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Microsoft, tax avoider

Ethics, Ireland, Microsoft, Tax Havens 6 Responses »

May 042008

RTE in Ireland has reported:

Accounts for Microsoft Ireland Research, an Irish subsidiary of the global software giant, show that the company paid just €460,000 in tax, on profits of more than €1.2 billion last year, by using provisions in Irish tax law to take its corporation tax bill down from €158m. Much of Microsoft’s international profits are channelled through Ireland, but because the main company for Microsoft’s activities has unlimited liability, it does not have to file detailed accounts.

You couldn’t make it up. That’s 0.04% tax.

Corporate social irresponsibility in a parasitical state writ large, I suggest.

And it’s this sort of behaviour that finances Bill Gate’s philanthropy. I cannot tell you how angry that makes me.

Disclosure: I am an Irish Citizen. I do use Microsoft products.

Ireland – Sic Transit gloria

Ireland, Microsoft 1 Response »

Apr 242007

It looks like Microsoft’s love affair with Ireland is fleeting. According to the Irish Independent (behind a registration wall) in the past two years Microsoft’s Irish subsidiary has paid dividends totalling €5bn to its Seattle-based parent. That’s despite making profits less than that at €2bn pre tax a year. The tax charge is running at about 10%.

The profits booked are of course illusory. Out of turnover of €9.5bn last year almost €6.7bn was generated in Continental Europe, with the UK accounting for €1.7bn in revenues. Which gives clear indication as to where tax should have been paid in my opinion.

Even so, this is not enough for Microsoft. According to the Irish Independent:

Microsoft Ireland’s managing director Joe Macri has warned that Ireland will cease to be an attractive location for foreign direct investment (FDI) if employment and other costs here continue to rise

It’s not enough then for a state to sell it’s tax system to foreign corporations: it’s population must not benefit from increased prosperity as a result either.

It looks like Ireland’s days as the Celtic Tiger will soon be over – proving that they never were anything but a tax bubble anyway.

How much tax does it cost for Google to create a job?

Economics, Ethics, Microsoft, Tax avoidance, Tax management 4 Responses »

Jan 212007

I always get a little annoyed when those who suggest that commerce is the only way to create wealth ignore the fact that those companies that very often attract the highest publicity for being in the forefront of the entrepreneurial revolution get some of the biggest tax subsidies. Richard Branson’s Virgin is one such enterprise that seems to live off subsidies. Google is another. As Web Host Industry Review reports:

Google is going to build a $600 million data center in Lenoir, North Carolina. That [means] Google will receive $100 million in tax benefits over the next 30 years. That’s $500K for each of the 200 jobs that the data center is expected to create.

So much for the risk taking of free enterprise. Google has been the fastest growing stock over the last few years. And it still requires the state to absorb its risk.

As ever, don’t get me wrong. I’m pro business. But I also argue that business would be completely lost without government. The evidence is plain to see. Without taxes (which Google is keen to avoid) Google could not do what it does. Which makes it a hypocrite for locating its entities in low tax zones, like Ireland.

I guess they’ve got that in common with Microsoft and Apple.

Do tax practitioners need to exercise moral judgement?

Apple, Barclays, Ethics, Microsoft, Richard Murphy, Tax avoidance 4 Responses »

Jul 182006

Over at AccountingWEB Rebecca Bennyworth has posted a thoughtful piece on whether tax practitioners have to exercise moral judgement in the course of their work. She has been slated for by some commentators, but I think her piece reflects the real confusion that exists in this area, and on which all the professional bodies (in the UK at least, and I suspect elsewhere) are failing to give a lead.

She makes a number of good points (for those who can’t follow the link since AccountingWEB have a tedious registration process I reproduce some here). She says for example:

With my head I have no doubt that tax must be a legal issue.

But then adds:

I make no secret of the fact that I am intensely uneasy about some of the more esoteric tax avoidance schemes developed by advisers for the very wealthy and large businesses. I personally find the extremes to which they go distasteful. ‚Ä¶I would certainly not engage in more extreme areas of tax planning myself. ‚Ä¶. So I am making my own moral judgement about what I will and will not engage in.

Having got to this point she says:

If tax is indeed a moral issue, then who is to make the moral judgement over “how much to pay” if there are many options open to a client or business?

And goes on to ask:

Given that tax is established by rule of law, and gives citizens and businesses a choice about how to organise their affairs, with different tax outcomes, how should the citizen make his choices? And what is the role of the accountant advising him in helping him to come to decisions?

As she, rightly notes:

We have neither been trained nor are we necessarily qualified to make such moral judgements.

