Financial Transparency Coalition

Jesse Drucker at Bloomberg is on form again. This time, it’s a startler: Google 2.4% Rate Shows How $60 Billion U.S. Revenue Lost to Tax Loopholes. (Note: TJN just wrote about Martin Sullivan explaining how Microsoft has shielded billions from U.S. taxation.)

In each case, it is this trick of transfer pricing (or mispricing) being used to shift profits around the world, in order that profits are realised in the low-tax or zero-tax jurisdictions, while the losses are shifted to the “onshore” higher tax countries, where they can be heaped (in the form of lost tax revenues) onto the shoulders of unsuspecting populations.

We won’t repeat any of the article here, as it can quite ably speak for itself. Read it. It also has a nice little interactive graphic, exposing the disgracefully artificial profit-shifting Google has been up to (the graphic is similar to one in Drucker’s similarly excellent Lexapro article recently.)

And then read our discussion of the notion of corporate responsibility – a particular issue for a company whose motto goes, or at least went, “Don’t be Evil.” This goes contrary to what Irving H. Plotkin, a senior managing director at PricewaterhouseCoopers LLP, had to say.

“A company’s obligation to its shareholders is to try to minimize its taxes and all costs, but to do so legally.”

He would say that. He makes his living, presumably, from helping companies do exactly that. And this seems like a reasonable thing to say — except for one minor detail. A corporation’s obligation is not only to its shareholders. Corporations get their licence to operate from the societies in which they are embedded, and whose facilities, from the educated workforces to the rule of law, they depend on. As Joel Bakan puts it in his best-selling book The Corporation:

The state is the only institution in the world that can bring a corporation to life. It alone grants corporations their essential rights, such as legal personhood and limited liability . . . Without the state, the corporation is nothing. Literally nothing.’

(See the philosophical underpinnings of this too, here.) Once you understand this, you understand that corporations are accountable not just to shareholders, but to a wider set of stakeholders. And having understood that, then we understand how the accountancy profession’s distorted world view has become corrupted in the service of narrow interests, against society.

Are these transfer pricing operations legal or illegal? Usually, the answer is only discovered if the IRS takes the corporation to court, and their is a ruling. It is a highly complex arena.

Note also that all of these shenanigans may do wonders for Google’s share price (one analyst reckons it has put $100 on Google’s $600-odd share price) – but they do absolutely nothing to add value in global markets: what is given to Google is taken away from somewhere else, either in terms of higher taxes or lower spending. This is just a subsidy, via a tilted playing field, distorting markets and consequently making them less efficient.

Anyone concerned about the power of multinational corporations, either generally or in specific cases like this one, needs to pay attention to transfer pricing.

This is why we are, bit by bit, gearing up to move our transfer pricing project forward. Read more here.

Update: Google isn’t always evil.