tax countries paid relatively low U.S. taxes per sales or assets, lower than the multinationals with branches in high-tax countries, according to the 1993 study published by four economists. Thus, tax arbitrage provided another incentive, alongside cheaper labor, to relocate in such low-tax places as Singapore, Hong Kong, South Korea and Taiwan.24
The leading national governments, if they had the will, could put a stop to this erosion of their tax bases, but none had found the nerve to challenge the globalizing corporations. The obvious solution was a world-wide unitary taxation system that stopped the accounting games. Taxable incomes from multinationals would be apportioned to the nations where they operated, based on where their sales or assets or employees were located. Nations could tax that income at any rate they chose, but companies could no longer move it around to escape taxation.23
The use of a global tax formula would not be difficult to devise, but politics blocked reform. Though every major industrial government was in fiscal crisis, politicians found it easier to raise taxes on consumers or workers or to reduce government spending. The political scandal of multinational tax avoidance was a visible marker of who held power in the new world order.
William Greider, One World, Ready or Not pgs 95-97 |
