May 28 2013

On Google’s Eric Schmidt saying it’s fine to dodge taxes if it’s legal

Posted by: Nick Shaxson in: Thoughts

Cross-posted from the Tax Justice blog: something I just wrote.

From Paul Collier, a development expert, writing in Prospect Magazine:

“For companies to claim that they are morally in the right by having devised loopholes is ridiculous, even if their behaviour has been legal. Any society rests not just on laws but on conventions that make life decent and tolerable. If every citizen pushed right up against the limit of the laws, it would be unworkable. Society relies on people having a degree of mutual respect. Companies rely on a certain level of public spending, for example on the education of the people they employ. All this relies on people and companies paying taxes.”

This is one of several reasons why Google’s boss Eric Schmidt has recently been wrong – dumbfoundedly wrong – in his claim that everything’s just fine with his company’s tax compliance.

Collier is right (even if we don’t agree with every last word of his article) – but there’s plenty more to be said on this topic.

When it comes to corporate taxes, as Collier suggests, there is a  large grey area between the two poles of tax evasion (by definition, illegal) and tax avoidance (by definition, not illegal, but still involving getting around the spirit of the law.

Corporate CEOs have a choice as to how aggressive to be when pushing up into this grey area, towards (and sometimes over) the edge of the law and into the seriously dark side.

Some fine investigative work by Tom Bergin of Reuters, and revelations in the Sunday Times and elsewhere, show us that Google has done exactly this – claiming to the tax authorities that it hasn’t been running its sales operation out of the UK, while it has actually been doing just that. (That way, it has been claiming that it isn’t taxable on its UK sales.) But if it has really been running sales out of the UK, this raises the question of whether Google has been lying to the UK tax authorities and to parliament and whether it has been evading – yes, evading – tax. (Ultimately, it’s for Britain’s hopelessly conflicted tax authorities, which on recent form wouldn’t say boo to a corporate goose, to decide the answer to this question.)

This does look very ugly for Google: a clear choice by Schmidt, it seems, to push right up against the boundaries of the law, effectively taking the decision to de-fund hospitals and schools and the resources for filling those widening potholes in the roads, and so on.

This isn’t just a Google thing, of course: it’s a generalised problem. As Prem Sikka reminded us recently:

“Following a briefing from a former PwC insider the PAC chairperson said that the firm “will approve a tax product if there is a 25% chance – a one-in-four chance – of it being upheld. That means that you are offering schemes to your clients where you have judged there is a 75% risk of it then being deemed unlawful”

There is no CEO, anywhere in the world, who has a fiduciary duty to push aggressively, as far as he or she possibly can, up against the boundaries of the law.

So Schmidt is wrong: quite wrong. Either he doesn’t understand the issues, or — perhaps more likely — he is an example of the situation where it is difficult to get a man to understand something, when his salary depends on his not understanding it. And make no mistake: corporate tax avoidance feeds directly into corporate CEOs’ stock options and bonuses and so on.

Yes, we need to hold governments’ feet to the fire, to tighten up the tax system as far as possible. But we also need to hold the feet of the CEOs of those aggressive corporations to the fire.

A little while ago, we wrote about Schmidt stating that “I am very proud of the structure that we set up. . . . It’s called capitalism,” picking his argument into little pieces and then revealing the true nature of his assertion.

Foolish? Self-serving? Evasive? Take a look at our blog entitled Google boss Eric Schmidt takes a dim view of capitalism, then you decide.

Oh, and then there’s the small matter of Google enjoying a quasi-monopoly on internet search, thus  reaping economic ‘rents:’ the ‘income of the man who reaps where he does not sow.’

The response of any seasoned economist when they see the word ‘rents’ is to reply with a three-letter word ending in ‘-x’ : a word that has been making unusually large numbers of newspaper headlines in recent months.   We like the word so much that we even put it in the three-word name of our organisation.

Schmidt is defending the indefensible.

5 comments so far

La Chupacabra 5th May, 2013 1.52 am

Nick,

There are a couple of basic things in this piece that simply do not add up.

First, you write that “it’s for Britain’s […] tax authorities […], to decide the answer to this question”.

Sorry, that’s plainly wrong. It is for a court of law to decide if a law has been broken, not for HMRC or the IRS.

Second, you write that “there is no CEO, anywhere in the world, who has a fiduciary duty to push aggressively, as far as he or she possibly can, up against the boundaries of the law”.