This, although I doubt Rebecca intended it that way, is for me the most telling point in the whole piece, and a damning indictment of a so-called ‚Äòprofession’, the very exercise of which role does require the exercise of choice in accordance with an ethical code. If in doubt, just try looking up what a profession is in any reasonable source. The necessity for that ethical code shows that the exercise of moral judgement is an essential part of being a professional person. The denial of that role reduces the so-called profession to the level of being technicians. There’s nothing wrong with being a technician, but please don’t suggest it’s professional because by definition it is not. And yet a commentator on Rebecca’s piece (reflecting what is, I am sure a majority view amongst accountants) says:

There is no morality in tax, only rules. Your clients expect you to work to the limit of these rules. In fact the only immoral act is failing to do so – while gladly pocketing their cheque.

I find this incomprehensible. I can guarantee that this person does not leave his humanity at the door when he comes into his office, but that is exactly what he claims to do. It is as if he believes himself an automaton without a moral compass whilst working. That’s sad. I also suspect it is not true, but the failure of any professional body to teach ethics at a sufficiently high standard for him to have not appreciated this point is, I think, a bigger concern.

And I regret I cannot accept Rebecca’s conclusion for much the same reason. She says:

The “moral” or “legal” debate continues, unanswered. What is more to the point, the present Government seems intent on adding fuel to this smouldering fire with the constant use of the phrase “fair amount of tax and NICs”. Perhaps it is time for the tax profession to take them on, and ask for this to be defined in law, or for it (and the implied criticism behind it) to be withdrawn from use.

This too shows considerably confused thinking. If ethics has a role in taxation (and I am sure it does) then you most certainly cannot make it law, not least because (as I will show below) it can be about choices between laws. Nor, to answer the inevitable flat-taxer’s comment, can you resolve the issue by simplification. Ethical questions can be very simple. Indeed, the hardest ones are. But that doesn’t make the choice any easier.
To therefore argue that this issue must be resolved by law, or be dropped is to deny the reality of the issue, which is real, and which will not go away (at least, not so long as I and, I suspect, Dave Hartnett have anything to do with it).

So, preamble over, let me make it clear why ethics and tax are inextricably linked.

Let me be clear at the outset though that tax should only be paid if it is legally required. In other words, if there is no taxing statute tax should not be due. I think we can all agree on that. My point is though that this is a starting point. To end the argument there as most accountants, the large firms and the professional bodies seek to do is simply mistaken logic. The reasons are:

You have to know what the law is. Unfortunately any law is a construct of words and words are imprecise as to their meaning. In consequence they will always be open to interpretation. Every morning of every working day two barristers walk into a court in the UK to argue the meaning of tax law, both sure they are right. And without fail, every day one of them is found (not proved) to be wrong. Wrong, that is until another opinion is available. So judgement as to what the law says is an inevitable part of being a professional tax adviser. Those who argue ‚Äòthe law is the law and all you have to do is comply with it’ seem to have missed this essential fact. Likewise those who argue that the matter is simple; avoidance is legal and evasion is illegal have forgotten how hard it is to tell what is and is not legal – and I stress, this would be just as true (maybe more true) of a simple tax code. So accountants are duty bound to exercise judgement, and need an ethical (or moral code) to do so. This is fact, not fiction, and to deny it is to deny reality.
You have to decide which law you are complying with. Many complex tax planning schemes involve an international dimension. This is usually because they involve the trade off of one legal system against another. So there is a choice as to which law is to be followed, both as to tax, as to the jurisdiction in which a contract is written, and where it is to be accounted for. Any such choice is moral. It is a moral choice to represent a transaction takes place in one location even though the value was added in another.
You have to decide between options within the law. Most law provides for choice, and so they should. The world is not a simple place and a tax law that tried to be ‚Äòone size fits all’ would not work, which is precisely why the calls for simplicity are misplaced. But, this means judgement has to be used. If that judgement is commercially driven then few would say this creates ethical issues for taxation – including all tax authorities of which I am aware. But when the choices made available in law are abused i.e. a transaction is restructured for the sake of making it appear as if relief is available under a provision when the substance of the transaction is different from that for which the legislation was intended than ethical dilemmas arise. This is why I specifically argue for purposive legislation.
Tax can in some cases become the primary motive for transactions in themselves, or at least for major steps within them. Numerous examples exist where this is the case. This is an ethical choice. Is including a step in a transaction primarily to secure a tax advantage ethical? I suggest not, even if the step is in isolation legal. This is why I am sure a general anti-avoidance principle is required. But I accept, the decision as to what is ‚Äòprimarily’ is an ethical one on which judgement would have to be used. And it is already, of course, which again proves that those who argue otherwise are not reflecting reality.
As I have noted elsewhere on this site, the practitioner has a duty to more than one client at a time. They must see the world in the round, not in the micro detail of one client and one case if they are to be a true professional. In other words, externalities have to apply to the practitioner’s work and if that is true then externalities have to be considered in the decision making process. The duty to pay tax is an externality in the decision making process, but which has to be considered. If reputation risk is high (as it seems to be for Microsoft and Apple, so they’re hiding their tax planning) or if legality is in question, as is the case in high profile cases such as Barclays seeking to protect its UK customers with accounts in the Channel Islands from the due process of UK tax law under the guise of banking secrecy, then clearly ethics are a key component in the decision process, and in the way it will be judged. I have suggested Apple, Microsoft and Barclays have acted entirely legally but unethically.

