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Google’s CEO Eric Schmidt has stirred up an entirely predictable storm of protest over his statement in an interview with Bloomberg that he is proud of Google’s complex, but entirely legal, tax minimizing structure.  As has been widely reported, Google channels its revenues to shell companies in Bermuda where it has amassed several billion dollars far away from the reach of UK (and other) tax authorities.  Unlike Starbucks which has now offered to pay a voluntary £20 million over two years to the British Treasury, Schmidt is refusing to budge, stating bluntly: ‘Its called capitalism’.

Loathsome though he undoubtedly is, the really depressing aspect of this is that he is entirely correct.  Not just that it’s capitalism, but that what he’s doing is entirely legal and done in active cooperation with governments.  The right-wing UK press has been quick to join in the ‘moral’ condemnation, but they need to read their own articles a bit more carefully.  The Daily Mail  for example fulminated with the others about an estimated $32 billion ‘gap’ ‘between what is owed and what is collected’ but neither explained where this number came from nor how it relates to some of Schmidt’s other statements, also quoted in the same article.

For example, Schmidt is reported to have said:  ‘We pay lots of taxes; we pay them in the legally prescribed ways….  I am very proud of the structure that we set up. We did it based on the incentives that the governments offered us to operate….It’s called capitalism……We are proudly capitalistic. I’m not confused about this.’

And he’s right.  Whilst huge companies like Google undoubtedly hire armies of smart lawyers and accounts to work the system to the max, the system itself is designed to be worked.  Not only do individual states – especially Britain, but all the others too – create tax incentives of the kind Schmidt refers to, they also participate in, and routinely defend, an international tax system that is simply full of holes.

The key word here is ‘international’.  Tax affairs between states are governed by a combination of domestic tax laws and the provisions of an array of ‘double-tax treaties‘.  These are bilateral agreements between two ‘sovereign’ states and are designed to resolve what happens when ‘nationals’ (companies or individuals) generate income in more than one jurisdiction.  Ironically, these treaties have their origins in the desire of the Anglo-Argentinian beef magnate, Sir William Vestey, to pay his taxes properly in London. Vestey made strong representation to a British ‘Royal Commission on Income Tax’ in 1920 about the nature of international business:

You cannot say how much is made in England and how much is made abroad.  That is why I suggest that you should pay a turnover tax on what is brought into this country….It is not my object to escape payment of tax.  My object is to get equality of taxation with the foreigner, and nothing else.*

The ‘foreigner’ in this case, meant American meat producers who were using all sorts of Google-like tricks even then to maximise their profits.  Vestey’s objection that he was effectively paying tax more than once on the same income as it was reported in different jurisdictions.  His ‘turnover tax’ would only be applicable to income repatriated to a one jurisdiction from another.  The plan was subsequently adopted by the League of Nations and then evolved, largely unchanged, into the contemporary system of double-tax agreements.  The first such treaty was signed between the UK and USA in 1945 and then spread to the UK’s imperial possessions (like Bermuda) and then the rest of the world.

The holes in this system arise because companies and individuals are able, variously, to report their income (after much manipulation) outside of any jurisdiction, to hide their income altogether, or to only report in a jurisdiction that doesn’t tax them or doesn’t play ball with the international tax agreements (or all of the above).  To make things worse, since the 1960s companies in many jurisdictions (starting in Britain…again) have been given formal ‘legal personality’ – they are treated as persons.  However, unlike you and I, the states they reside in do not require them (or their money) to carry passports.  So unlike you and I, they (and their money) can come and go as they please. That’s the system, we call it capitalism, and it sucks.

Without a ‘global’ tax system – something that has been suggested many times, but furiously resisted by the UK, the US and the rest – there is no way of preventing Mr Schmidt and the rest from shunting their money off around the happy xenotopia of contemporary capitalism.  Whatever abuses we might find in particular instances (and there will certainly be them), in fact these companies are doing no more than playing by the rules.  The problem is that the rules they play by were set up specially for them….and not for us mere mortals.

I say this not to defend them, but to point out that  the hand-wringing hypocrisy in the media (most of which is owned by big corporations doing exactly what Google does) is missing the point.  First, as Vestey reminds us, this is nothing new – it’s been ‘capitalism’ for at least a century.  Second,  taxation and regulation are matters primarily established and managed by and between states, not firms.  So if we want to hold the likes of Google and Schmidt to account, we have to create a global tax system from which it is both difficult and expensive to escape.  And, courtesy of our governments and our anti-regulation media, we are nowhere near even starting down that route.

[And, yes, I used Google to track down all the links above on a Mac while drinking Starbucks coffee.  It’s capitalism, apparently, and who am I to argue…..?]

*cited in Sol Picciotto, 1992, International Business Taxation: A Study in the Internationalization of Business Regulation, London, Weidenfeld and Nicholson: p15