The Internet vs the taxman - TechCentral

The Internet vs the taxman

[By Alistair Fairweather]

Death and taxes now have a third, unavoidable friend, the Internet. Even the poorest people on the globe are touched by it, if only by the proceeds of online charity drives. But, like a typical youngest child, the Internet is already at odds with one of its siblings — the taxman.

Slate recently reported that Amazon.com, the world’s largest online retailer, is able to undercut its bricks-and-mortar competitors substantially and in some cases even the manufacturers of the goods it sells. A great example is Apple’s wildly popular MacBook which costs US$1 101 at Apple’s own online store, but $979 on Amazon.

How is this possible? Via a handy little loophole in US tax regulations, which says that a company only needs to charge a customer sales tax if it has a physical presence in the state in which that customer lives.

Since Amazon is a website, it can plausibly claim that it only has a physical presence in those states where it hosts its servers, warehouses and dispatches its goods and develops its software (and its other products such as the Kindle reader). That means, as far as the tax laws are concerned, Amazon only operates in four out of America’s 50 states, allowing it to undercut all its competitors by up to 9% in most of the other 46 states.

But Amazon’s tax trickery looks minor by comparison with Google, which manages to avoid about 90% of the tax on its earnings outside the US. Since that revenue came to $12,5bn in 2009 alone, that level of saving can make a huge difference — particularly when Google’s effective tax rate is 2,4% instead of the typical rate of 25% or more. Bloomberg calculated that Google has saved over $3,1bn since 2007 by using completely legal tax avoidance measures.

Multinational companies avoiding tax is nothing new — it’s been going on for centuries. It is the driving force behind the world’s many tax havens such as the Isle of Man, the Cayman Islands and Bermuda (which is, incidentally, the pipe through which Google’s river of profit flows).

But online giants like Google add a whole new dimension to the practice. Most firms need some kind of physical presence to make any real money in a country. Google simply needs Internet connectivity. A case in point is SA. Google only set up an office here in late 2006, a good five years after their search engine became our most visited website.

This intangible aspect makes it even easier to claim, as Google does, that its Irish office makes 88% of its international revenue. After all, where did the transaction take place? In an anonymous server somewhere out in cyberspace? Good luck sending a tax return to that address.

Though half of me cheers at this sort of clever tax avoidance — we’d all like a chance to stick it to the tax man — the other half worries about the long-term consequences. Companies, intangible or otherwise, operate within infrastructures built by tax money generated from ordinary citizens. Corporations should be willing to pay for that privilege — on ethical grounds, if not legal ones.

The real issue, though, is not the multinationals or their highly paid tax lawyers, but the ancient and inefficient legal systems around which they dodge and duck. Law-making (and changing) is a notoriously ponderous process — and with good reason.

We have to live with laws for a long time after they have passed, sometimes so long that they cease to make any sense (just ask Americans about the second amendment to their constitution).

Our tax systems were designed to fit late 19th and early 20th century societies — but those societies now only exist on paper. Unless legislators around the world wake up to the realities of the Internet, they are going to find themselves increasingly unable to cover their costs and provide for the needy.

Even if, like me, you believe in small government, you shouldn’t be comfortable with a corporation dodging billions in taxes that are needed to build roads and maintain schools. It’s not even an ethical problem so much as a practical one — and one that will only get more acute the longer governments ignore it.

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1 Comment

  1. But maybe governments can come to the party by using the money as efficiently as one of this big corporations. In the meantime I’ll be happy knowing that those companies make more profit, grow their businesses, employ more people and eventually, somehow, plough that money back into the economy.