And that is precisely the point: if it is possible to be legal and unethical at the same time the point that this is an issue is proven. At which point the request is not that the issue be dropped, but that accountants learn to deal with it.

So which Institute wants to get on with this? Your members need help. Are you going to provide it, or will you carry on banging the drum of ‚Äòsimplification and certainty’ – neither of which will happen, and both of which are contrary to the best interests of your members and their clients?I’m not holding my breath.

Too good a comment to hide

Apple, Dennis Howlett, Ireland, Microsoft, Tax avoidance Comments Off

Jul 172006

Dennis Howlett’s comment on the Apple article below is too good to be hidden away in the comments section. He wrote:

My iPod says: Designed in California, Assembled in China. I suppose we’ve now to add: Tax paid in Ireland.

I think that’s a classic.

Apple does a Microsoft and goes for secrecy in Ireland

Apple, Ethics, Ireland, Microsoft, Tax avoidance 4 Responses »

Jul 172006

Apple Corp is joining Microsoft in re-registering its Irish subsidiaries as unlimited companies according to a report in the Irish Sunday Business Post online. The result is that the companies will not now have to put their accounts on public record. The consequence will be that no one will know how much profit Apple will launder through Ireland to exploit its low tax rates.

Apple has claimed that it reregistered in May ‚Äò‚Äòin the best interests of the company”. And this time there can be no doubt that the key executives in the company know exactly what is going on. It is reported that the meeting at which the decision to go unlimited was made was attended by Apple’s chief operating officer, Tim Cook, its chief financial officer, Peter Oppenheimer and its treasurer, Gary Wipfler.

Apple’s Irish subsidiaries had accumulated profits of $2.6 billion in 2004 when the last accounts were registered according to the Sunday Business Post. If these represent after tax profits then pre tax profits (assuming a 12.5% Irish tax rate) would have been $3 billion i.e. tax of about $400 million would have been paid in Ireland to that time. But if tax had been paid at the average cash paid tax rate Apple suffered in the years 2002, 2003 and 2004 (according to its US filed accounts) then the tax bill would have been charged at 39% – or $1.17 billion.

I think that rate might overstate things as Apple was not that profitable in 2002 and 2003. Let’s assume a more likely OECD average sort of rate of 30% – then the tax bill would have been $900 million on those accumulated earnings. That’s still a saving of $500 billion of tax by Apple.

Now, at September 2004 Apple was worth in total (per its accounts) just over $5 billion. 10% of that might have come from Irish tax savings. It’s also worth noting that it’s total retianed reserves were $2.67 billion – of which 97% were in Ireland according to the Sunday Business Post report.

Let’s also put this in another way. In 2004 Apple had pre tax profits of $383 million. And its profits in Ireland were $345 million. So 90% of Apple’s profits flow through Ireland.

Which as anyone can tell you is absurd. 90% of Apple’s added value does not take place in Ireland. So this is profit laundering on a grand scale to ensure that profits are relocated by what are without doubt entirely legal means to a place where they cannot be argued to be earned but where they can be booked at low tax rates.

This is not, in my opinion, corporate responsibility. It may be legal, but that’s the only basis on which you can defend it. And in my book that’s not the way to run a business.

And, this also shows yet again that the Celtic Tiger is a myth. Accounting tricks are not value added.

Microsoft does tax avoidance in secret

Ireland, Microsoft, Tax avoidance 8 Responses »

Jul 102006

In November last year the Wall Street Journal reported that Microsoft was saving as much as $500 million a year in tax by the use of an obscure Irish holding company called Round Island One Limited to collect almost all of its world wide revenues from outside the USA. I admit I was pleased to have played a part in bringing that story to light.

Microsoft suffered a lot of flack in both Europe and the US for having engaged in such an obvious tax planning activity. I think that was appropriate.

Now Microsoft has decided to do soemthing about its activities in Ireland. Of course, what one would have hoped would be that they had decided, in the true spirit of what I think to be corporate responsibility, to have paid tax in all the countries in which they make their sales in at least broad proportion to the revenues earned there.

That would, however, be too much to hope. Instead Microsoft has, according to reports on Irish website FinFacts, decided to re-register Round Island One as an unlimited company. Which means it will no longer have to file its accounts in Ireland for public inspection but will retain all the benefits of its structure.

I have three reactions to this. Firstly I call it corporate irresponsibility. Second I think it proves that Ireland is being used as a tax haven, in which act it connives. Third, the next time someone points out Bill Gate’s philanthropy I’ll politely point out that if his corporation paid the tax that it avoided there might be less need for his personal aggrandisement through the activities of his foundation.