Taxation, the most boring #rp17 talk
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Transcript: English(auto-generated)
00:16
make my part really quick, so I hope it won't be boring.
00:21
That's us three. We have different backgrounds. What unites us is we basically studied together, and it will give a quick intro. What is the status quo? How much money is actually paid in taxes? Maxi's economist at Harvard University will talk about reform proposals. It's like policy stuff. What would have to be changed?
00:41
And Danny from the Vandal in Vienna talks about what needs to be done to change that, to use the policy stuff. So how we got here, we all studied in Vienna at the University of Economics. That's where we're living now, and why is this a world map? Because basically this issue with not paying taxes from corporations
01:01
is a worldwide issue. So it's not locally in Austria or in Germany or in Europe. And how did I get into the topic? I was like 2011 reading an article about ExxonMobil. ExxonMobil is like the sixth largest company in the world by market revenue and market cap. And that basically was the article about. So there was one employee working on a salary
01:22
for 44,000 euros and making in two years 9.9 billion net profit. And I was like, I want to have that job. Because that's basically whoever the guy is, I couldn't figure that out, but that's like the stock of capitalism. So whatever money you pay him, he makes more than 100,000 out of it.
01:42
That's even Warren Buffet or Bill Gates or whoever is pretty much like a loser compared to this John Doe from Spain. And I thought like, would be a great job. So the takeaway from my quick presentation will be like a lot of corporations are not paying a lot of taxes, and we're talking about a lot of dough.
02:01
In German it's a badsen, a really huge amount of money. And the famous quote, there's like a bill in here, bill in there, pretty soon you're talking about real money. And there's one quote from Benjamin Franklin that the two things are certain in life, the one is death, the other one is taxes, and we want to point that there's also certain in life
02:21
and that's inequality. And while a lot of people are talking about other issues of why we should lower the tax rates and so on, we would like to reduce the inequality. So what we can agree on it is like everybody complains about the taxes and the taxes for themselves are like too high. And you should consider that with the taxes some things are getting done,
02:41
like kindergarten, public school, infrastructure, the police, you may not like it, but it's still helpful sometimes. That's the love curve where you can say like what's the tax revenue on giving certain models and how much taxation you could have. And the big question in the room is like when you have taxes, and in German it's called Storen, and Storen also means like steering, it's like what kind of society do we want?
03:02
So do you have the question who pays, how much, for what purpose? And you can also have in the discussion it's not about like just a Stohr-Zahler, but it's also like a Stohr-Beidag. You're doing something for the society. It used to be back in the days when you called like entrepreneurial or like old businessmen like Hans Jaapen, they have a responsibility for the local city
03:22
or even for the state. It's not just about like getting a rich in the quick scheme. On the corner down there you see them like what are the issues with taxes are like, you have for example achieving social goods. And so you have tax revenue, and that's like a funny formula, but basically when somebody's not paying their share,
03:43
and you want to have the same output, somebody else has to pay more, or if they're not paying more, it's reducing. So you would have less schools and stuff like that. And then in this talk we're talking about like legal tax optimization, it's not illegal. Illegal you may know, I mean not all of them, but comics in German it's like a huge dough,
04:02
it's a badsen dough, it's like 12 billion. You had last year the Panama Papers, Gabriel Zuckman was describing it like the damage from this is roughly around 200 billions a year. And then you have for example right now in Germany the fun with the Swiss tax buy. For example, Nordrein Westfahren was getting
04:20
1.8 billion out of the taxes back from Switzerland. And we are talking about the legal stuff. And this is the quote from Obama. A lot of this is legal, but that exactly the problem. So that's why we're saying legal, illegal, sheilsegal, in bottom you see like politicians who should answer the questions, and we need a discussion about it.
04:40
Why do we need a discussion about it? Because we're living in a world where a lot of things are changing. So we're taking about like software is eating the world from Andresen. We have AI robots taking on jobs. And the question is like how do we do with that when you have like income share from labor declining? And this is the trend roughly, the crooked data, so he's an economist.
