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A House of Cards

Corporate freebooters always put shareholders first

Popular anger against tax avoiding transnational corporations like Starbucks, Amazon, and Google is rising fast as government spending cuts accelerate. Now Rupert Murdoch’s Sun is beating its drum against Npower.

A petition from 38 degrees reveals that the energy company manages to pay no tax in the UK, avoiding an estimated £108 million bill by sending its profits through a shell company registered in Malta.

According to tax expert Richard Murphy, Npower borrows money from RWE, its German owner, and then pays the interest on the debt to the Maltese company – Scaris. It’s a legal scam that allows Npower to record a loss in the UK.

The Sun says “foreign” companies are buying up British assets, and more of “our” hard-earned money is heading abroad. This is deliberately misleading, nationalist rubbish.

Profits come from the hard work put in by millions of ordinary people all over the world, many employed in dangerous conditions, who are paid as little as employers can get away with. They end up in the managed wealth funds of shareholders located wherever they can find the most tax-efficient homes. That’s the normal operation of the 21st century capitalist economy.

Corporations exploit competition between governments. During the Blair/Brown New Labour governments, business taxes were driven down to attract investment. Last month, Tory chancellor George Osborne announced plans to cut the corporate tax rate to 20%, the lowest in the G20 group of advanced economies. Treasury minister David Gauke, said ominously: “We must recognise that we are in a global race. There will be economies that succeed and those that fail.”

On the scale of tax-optimising accounting tricks used by all corporations, Npower’s £108 million hardly registers. The Netherlands – a key destination for the profits of many corporations operating in Europe – attracted $3.5 trillion of inward investment in 2012.

However, just $573 billion ended up in the “real” Dutch economy.

The rest found its way into “special purpose entities”, the finance and holding companies often designed to help businesses avoid tax. In tiny Luxembourg an amazing $2.28tn came into the country disguised as investment but just $122bn – 5% – entered the real economy.

If these huge, incomprehensible numbers make your head spin, let’s just focus on one well-known name to shed some more light on the murky activities of corporate freebooting.

Yesterday, despite holding $145 billion in spare cash, and having no debt at all, Apple sold the largest amount of bonds ever issued by a non-bank company. The corporation borrowed $17 billion from investors on the debt market to be repaid in periods up to 30 years. So why did one of the world’s most successful companies decide to get into debt?  

It turns out that Apple is under pressure from its shareholders, who are anxiously watching the precipitous 45% decline in the company’s value over the last seven months. The plan is for Apple to drive its value back up, not by investing in new production, but by increasing dividends – giving more of the profits to shareholders, and buying back a proportion of their shares to make those remaining more valuable.  

Apple doesn’t want to use its cash to do that because $105 billion of its $145bn is parked outside the US, and repatriating it would incur US taxes. Better to use borrowed capital – and the additional tax sweeteners that borrowing attracts. Microsoft is doing the same.

So the profit-maximising logic of capitalist production actually requires the most successful companies to avoid tax, borrowing from one set of gamblers to keep the favours of another.  

Meanwhile, in the Foxconn sweatshops of China, workers assemble the latest iPad, for a relative pittance. And workers making clothes for Western corporations in Bangladesh are killed when their poorly-built factory collapses. Tax avoidance is only an aspect of a system that is rotten to its core.

Gerry Gold
Economics editor
1 May 2013

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