An investigation into Amazon published in The Globe and Mail last week was a primer on the accounting gymnastics that multinational companies, especially the giants of tech, use to minimize corporate taxes in the many countries where they operate.
In a strategy used over many years, Amazon structured its affairs so that profits from its retail business earned in Canada could be booked in the United States.
The retail giant stayed between the lines by limiting its retail employees’ time in Canada, and by making sure that any agreements reached with Canadian companies were signed on American soil. The company’s books and records were kept in Seattle, and directors and officers were forbidden from living in Canada, all of which could prevent profits from its Canadian retail operations from being taxed here.
It was all perfectly legal. Amazon, which reported a profit of US$33-bilion in 2021, says it has paid “all taxes owed under the law” in Canada.
No one is arguing with that. And why wouldn’t Amazon operate that way, if Canadian law allows it? Tax minimization strategies have long been standard practice for business. But in the digital economy, traditional tax minimization has been supercharged.
Internet companies like Amazon, Apple, Facebook and Google that have limited physical assets but sell products and services around the world have exploited loopholes in local tax laws in order to shuffle profits out of countries like Canada, and move them to havens with lower tax rates.
Places like Luxembourg, for instance. The International Monetary Fund reported in 2019 that the tiny European duchy, home to 600,000 people, is the host, at least on paper, to more than US$4-trillion in foreign direct investment – more than China and as much as the United States.
That money is what the IMF calls “phantom investments” – earnings shifted to Luxembourg through accounting magic by companies looking to avoid taxes in the countries where their revenues are generated. The IMF suggested in 2019 that the corporate taxes lost to countries around the world could be as high as US$600-billion a year.
The Organization for Economic Co-operation and Development said the same year that its 140 member countries could recover as much as US$240-billion a year by jointly agreeing to a two-pillar solution.
One pillar would see countries agree to set a minimum corporate tax rate of 15 per cent for companies with revenues of at least $1-billion (€750-million), thereby reducing the ability of countries to undercut each other.
The other pillar would see the largest and most profitable multinationals allocate a portion of any profit after the first 10 per cent to the countries where their sales are made, making it available for taxation in those jurisdictions.
(As part of that pillar, Canada has delayed implementation of a complex 3-per-cent tax on internet services introduced in the 2021 federal budget, pending the outcome of the OECD deal.)
The OECD describes its two-step plan as a much-needed fix in a digital era that “has undermined the basic rules that have governed the taxation of international business profits for the past century.”
Sadly, the deal is on the rocks. U.S. Treasury Secretary Janet Yellen is one of its champions, but the sudden reticence of swing voter Senator Joe Manchin means Congress is unlikely to ratify it, a move that will have a ripple effect across the globe. That puts the ball squarely back in Ottawa’s court.
Instead of waiting to see whether the floundering OECD plan goes through, Ottawa should change its tax rules now, to ensure that internet giants and other multinationals pay taxes on the billions they earn from Canadian customers.
It’s a move that Canadian business groups are calling for. They point out that smaller, local companies don’t have the same arsenal of tax lawyers and accountants, giving the multinationals an unfair advantage. There is indeed something resolutely unfair about giant foreign companies that dominate Canada’s digital market being able to minimize taxes in ways not available to most Canadian businesses.
Ottawa is right to support the OECD proposal, but it can’t rely on an agreement that might never come into being. The federal government has to be willing to tackle a problem that starts at home, especially when the costs of not acting are plain to see.
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