Tax Havens on the Electronic Silk Road

UKTaxHavensElephantInRoomAnupam Chander could not have picked a better topic in modern political economy than the digitization of flows of commerce. The Electronic Silk Road is packed with fascinating narratives about the legal conflicts that digitization generates.

As more value becomes digitally mobile, we may be on the cusp of unprecedented regulatory arbitrage (predicated on dubiously relevant doctrines, free trade commitments, and contracts.) To his great credit, Chander offers a fair assessment of digital commerce, balancing enthusiasm for its inclusive effects with caution about the need to curb the worst abuses of multinational corporations. My question is: will there be funding available to governments who take such a regulatory agenda seriously? For example, if Amazon’s Mechanical Turk decomposes digital labor among workers on different continents, how are we to fund the (sure to be sizeable) regulatory apparatus needed to assure that basic labor, safety, and other legal obligations are honored?

Consider, for instance, the aggressive tax planning of Apple. The company uses transfer pricing and Irish subsidiaries to manipulate its tax obligations. Apple’s IP (ranging from the Apple trademark, to the copyright-protected software, to patents on the phone’s innards, to design patents that give Apple an exclusive right to use the particular “look and feel” of its phones) may, in turn, be “owned” by an Apple subsidiary in, say, Bermuda, or the Cayman Islands. When people try to criticize Apple’s suppliers’ sharp labor practices, their work is often banned from the company’s app store. Apple ensures its own iGovernance mechanisms are unitary, swift in judgment, and a near-absolute authority on many aspects of the smartphone experience of tens of millions of netizens, while taking advantage of weak and fragmented jurisdictions for tax planning purposes.

Of course, Apple is not alone here. As Charles Duhigg and David Kocieniewski reported in 2012, “Over the last two years, the 71 technology companies in the Standard & Poor’s 500-stock index . . . . reported paying worldwide cash taxes at a rate that, on average, was a third less than other S.& P. companies’.” The other firms are not exactly “slackers” at minimizing tax liability. But, as the Duhigg and Kocieniewski explain, “[i]t is much easier for businesses with royalties and digital products to move profits to low-tax countries than it is, say, for grocery stores or automakers. A downloaded application, unlike a car, can be sold from anywhere.”

High technology companies use the method with impunity, shifting transactions from country to country with the skill and aplomb of a magician. In Europe, Amazon’s British branch paid only £2.4m tax on sales worth £4.2bn by routing its earnings through Luxembourg. And Google has used tax havens to achieve a laughably low effective tax rate. The chairmen of such companies don’t get to be some of the richest people in the world (and to buy outlets that might have once criticized them more harshly) by taking a civic or moral perspective on the obligations of their firms.

There is some resistance to these maneuvers building. The US Senate held a major investigation of Apple, culminating in a Congressional hearing on May 21, 2013. Many senators professed shock and outrage that the company would use “stateless subsidiaries” to essentially become, for many purposes, a resident of nowhere. How could the firm use so many American resources and pay so little in tax?

The world should also feel ill-done-by: the hearing revealed that, on $74 billion of international profits, the company paid no tax to any country. Tech companies’ protean characterization of where money is earned is key to “how globalization really works.” The spread of companies globally is often driven not only by cheaper labor or lower environmental standards overseas, but also by the opportunity to flexibly “hide” some earnings from home tax authorities, or shift them to more hospitable (read: lower tax) jurisdictions.

Chander’s book distinguishes itself by tempering an optimistic vision of the influence of digitization on global political economy with a realistic assessment of the problems it can cause. The critical question now is whether legitimate authorities—be they regional, national, or international—can help temper the problems (and cultivate the positive effects) of internet-driven globalization. Without swift and decisive action against aggressive tax avoidance, they will not have the funds necessary to do so. The template of that unfortunate future will be Ross Ulbricht’s Silk Road, not Chander’s.

Photo Credit: Tax havens are the elephant in the room, by campaigners “Enough Food for Everyone.”

You may also like...