05:02
I'm doing more like presentations like this, but what you definitely can see is like you have a downward slope in both ways. The one is like a trend from the 40s till 2009, but the corporate income tax is the shares, and the other one is the cash effective tax rate. So in general you have rules as corporate taxes, the less profit, the less taxes you pay,
05:21
and once you have profit, you try to pay there the profit tax went slower. So you should think always when you hear about taxes, that is basically hacking the tax code. There are your hackers, and they basically work like around the clock to figure out like where they can actually reduce the amount of tax they pay, and that's the hacking teams.
05:42
That's the four big accounting firms. So in terms of things like the Republica, that's a lot of cyber with fairy dust, and a lot of dough, butts and gelt, where it says kachink to some companies, and you have like two trillion overseas money the U.S. is missing, which goes down to like 60 billion dollars annually. So that's like a fucking lot of dough.
06:03
For Europe, the estimate is like what this legal tax dodging is costing is like between 50 and 70 billion a year, and the OECD, a base erosion price shifting report, basically called just like a region. And why is this happening? Well we have a transfer from like real goods to intangible goods, or assets.
06:21
So we have a lot of things that are doing right now like intellectual property, patents, trademarks, copyrights, and even like business processes. So for example the famous thing was like the one click Amazon shopping button. And this is the trend, so we have five biggest companies in the world right now. The blue means like they are tech companies.
06:42
11 years ago it was like Exxon Mobile, General Electric, British petrol, and Citigroup, banking group. So you had a tremendous shift like oh what is happening with the digitization. And that process makes it easier to actually screw around like the intangible assets. And one famous example about this
07:01
is like the double Irish Dutch sandwich. You have like two shell companies or Irish companies in the middle of a Dutch company, and you're shifting stuff around. So that's the layout in Chinese because it's quirky. And over there you can basically see like you have an American company using an Irish company based into the Netherlands company
07:20
and being packed to the Irish company and transferring the money over to Bermuda. And that's why how you basically go like from a normal corporate tax rate within the US like up to 35%, below 1% to like sometimes 2%. Pretty much all of the companies are doing it. Like that's Microsoft, Apple, Google, Facebook, Amazon, Gap, the glow store.
07:43
And you might have heard it in similar changes with the Starbucks shell on the Z death since it was mentioned before. And I would quickly point out like one example. That's Google. Over there you see it's a tens of the revenue is like based in the UK,
08:00
but only like 1.3 actually they paid in taxes on it. So somewhere in this process where they're shifting around stuff, they're basically lowering it way down where you have to like a 2.4 tax rate for Google overseas. And as an example, why there's peanuts on it, when Google comes to us like a digital news initiative,
08:21
then it's only 150 million. That's easily like covered by some tax deduction. The other case is Apple. So they are sitting on a pile of cash for 250 billion. That's almost two thirds of the Austrian GDP or like two thirds of the Greece debt. And that's part of it because they paid 2014
08:41
only 0.05% on corporate tax. And that caused a lot of issues because on the one side Ireland was almost broke. On the other side, the European Commission wants to have the money back and also the US wants to have the money at some point. So recently there was like the European Commission sent Apple 19 billion tap to pay the taxes
09:04
while Ireland is defending it because it's like part of like the business opportunity below a tax country. And then they also announced 2014 that they will close down like this double Irish tax loop, which is on the one side it's good and you can see like this little bumpy
09:21
that means like capital, it's always like really a shy animal and runs away. But on the other side, they're replacing it as a less dodgy system, which is called the knowledge box, which basically does the same shit again, just on a different name. And then another famous example to see how that stuff works is like general actives of the 21st of December, 2015,
09:45
selling a company for 40,000 Swiss francs and an hour later, another general elected company was buying it for like 6.4 billion. And why they're doing it? We are talking about effect of 167,000. So that's like a great investment opportunity.
