Cross-border corporate taxation is fiendishly complex, the lobbying around it furious. Several recent academic studies show just how pervasive tax avoidance is. The ability to shift profits to low-tax countries by locating intellectual property in them, which is then licensed to related businesses in high-tax countries, is often assumed to be the preserve of high-tech companies. Yet in “Through a Latte, Darkly”, a new study of how Starbucks has largely avoided paying tax in Britain, Edward Kleinbard of the University of Southern California shows that current tax rules make it easy for all sorts of firms to generate what he calls “stateless income”: profit subject to tax in a jurisdiction that is neither the location of the factors of production that generate the income nor where the parent firm is domiciled. In Starbucks’s case, the firm has in effect turned the process of making an expensive cup of coffee into intellectual property.
In another new paper Harry Grubert of America’s Treasury and Rosanne Altshuler of Rutgers University delve into tax returns by American multinationals in 2006. They examine all the foreign profits held abroad by these firms (because bringing the money home would incur tax). A remarkable 36.8% of these profits were recorded in countries taxing them at a rate of 0-5%, and a further 9.1% were in countries taxing at 5-10%. Given how much more aggressive their tax-avoidance strategies are believed to have become since, it seems likely that the proportion of foreign profits held by American firms in low-tax countries is now well over half. It will take more than fine words in a communiqué to change behaviour when so much is at stake,
Excerpt, The G8 summit: T time, Economist, June 22, 2013, at 72