Based on the reports from the international economic organizations, the gap between the poor and rich has grown over the past few years, with a huge increase in wealth, especially for the tech giants, while the wealth owned by the middle class is falling. Such tremendous economic inequality has been largely driven by tax avoidance and evasion, which has reached unprecedented scales. Although millions around the globe are living in poverty, well-to-do companies are exploiting the advantage offered by tax havens, are still dodging tax.
Both multinational and domestic companies are using different schemes to evade tax in case they generate massive revenues. Following are some of the ways that big tech companies avoid paying taxes.
The big tech companies are utilizing tax loopholes in order to save money. This includes finding other ways to shift profits to foreign subsidiaries in nations with lower tax rates, a common practice that’s referred to as the offshore tax shelter. Essentially, companies don’t have to file taxes on income that’s earned overseas until the income is repatriated from overseas. However, the tax can be indefinitely deferred incase the revenue is indefinitely held abroad. The money held overseas can be used to invest in local assets or even borrowed against.
Another common way through which big tech companies avoid tax is through accelerated depreciation. The level of freedom in the tax laws has also allowed organizations to reduce the costs of capital investment (such as buildings and machines) at a much faster pace than it wears out. Doing this allows the entity to declare less income and ultimately defer paying taxes for some time, as long as the firm continues to invest, the company can defer paying tax for the foreseeable future.
Giving stock options to workers, as part of the compensation is another path that has helped big tech companies to reduce the amount they should pay as tax. When such options are exercised, the variation between what the employees pay for the stock and the market value may be claimed for a tax deduction.
Consequences Of Not Paying Tax
The biggest question is why paying tax is important. One main reason is that the less tax paid by corporations to the government means a lot for individuals that are best suited to make good use of it and contribute to the growth of the economy. This might work perfectly for wealthier segments of society and rich nations.
There are several impacts on emerging/developing nations:
- Secrete offshore trusts and bank accounts encourage the big tech companies and wealthy individuals to evade tax.
- The ability of big companies to structure their investment and trade flows through paper subsidiaries in the tax havens offers them a great tax advantage over the nationally based competitors. Essentially, this kind of biased tax treatment is largely in favor of the big tech companies than the small organizations, the international corporations over the local ones, and the long-established brands over small tech startups. This is because most businesses in the developing nations are newer and smaller than those in developed nations and often more domestically focus, that this built-in bias in the taxations system usually favors big multinational companies over their local competitors.
- The banking services and secrecy offered by the global financial institutions operating abroad offer a secure cover to launder the proceeds of the global drug trade, illicit arms trading, embezzlement, fraud, and political corruption.
- The offshore economy has also contributed to the rising incidence of instability in the financial market that destroys livelihoods.
By complying with UK’s tax regulations, the big tech companies usually create a sustainable basis on which they can run their business, and it seems that with time the individuals and corporations involved in tax evasion will be brought into compliance.
Facebook, Google and Microsoft ‘avoiding $3bn in tax in poorer nations’. (2020, October 26). BBC News. https://www.bbc.com/news/business-54691572
Wolf, Z. B. (2021, June 9). Analysis: How the richest people on earth avoid paying taxes. CNN. https://edition.cnn.com/2021/06/08/politics/what-matters-income-taxes/index.html
No federal taxes for dozens of big, profitable companies. (2021, April 2). The New York Times – Breaking News, US News, World News and Videos. https://www.nytimes.com/2021/04/02/business/economy/zero-corporate-tax.html