One of the big items on the agenda for the leaders of G-20 economies gathered today and tomorrow in St. Petersburg, Russia, is re-shaping international regulations and practices to stem corporate tax evasion and avoidance. Yawn, right? Well, consider these two stories:
Apple has paid little or no corporate tax on some $74 billion in income over the past four years. That’s because the tech giant oversees all of its business outside the Americas through a number of units in Ireland. These subsidiaries are virtually tax-free because America doesn’t tax companies incorporated outside the U.S. and Ireland exempts locally incorporated companies if they are managed abroad.
Now read this:
Under U.S. tax law, citizens and permanent residents must file and, if applicable, pay income taxes, even if they don’t live in the U.S. and have no U.S. sources of income. Some time ago, the IRS fined an American retired widow who’d been living in Canada for 30 years $75,000 for failing to file U.S. tax returns. The penalty was 25 per cent of the woman’s $300,000 in savings.
The tax treatment of Apple and the woman seems unjust to say the least. But that’s not the only reason why international corporate tax reform matters.
The other reason is this: The IRS can’t do anything against legal but morally questionable corporate tax practices. It can, though, slam individual taxpayers who commit forgivable, and often unintentional, infractions. And it has to get the money somewhere.
(A quick note here: The IRS does wave or reduce penalties for individuals in some cases, and the woman from my anecdote might have been spared — but the horrendous fines remain an ordeal for many average taxpayers.)
In a recent report calling for action on global corporate tax loopholes, the Organization for Economic Development and Cooperation noted: “When tax rules permit businesses to reduce their tax burden by shifting their income away from jurisdictions where income producing activities are conducted, other taxpayers in that jurisdiction bear a greater share of the burden.”
According to the U.S. Congressional Research Service, estimates of how much corporate tax avoidance costs Uncle Sam range from $10 to $60 billion a year. For individual tax evasion, the range is $40 to $70 billion. Both are a hefty drain on government coffers, but cracking down on individuals, it seems, is easier.
“Most provisions to address profit shifting by multinational firms would involve changing the tax law,” reads the CRS report. On individual tax evasion, on the other hand, the IRS has found ample margin to tighten the screw simply by stepping up enforcement, changing practices and increasing information sharing with other governments — in other words, without amending the law.
Of course, catching and punishing individual tax cheats is a good thing. But anecdotal evidence suggests the IRS’s tighter net is trapping lots of small fish, average-income taxpayers who simply missed the fine print. And there are many of them among the hundreds of thousands of Americans living in Canada and Canada-U.S. double citizens.
Eliminating loopholes and opportunities for legal arbitrage by international corporations might reduce the pressure on tax agencies to go after people who were obviously unaware they were breaking the law.