10:02
The stuff is they're avoiding then the tax rate from 18% in Switzerland to 2% down in Hungary. So that's the players involved. Switzerland, Netherlands and Hungary. That's like how the money was transferred. It's all in the slides online because I'm running here short on time. And there are like a lot of more examples like that, but I don't wanna bore you.
10:21
And the bottom is like of this presentation, it's a worldwide issue. And it's a race to the bottom between the countries and we are losing out. And we have, for example, another example is that in the Ukraine, they have more transparency in Germany. So the Ukraine black money goes into Germany, is hiding here. And in Ukraine, they can't do anything. And so that's like the weakest link in the chain,
10:41
in that case would be Germany, because the transparency richest is not public. And there are two great initiatives, that one is our ownership and the other one is extractive industries, transparency initiatives. So that's my presentation. Remember a lot of the Watson Guild. When we go back to the ExxonMobil guy,
11:02
that basically my dog would be more worse than Obama's yesterday, 400,000 US dollar speech. And Max Casse is now on from Harvard University, going back to like the history and the policy details.
11:20
Thanks Walter. Now that I've got your attention, let me take a step back and talk a bit how we got to this point where all this big internet corporations basically don't pay any taxes anymore at all and what we can do about it. And to do so, let me explain what are the basic guiding principles that organize international corporate taxation. And since the 1920s,
11:40
there have been three principles in place. The first one is called source country based taxation. The second is called arms length pricing and the third one is called bilateral treaties. And I wanna go through each of these, explain what it means and why they cause problems now. So source country based taxation basically means that corporations owe taxes on their profits
12:01
and they owe tax in the country where production happens. So say there's an American car company, the car company produces cars in Germany and then sells them in France. Under the system, they're supposed to pay taxes in Germany because that's where the production happens. But now with multinational corporations, that's a bit more complicated because production doesn't just happen in one country.
12:22
So if the German car company say buys car parts from Austria, it's really part of the production is already happening in Austria, part of the production is happening in Germany and so the question arises, do they pay taxes in Germany, do they pay taxes in Austria or some part each? And that's where the second principle comes in. So this first principle, paying where production happens,
12:41
that's source country based taxation. The second principle is called arm's length pricing and the idea in arm's length pricing is that you have these multinational corporations, they have their national subsidiaries and the system treats them like they're independent companies. So what it means is that the, say the car company has an Austrian subsidiary,
13:01
a German subsidiary and the accounting has to assume that the German subsidiary would pay market prices for the car parts and that's how part of the profits ends up in Austria, part of the profits ends up in Germany and correspondingly they are taxed. And the third principle of bilateral treaties means that all the details of this are not regulated in some overarching system
13:24
that's common to all countries but in separate treaties for every pair of countries. And now you might think these principles sound reasonable, why not do it like that? And actually it's worked more or less for the first few decades of the existence of the system but it basically completely broke down in the internet age
13:42
and that's due to each of these three principles. Now source country based taxation, what that means is that corporations have an incentive to move the production to the countries with the lowest tax rate. So say the car company has to decide whether to produce in Germany or in Poland and Poland has a lower corporate tax rate
14:01
then it makes sense for the company to move the production location to Poland and they end up paying less taxes for the same amount of profits. So these little blue dots here are factories and then they might move them around to some other countries where they pay lower taxes and thereby reduce the total taxes they pay on the profits.
