How companies use inter-country ruses to dodge tax

Companies dodge tax like rats dodge peckish weasels. Which at first glance is not unreasonable. But when it comes to tax the weasel has been hamstrung by tax legislation carefully designed by governments around the world to be feeble and loophole ridden. 

Governments simultaneously collude and compete with one another to provide gaps that expensively advised companies can drive their earnings through. Providing highways and byways for companies like Amazon, Google and Starbucks to shift UK profits to low tax countries thereby comprehensively dodging UK tax. 

One such gaping loophole is to finance a company with debt instead of equity. An example of this is provided in a report by Richard Murphy, the tax campaigner, on the devices used by Npower to dodge paying tax in the UK. 

Npower is one of the ‘big six’ energy providers in the UK, and is a subsidiary of the German company RWE Ag. As a wholly owned subsidiary, you may have thought that RWE puts money into Npower, and takes a return in the form of dividends paid from Npower’s profits in the UK. Profits on which tax has been paid to the UK Treasury. 

However, in April 2013 the NPower CEO admitted to a House of Commons committee that his company had paid no Corporation Tax in 2009, 2010, or 2011. According to Richard Murphy’s report one way Npower avoids tax is by executing a manoeuvre involving a ladder of snakes linking the tax laws of the UK, Malta, and Germany.

a)      *UK is pretty blind when it comes to deducting interest payments from profits. (Not just for companies, but even from ordinary Britons doing ‘buy to let’, who are able to deduct mortgage interest from their rental income before paying income tax).

b)      **Malta has a sensible corporation tax rate of 35%. However, when profits are paid as dividends to someone outside Malta the effective tax rate is reduced to between 5% and 10%. A pretty transparent device for providing tax dodging services, while still taxing its own local Maltese companies at 35%.

c)      ***Germany does not impose tax on dividends received from an overseas subsidiary.

It’s not just the UK that gets stiffed by the jigsaw puzzle of inter-country tax rules. According to a report by Bloomberg the troika of Ireland, Netherlands and Bermuda provided a ready route for Google to minimise its taxes:

"Google Inc. cut its taxes [payable in the USA] by $3.1 billion in the last three years using a technique that moves most of its foreign profits through Ireland and the Netherlands to Bermuda. Google’s income shifting helped reduce its overseas tax rate to 2.4 percent, the lowest of the top five U.S. technology companies by market capitalization."

As HMRC tell us ordinary Britons every year, "Tax doesn't have to be taxing". A classic double-entendre:

• Meaning 1 for ordinary Britons: It isn't hard, just pay your tax.
• Meaning 2 for multinationals who can pay tax consultants: You don't need to be taxed.