Multinational companies have to pay taxes after all

A couple years ago, when asked by Bloomberg about his company’s aggressive tax avoidance efforts, Google Chairman Eric Schmidt had this to say:

It’s called capitalism. We are proudly capitalistic. I’m not confused about this.

Nowadays, Schmidt and his colleagues at Google are being introduced to something called representative democracy. Or at least bureaucratic logic. The tough European antitrust approach on Google is surely motivated in part by the widespread sense there that company hasn’t been a good citizen — most of the tax avoidance by Google and other American tech companies seems to involve income earned in Europe. And now the Paris-based Organization for Economic Cooperation and Development, also known as the rich nations’ club, is two years into a “Base Erosion and Profit Shifting” project that is already beginning to have an impact.

The BEPS effort is aimed at shutting down “tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity.” Last month Amazon started booking its European sales in the countries where they occur, rather than funneling them all through low-tax Luxembourg.  Starbucks moved its European headquarters last year to London from Amsterdam, where complex deals with the Dutch government seem to have allowed it to move income from all over Europe to the Netherlands and pay almost no tax on it. And the “Double Irish” tax structure that Apple, Google and many others used to shift income is on its way out.

In a survey of global corporate tax and finance managers conducted earlier this year, Deloitte found that 56 percent “are anticipating significant legislative and treaty changes in their country as a result of the BEPS initiative,” and 91 percent say corporate tax structures “are under greater scrutiny by tax administrations now than they would have been a year ago.” Some of the individual responses are especially telling:

My sense is that the tax planners at multinational corporations had been operating in something of a bubble for the past couple of decades — able to exercise their craft with more and more creativity without much fear of media scrutiny or political pushback. Those happy days ended a few years ago, in part because the financial crisis unleashed a new activist spirit among regulators and in part because some multinationals had pushed their tax avoidance way too far. So stop complaining, people. This is most likely the new corporate-tax normal.