14:21
Now actually they don't even have to do that under the principle of arm's length pricing because with arm's length pricing it turns out what they can do is just make up prices to pay each of the subsidiaries. And so the example I want you to have in mind is for instance Google where the Google search algorithm that's owned in the Bermudas
14:40
and what that means is that under the system the fiction is that the production of Google search happens in the Bermudas and so all the other Google subsidiaries have to pay the market price for the Google search algorithm to the Bermudas but since there's no market for the Google search algorithm they can just make up whatever price they want to and so all the other subsidiaries pay a ton of money to the Bermudas
15:01
and end up having no profits and all the profits end up in the low tax country Bermudas and so just by doing this accounting trick they move their profits around and end up paying no taxes because of that. And finally bilateral treaties, what that does is that you have tons of inconsistencies between these different treaties. There's lots of different details that matter here
15:21
and as soon as those details are different in different treaties what you can do is hire a bunch of smart lawyers and the smart lawyers will figure out that by moving firm locations and some accounting and so on back and forth you can end up completely reducing your tax bill and that's for instance the double Irish Dutch sandwich
15:41
is one example of this but there are many other less well known examples. And so all of these principles are used in particular by the big internet giants but also by other firms like IKEA for instance or Starbucks and again the reason that the internet age matters for this is that you have tons of intangible stuff like search algorithms, like logos,
16:01
all kinds of things for which there is no market and you can just pretend that the production happens in the Bermudas or wherever and thereby you move your profits wherever you don't pay any taxes. And so to summarize that there are three reasons that corporations don't pay taxes anymore. The first one is that they just use these fictitious prices to move profits around.
16:22
The second one is that they move actual production around and the third one is because of the first two there's ton of tax competition between countries. If companies can just move their profits wherever they pay the lowest taxes countries have an incentive to lower the tax rate and if they lower the tax rates then the companies will move the profits to that country and that country ends up having more revenue
16:41
but every other country loses out. And you get this raise to the bottom and that's exactly what we've seen since the beginning of the 80s. So here I just picked out some European countries and you see this massive collapse of corporate tax rates. So Ireland is one of the famous examples they started off with a tax rate of 50% in the early 80s and collapsed down to 12%. But the same is true for instance for Germany
17:01
starting off at 60% and going down to 30%. So reducing by half the amount of taxes to charge the corporations. And so by the combination of all these three things you get that all the big multis don't pay taxes anymore. Now that's kind of depressing because that means everybody else has to pay the bill. Either you get less public services
17:21
or everybody else has to pay more taxes. But turns out there are things that can be done about this and in particular there's a whole bunch of good reform proposals out there. And the best one in our opinion is called sales-based apportionment. And so the idea is to get rid of this idea of source country-based taxation to get rid of the idea of arms length pricing
17:41
and instead allocate profits to countries in a different way. And what sales-based apportionment does is it says if you're operating in this country as a corporation you have to report your global profits, you have to report the share of your sales that happen in that country, multiply the two and that's your tax base and that's what you pay taxes on in that country.
18:01
And why is this a good idea? Basically with sales-based apportionment what happens is you cannot move your tax base around anymore. It doesn't matter where you're produced, it doesn't matter what accounting prices you come up with because you can't move your consumers around. You're just stuck with the country in which you're operating and that's where you have to pay taxes, right? So Google can't just move all the people
18:20
who use the Google search algorithm to the Bermuda's even though they can move their profits there but the consumers are where they are. And so under the system every country could just set their own tax rate, they would have no more incentive to lower the tax rates and you would get back to a system where these big corporations pay their fair share again. And what's also nice about this proposal
18:41
is you could introduce it one country at a time. So this doesn't require that everybody introduces this at the same time. Could just have Germany or whichever country starting to do this and it would make economic sense and you would restore the tax base and a fairer tax system for everybody.
19:00
Now the question is how do we get there and that's where I wanna turn over to Dani. Yes, so after all the background you just got some people might just wonder like, okay, so we want a fairer, more transparent tax system where everyone, also multinational corporations
19:23
contribute to the progress of our societies. How do we get there? How do we get to the system we just heard about? The first step to change a system is you need to want to change the system and this is already an open question within the European Union
19:41
whether we actually do want to change the system. So as you probably hear from different countries, not only people from Berlin, actually it would be interesting for me to see who in the room actually would like to change the international tax system to a system which is transparent, fair
20:01
and similar to the one that Max described. Can you just raise your hands? Okay. And who would not like to change the system to a fairer and better system where everyone contributes their fair share to our societies? You can be brave, I can, anyone?
