Every year, the eurozone loses an estimated one trillion euros in revenue from multinational companies that don’t pay taxes on their European profits. These companies, including tech giants like Apple, Amazon and Google, as well as coffee company Starbucks, take advantage of loopholes in the complicated international tax code system and move their profits around the world to dodge tax payments. But they are facing increasing scrutiny from cash-strapped European governments and criticism from consumers over their unfair practices and lost revenues.
Paying the bills every month is a challenge for businessman Jalil Kidder, the owner of a security company and small restaurant in a suburb of Frankfurt. Among his highest costs – the long list of German taxes. In addition to other taxes, Jalil pays the German government on average 30 percent of his profits in income tax.
In Frankfurt’s financial district, a short drive from his restaurant, Starbucks’s flagship store in the city has paid no profit tax since it opened its doors 10 years ago. This contradiction is at the heart of a recent debate in Germany and the European Union about tax avoidance by wealthy multinational corporations.
“There is a saying here that goes like this, the big ones are eating the small, he says. That’s exactly what we are experiencing in this situation in Germany: the big companies are getting richer and richer in this country while small businesses like mine are struggling, they’re going kaput,” said Kidder.
Starbucks and Apple declined interview requests for this story. But a recent investigation by the U.S. Senate shows that between 2009 and 2012, Apple paid no tax on its reported $74 billion in overseas income. Apple achieved this by legally opening a subsidiary, or affiliate, in Ireland and exploiting a loophole in the Irish tax code.
Companies like Facebook and Amazon employ similar tactics, using a complex network of affiliates in countries like Luxembourg, the Netherlands or Switzerland to dodge billions of euros in taxes. Taxes that would otherwise go to Germany or France go instead to Luxembourg or Ireland, but at a discounted rate.
Hanno Kube, a professor of tax law at the University of Mainz, says these seemingly legal tactics are unethical and unfair to small local businesses.
“They have [a] competitive advantage which is not acceptable; [just[ because they use international structures is not a justification for not making them pay taxes. Also, they use infrastructure provided by the [German] states, they use the streets, our banking system, our laws, so it’s only fair that they also pay taxes for the profits they make,” Kube said.
And European governments are hoping this happens sooner rather than later. The EU recently asked the governments of Ireland, the Netherlands and Luxembourg to disclose their corporate tax arrangements with U.S. tech giants, while the Organization for Economic Co-operation and Development, or OECD, presented the G20 in St. Petersburg earlier this month with a 15-step plan to tackle international tax avoidance.
The OECD tax reform plan would require multinationals with overseas operations to pay taxes on any profits coming from sales in that particular country – basically, to play by the same rules that apply to local businesses. Consumers in Germany agree the change is long overdue.
“I think it’s kind of unfair because all the other companies in Germany have to pay taxes,” said Viola Marienfeld, a college student in Frankfurt. “But it won’t change my opinion about Starbucks. I still like them.”
The issue has also been getting attention in the United States, with Apple executives going in front of a U.S. Senate subcommittee in May to explain the company’s tax practices in the U.S. and abroad.
Hanno Kube of the University of Mainz says it’s no surprise many of the biggest tax avoiders in Europe are U.S. tech companies. The United States uses a tax law that subsidizes multinational companies and eventually leads to lost revenues for European countries. Resolving this issue, he says, will be hard, but the U.S. is part of the solution.
“It needs the consensus of many nations because corporations will always find a small country which will attract them, a country which doesn’t cooperate,” he said. “That’s a big problem in international tax law, but, in general, I do see a trend towards stricter international tax law and also towards more exchange of information between states, including Luxembourg and Switzerland, an exchange of information which we haven’t seen years ago. So the political pressure is increasing.”
If adopted, the 15-point plan released earlier this month by the OECD in St. Petersburg will overhaul the international tax system and eventually bring in billions of euros of much needed revenue to a region still grappling with debt and austerity measures. Most importantly, the plan will bring some relief to small businesses and ordinary taxpayers.