Saturday, May 12, 2012

A tale of tax havens.. U.S. government complicit and starved of revenue

From "The Price of Civilization" by Jeffrey D. Sachs,  p.126-7
The Proliferation of Tax Havens
The globalization of capital markets has also made it far easier for companies to hide their profits in offshore tax havens. This is part of the "race to the botton." The use of tax havens has soared in the past thirty years, and what was once a dodge for wealthy individuals avoiding the IRS has become a systematic vehicle for hiding corporate income from taxation. Yet what is even more notable is that they IRS is often a willing handmaiden to these practices. A recent report on Google pulled the curtain back just a bit on these practices.
Google is an American-based corporation with earnings all over the world. Its main capital is its intellectual property (IP), specifically its powerful search engine. Under the U.S. tax code, the allocation of Google's earnings around the world should reflect the reality that its is core IP is U.S.-based. Specifically, whan a Google foreign subsidiary sells search-engine services to a foreign client, the foreign subsidiary should transfer the bulk of those earnings back to the U.S. headquarters in the form of internal royalty payment for the use of the intellectual property. For allocating incomes among Google's international operations for U.S. tax purposes, the internal transfers should take place at a royalty rate that mimics an arm's-length commercial transaction between unrelated firms.
Google instead found friends in the IRS. In 2006, Google and the IRS reached a secret agreement whereby a wholly owned Google subsidiary could keep the revenues and profits abroad. Specifically, Google was allowed to license its IP at a noncommercial rate to a foreign subsidiary called Google Ireland Holdings. Google's foreign operations pay IP royalties to Google Ireland Holdings, which thereby books almost all of Google's profits earned in Europe, the Middle East, and Africa. Specifically, Google's operations for those three regions are headquartered in Dublin in another entity called Google Ireland Ltd. Google Ireland Ltd. takes in around 90 percent of Google's $12.5 billion in revenues from those markets and then channels the profits to Google Ireland Holdings as royalty payments. The last step of this wonderful chain is that Google Ireland Holdings, despite its name, is based in Bermuda, where it avoids taxation on the billions of dollars of royalties paid to it.
In another page, Sachs details the dollars by sector spent on lobbying, essentially currying favours with Congress. Not incidentally, "Communication and Electronics" spent, between 1998 and 2011 in US Billions, $3.7, fourth highest after 1) Finance, Insurance Real Estate, 2) Health, and 3) Miscellaneous Business each of which sectors spent $4.5 billions.
Can there be any doubt that democracy in the U.S. has been replaced by what Sachs calls a duopoly, in which both political parties owe their election war chests to the funds they raise from lobbyists, whose funds flow into those war chests only on condition that their "quid pro quo's" will be honoured once the political actor is elected, or in most cases, re-elected.
I quote the Google story, as one example of the travesty, not so much in legal terms, because there is nothing illegal in what they are going, but more in terms of fairness, and the contribution such practices make to the over-all debt, deficit and unfairness of the macro-economical manner in which the government is shut out of such huge potential revenues. And all of this occurs while the Financial Services sector continues to pawn off credit swaps, derivatives, on unsuspecting buyers, flooding the market with worthless home mortgages, and thier own books with monstous losses (witness JPMorgan's loss of at least $2 billion this week, due to over-leveraging).
Educating the public in a democracy has never been more critical to the fair and equitable functioning of the state, and it has also never been more difficult, given the pace and the complexity of the instruments designed to camouflage the greed, avarice and unscrupulous behaviour of those generating the instruments.
If the people will not wake up, can we expect the government to wake up to the folly of their own behaviour, blindness and secrecy?

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