20:23
Yeah, there's one person. So you all are kind of average people who want to change the tax system so that multinational corporations also contribute but you in the back, congratulations,
20:40
you're fully in line with the European leaders and head of states and governments who actually like the system because they don't want to change it. So you actually won in this debate. It's not about, actually at the moment, it's not so much about what the majority wants, it's more about what do the people want to actually do decide this?
21:02
And this brings me to the next step, the question of who's responsible for the current international tax system. On this picture, you see all the European leaders and heads of states together with Pope Francis on the eve of the summit in Rome to mark the 60th anniversary of the European Union.
21:24
Here you can see all the, you see Angela Merkel here, you see our Austrian Chancellor, Christian Kern. They run national governments, their heads of states, but secondly, they're not only responsible for politics in their own countries, they also together form the European Council
21:42
and the European Council is within the European Union responsible to set the general direction and political priorities within Europe. So these are the people who are responsible not only for tax evasion, they're also responsible for the wrenching austerity that we have to endure
22:03
caused by corporations not paying taxes. Why do they do this? Like, why do they not change the system? I think there's only two explanations. One, possible explanations, one is they don't know how the system works. They don't know that it's bluntly unfair
22:21
and the second one is they actually like the system because it represents the interest of those people in corporations that they actually represent within Europe. So I leave it up to you when you look at this picture whether it's the Pope and a lot of innocent little sheep
22:42
or there's actually, I don't know, maybe one or two black sheep that actually don't want to change the system. When you think of the European Union, there's also the European Parliament and one other question is like, actually, do they have a say in this?
23:00
Like, why, like, people voted for it and the question is also like, how do they think? So within the European Parliament, of course, there are some people who would also, like they push for change in the international tax system but most of them are mainly concerned with what happens in their own countries. So when you look at the Irish,
23:22
the Irish fraction in the European Parliament, this is what we heard so much. Like, they like the double Irish with a Dutch sandwich because this is where they get the tax from and this is where they won in the tax race. The main advantage of corporations is that capitalism works on a global scale,
23:43
democracy obviously doesn't. So as long as there is no pressure on our representatives in the national governments and the European Parliament, there's no reason for anyone to change the system. The lobbyists and corporations, they make their voice heard and we obviously don't
24:03
because you raise your hand when you're in a talk but you don't raise your voice when it comes to elections. But is it all hopeless? No, it's not. There are things we can do and like the theme of Republica, we can laugh out loud, we can laugh Europe
24:22
and we can laugh taxes. First of all, taxes are quite a cool thing. It's actually the best way to fund projects by a big crowd.
24:42
As a society, we do fund a lot of things without taxes. We do fund wars, we do fund prisons, we do fund directly multinational corporations by our subsidies and we don't fund things we might want to do.
25:01
So if you're convinced that like one of your projects, this is something actually you can do, if you're convinced that one of your projects is for a greater good, you should not just run off with it and fund it with your friends. You should be actually in the public discourse demanding that like our tax money is funding good causes.
25:24
Why should we not do something good with it? If we can, it's all our voice. And second thing we should all do is like not be like the European Parliament and only think within our national borders but we should make this a European cause. When Starbucks is not paying money in Berlin,
25:42
it's also not paying money in Vienna, it's not paying money in Lisbon. So when we talk about the tax cost and the international tax system, we should bring it to the European level and the European attention.
26:00
So this autumn, we're actually all working on a project where we want to make the whole topic of the European tax system a cause or like a discussion in the public media. If you want to join this course, just sign up on this little line.
26:20
If you can see it, I'm not sure. Maybe I'm in the way. Sign up for autumn.davantel.at and we can tell you what we will do. Thank you.