U.S. lawmakers grilled Tim Cook and other Apple Inc. executives on Tuesday over the company’s now well-documented move to shift billions in profit to offshore affiliates to avoid paying taxes.
The world’s largest technology firm – and one that vies with oil mammoth Exxon Mobil Corp. as the world’s biggest public enterprise, period – is on the hot seat in cash-strapped Washington after a Senate Permanent Subcommittee on Investigations released a scathing report a day earlier detailing the movement of $74 billion to subsidiaries in Ireland, where Apple paid at times just 0.05 per cent in tax.
But as even some members of Congress conceded, Apple is far from alone. Tax avoidance strategy is a core chapter in any multinational firm’s playbook nowadays, experts say, including blue chips based in Canada.
“We have the very same problem in that our multinationals are increasingly finding ways to pay less tax in Canada,” Arthur Cockfield, a tax professor at Queen’s University said.
Canadian firms legally book billions of dollars in revenue a year in subsidiary companies set up in low-tax jurisdictions like Ireland and Barbados, he and others say.
With nearly $60 billion flowing from Canada to Barbados, which has a statutory tax rate of roughly 2 per cent for foreign firms, the tiny island country ranked third behind the U.S. and U.K. among destinations receiving foreign direct investment by Canadians and Canadian companies in 2012. That figure is up from $50-billion two years earlier.
Ireland – which cut a special deal with Apple allowing the tech giant’s Irish subsidiaries to pay even lower rates than the statutory level in that country – was No.7 on the list of jurisdictions receiving billions in Canadian capital, behind Luxembourg.
The incentive for tax haven countries, experts say, is essentially easy money from entities that exist primarily on paper and require little to no public resources. Larger countries meanwhile that are deprived of revenues needed to support huge budgetary requirements have sought to lower tax rates to keep business taxes from eroding.
“It’s difficult to know what to do about this. One theory is that various jurisdictions will just compete their tax rates down to zero,” Michael Veall, an economist and professor at McMaster University said.
While Washington has resisted the trend – something Apple’s CEO Tim Cook said Tuesday should change if lawmakers want U.S. multinationals to “repatriate” or bring more international income back through U.S.-based operations – Ottawa has played along in this global race among governments to cut corporate taxes, Veall said.
Average tax rates that include provincial rates hover around 25 per cent in Canada now, or about 10 percentage points lower than the United States.
“One of [Canada’s] objectives, it’s thought, is corporate tax revenues would stay reasonably stable rather than decline because this would be a place corporations would want to take profits [rather than seek to shift them elsewhere],” Veall said.
Has it worked? Maybe.
In 2000, corporate taxes made up roughly 13 per cent of federal tax revenues, according to Statistics Canada ($23.9 billion). In 2009, the latest data available, the share was the same.
Still, Cockfield and others say corporations are becoming more skilled at winning special tax breaks and inciting governments desperate for economic growth to compete for their business and the investment and jobs jurisdictions hope it will bring.
Apple’s CEO Tim Cook forcefully defended his firm’s tax record Tuesday, pointing out that the company paid $6 billion in taxes or the equivalent of $16 million a day to Washington last year, employing tactics completely within the boundaries of the law.
“We pay all the taxes we owe, every single dollar,” Cook said.
The Congressional committee report suggests Apple sidestepped another $9 billion in taxes last year, or more than an additional $24 million a day.
For Canadian companies that can afford it – namely the country’s biggest and those with international operations, the game’s the same, Cockfield said.
“Canadian corporations are just as aggressive with their tax avoidance strategies. But as you’ll have to remind your readers, it’s all legal.”