Sorry, but that is plainly wrong again. There are actually two sets of laws that mandate managers to minimize tax expenses.

The first are US securities laws, which should be pretty obvious. But even there were no such laws, that would have little impact over Google’s course of action: imagine Mr. Schmidt standing in front of his shareholders and saying that he has decided to pay more tax than legally necessary in the UK, a country that shareholders probably feel they owe nothing to, because it was ‘morally’ the right thing to do. How long do you think it would take before shareholders organize to replace Mr Schmidt with a CEO more inclined to defend their interests?

The second are US tax laws. The Code is very clear that US companies will only receive credit for compulsory overseas taxes, and not for voluntary taxes. It also mandates companies such as Google to exhaust all avenues to minimize overseas taxes in order for those to be eligible as credit against domestic taxes payable upon repatriation of foreign profits. There is a very good summary of the relevant provisions by (apparently) tax guru Lowell Yoder here (http://www.forbes.com/sites/lowellyoder/2012/03/06/beware-of-double-taxation-of-foreign-profits/)

Simply said, if Google’s management did not minimize it overseas tax, it would be failing its shareholders not once, but twice: by paying excessive taxes overseas, and by not receiving credit for them in the homeland. It would not take long for shareholders to start civil proceedings, and even the government may even have a case to initiate criminal proceedings.

Nick Shaxson 6rd June, 2013 12.35 pm

On the tax authorities vs the courts, ok yes well it is the tax authorities that take the companies to court, which ultimately decides.
But on your main point, you’re quite wrong. All I can do is restate what I said in my blog, in a different way. First, imagine Schmidt standing up in front of his shareholders and saying ‘we are going to go and try and escape more UK tax – but we are going risk breaking the law to do it.’ Your second point faces just the same issue: how far into this grey area should we go. And then there’s the philip stephens point.

Par E Winkler 5th May, 2013 4.22 pm

Society sets the norms of behaviour for those those who are members of it. Perhaps it’s time to start judging these elite as sociopaths. Although they seem to consider themselves apart from the general population, since they operate within it and often have significant influence over the developing values and norms at play, their sociopathic tendencies threaten the value we cherish and hopefully defend – the very culture we have built in our societies.

If society cannot defend our culture, values and what is judged to be unacceptable behaviour within our legal frameworks we will loose it. unfortunately, we have only the reasoned rules of law to defend it and the law applies only to those who can’t afford to defend themselves. Throw out reason and culture will thrive again.

La Chupacabra 6th June, 2013 3.09 pm

The Stephens argument is ridiculous. Companies are not people, and unlike people have no ‘moral’ compass. They are legal-economic constructs with the sole objective of maximizing returns for their stakeholders (primarily shareholders). If stakeholders feel their company has a moral obligation to pay more than is legally required, they should feel free to make a charitable or voluntary donation, rather than impose those ‘moral’ views and related obligations on all other stakeholders. (Stephens is one more reason why nobody reads the FT in the US, btw).

Regarding your own point, one can’t help but noticr that you have switched up a gear: your approach used to be that Google (et al) had twisted the law, but you had never dared to suggest they had broken it. Now, you seem to openly suggest that laws have actually been broken and that Google (and presumably others) are guilty of criminal behavior.

All I can say is ‘good luck with that’. Google did not devise its tax arrangements on the back of an envelope during Happy Hour. It would have received extensive advice and obtained multiple legal opinions from leading tax law firms. Although the risk of af a legal challenge can never be completely eliminated, it will have been brought down to a minimal level.

No doubt you will bring up some sort of conspiracy theory about this (capture or something alonf these lines), and that is fair enough. At least it goes after the right target, ie. the legislators who seem unable to put together sensible tax laws.

Nick Shaxson 6th June, 2013 10.02 am

I’m afraid that even though you wish this to be true, it isn’t true. Here’s another set of arguments, bolstering the first.
http://taxjustice.blogspot.ch/2013/06/the-fig-leaf-of-shareholder-value.html
and on the google thing, the tom bergin story clearly suggests that they did cross the boundary. And then there’s this – not aimed at Google but at the firms who help put these things together:
“following a briefing from a former PwC insider the PAC chairperson said (see page Ev4) that the firm “will approve a tax product if there is a 25% chance – a one-in-four chance – of it being upheld. That means that you are offering schemes to your clients where you have judged there is a 75% risk of it then being deemed unlawful”.
http://theconversation.com/columns/prem-sikka-4302

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