The Legal Practice of Tax Avoidance by Corporations: How Apple, Amazon, and Starbucks Do It
Tax avoidance is a controversial topic that has garnered attention from media outlets and lawmakers alike. Corporations such as Apple, Amazon, and Starbucks are among those that have been accused of engaging in high-level tax avoidance practices. While tax evasion is illegal, tax avoidance is a legal practice that takes advantage of tax loopholes provided by governments. In this article, we will explore how these corporations avoid paying taxes and the impact this has on the economy.
Corporations keep their tax schemes closely guarded, but investigative journalists and law professors have pieced together some of their methods. By reporting income earned in one country as if it had been earned in a low-tax jurisdiction in Europe and using artificial expenses in a foreign country to offset that income, corporations can lower their tax bills significantly. In Europe, Luxembourg has become a favorite tax haven for many corporations. Amazon, for example, reported sales of $213 million in the UK but sales of $11 billion in Luxembourg. The reason for this is that Luxembourg offers very low tax rates for corporations, and Amazon can take advantage of this by reporting sales in Luxembourg instead of the UK.
So how does Amazon get away with this? The answer lies in the fine print of an Amazon contract, which shows that a Brit buying a book is ordering from Amazon Luxembourg, not Amazon UK. Only a few Amazon employees are needed to keep up the façade of running a business in Luxembourg. The UK is left on the hook to provide healthcare, education, and other benefits to the thousands of Amazon employees, while Luxembourg gives Amazon a very special tax deal and reaps a huge gain.
The European authorities have been aggressively pursuing corporations that abuse tax avoidance schemes. The European Competition Commission fined Amazon $259 million in October of 2022 on another of its tax dodges. The Competition Commission commented that "Luxembourg gave illegal tax benefits to Amazon. As a result, almost three-quarters of Amazon’s profits were not taxed."
However, in the US, these practices are still legal and upheld by courts. Although the Senate recommended changes to the US tax code in 2013, nothing has been done about it. Thus, a US court upheld the Goldcrest scheme, which allows corporations to shift their intellectual property rights held by their US parent company, in part, to a Luxembourg subsidiary which then collected royalties tax-free on international sales.
This practice raises the question of whether Amazon's ability to squeeze out small retail bookstores is due to its superior business system or superior ability to dodge taxes that locals cannot. It also raises the issue of fairness in the marketplace, as small businesses cannot compete with corporations that have the means to avoid taxes legally.
Starbucks has a similar tax avoidance practice. They formed a company in Switzerland called Starbucks Trading, which bought raw coffee beans from South America and resold them to Starbucks subsidiaries that do the roasting at a 20% markup. Starbucks Trading Switzerland does nothing but process transactions on its computer. Starbucks UK could easily have ordered the beans directly, but instead, they pay the 20% markup and deduct it from their UK tax. This practice is made possible by a tax rule called 'transfer pricing,' which permits a company to charge for internal services what it would pay if it had bought these services from an outside business.
The practice of shifting income from a high tax to a low tax country and creating artificial expenses to deduct from it is called profit shifting. It is a way for corporations to lower their tax bills legally, but it has a significant impact on the economy. When corporations avoid paying taxes, it means less revenue for governments to spend on public services, such as healthcare and education. It also puts small businesses at a disadvantage, as they cannot compete with corporations that have the means to avoid taxes.
In conclusion, high-level tax avoidance by corporations is a legal practice that takes advantage of tax loopholes and subsidies provided by governments. While it may be legal, it raises ethical questions about fairness and the social responsibility of corporations.
On one hand, corporations argue that their first obligation is to maximize shareholder value, and minimizing their tax bill is one way to achieve that goal. They also argue that they are following the law and that it is the responsibility of governments to close tax loopholes if they are deemed unfair.
On the other hand, critics argue that corporations have a social responsibility to contribute to the societies in which they operate and that tax avoidance undermines the ability of governments to provide public goods and services such as healthcare, education, and infrastructure. They also argue that tax avoidance is unfair to small businesses and individuals who do not have the resources to engage in such practices.
The debate over high-level tax avoidance is likely to continue for the foreseeable future, as governments and international organizations struggle to find a balance between promoting economic growth and ensuring that corporations pay their fair share of taxes. In the meantime, consumers and investors have the power to influence corporate behavior by choosing to support companies that prioritize social responsibility and ethical business practices.
In conclusion, high-level tax avoidance by corporations is a legal practice that takes advantage of tax loopholes and subsidies provided by governments. While it may be legal, it raises ethical questions about fairness and the social responsibility of corporations. The debate over high-level tax avoidance is likely to continue for the foreseeable future, as governments and international organizations struggle to find a balance between promoting economic growth and ensuring that corporations pay their fair share of taxes.