Tax avoidance: how do multinationals do it and can it be stopped?

If you want to reduce your tax bill it seems the most effective route would be to become a multi-national company.

Time and time again we hear stories of how big name companies are paying minimal taxes. The latest report revealed that Facebook paid just £4,327 corporation tax in 2014 despite making global profits of £462m in the final quarter of that year.

So, what is going on?

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How are these companies escaping tax?

Clever accounting and use of tax havens.

Facebook’s most recent accounts filed at Companies House show it making a pre-tax loss of £28.5m in 2014. But, at the same time it paid its 362 UK staff a total of £35.4m in share bonuses. The resulting pre-tax loss on its UK accounts allowed it to pay next to nothing in corporation tax.

But Facebook confirmed all of its staff who received bonuses paid income tax on the awards. This actually would have increased the tax take for the UK exchequer to more than £14m, compared to the £1.5m it would have received on the net profit the company would have otherwise banked.

More pressing is whether the company really only made the £105m revenue it officially posted in the UK last year - it reported $2.9bn (£1.9bn) globally.

Interesting in this respect is Starbucks, which paid a similarly negligible £8.6m in corporation tax in the 14 years from 1998 to 2012, despite making more than £3bn in UK sales during that period. Complex licensing deals between various entites allowed it to funnel money through tax-friendly countries like the Netherlands and Luxembourg.

Across Europe this has become a familar tale that applies to companies including Apple, Amazon and Google.

What is being done about it?

In the March budget George Osborne announced that he was pressing ahead with plans for a “Google Tax”. This is a diverted profits tax on companies that artifically move their profits overseas. The chancellor also announced that firms that helped big companies evade tax would face new penalties and criminal prosecutions.

Elsewhere the European Commission has issued preliminary rulings against the Netherlands and Luxembourg over the so-called "sweetheart" deals they gave to Starbucks and Fiat, with more such actions like to follow. These set a precedent, but are open to what will prove to be lengthy legal challenge.

The Organisation for Economic Co-Operation and Development (OECD) has now weighed in to the fight with the announcement of new guidelines to help crack down on multi-nationals abusing tax loopholes or funnelling money through tax havens.

Described by the OECD as “the most significant re-write of international tax rules in a century,” the new rules include 15 recommendations to stop profits being moved artificially from high-tax to low-tax jurisdictions and to force firms to be transparent about where they generate income.

The G20 is now going to discuss how to implement all the new guidelines.

Will it work?

The OECD guidelines are “a patch-up job that offers improvements in certain areas but fails to deal with the core problems,” says The Economist. “In some of the most important areas, such as grappling with how to tax cross-border online sales, cans have been kicked down the road. Several proposals were diluted at the insistence of powerful countries (not least America, whose IP-rich multinationals are the main target of the reforms).”

The Financial Times is more optimistic. “It is wise not to expect dramatic breakthroughs when confronting something as hydra-headed as international tax avoidance,” says an editorial in the paper. “Solid, rather than spectacular progress is what the Base Erosion and Profit Shifting project was set up to achieve… this week’s proposals mark just that sort of progress.”

Does boycotting help?

Many people have been boycotting Amazon for years for a variety of reasons, ranging from its decimation of independent book shops to its pitiful efforts at paying tax to allegations of its appalling treatment of employees. But, the firms stock has continued to soar.

Managing to completely boycott a massive company is difficult. For example, you could stop shopping at Amazon, but just by looking at some web pages you could be using its services thank to its cloud computing service. A better idea might be to shop selectively.

“Amazon often sells certain products like diapers and toilet paper at costs so low the company actually loses money on them – especially if it has to deliver them to Amazon Prime customers’ doors in two days or less,” says Claire Brownell in the Financial Post. But, even that probably won’t take down an international behemoth.

Instead, consider writing to your local MP and expressing how outraged you are at multi-national tax avoidance. A petition created by two book shop owners in 2013 led to a parliamentary debate on Amazon and other multinational companies and UK corporation tax.

That debate has helped get us the law changes and investigations that are currently underway.