If Theresa May wants to stop multinationals like Apple dodging tax in the UK, this is how she can do it

Sensible politicians are aware there is something fundamentally awry with the manner global companies are taxed. If Theresa May wants to stop them from avoiding paying tax entirely, this is what she needs to do

EU Commissioner Vestager gestures during a news conference on Ireland's tax dealings with Apple (Reuters)

Steve Jobs must be revolving in his grave. Not only has his successor, Tim Cook, introduced one of those stylus pens the Apple founder always regarded as an indicator of technological failure but Cook’s now also demolished Apple’s carefully cultivated cool image.

“When you’re accused of doing something that is so foreign to your values, it brings out an outrage in you, and that’s how we feel,” Cook blustered in an interview last week in response to the verdict of the European Union’s Competition Commissioner that Apple had benefited from a 25-year sweetheart tax deal from Ireland and now needs to stump up €13bn in avoided corporation tax.

As he hyperventilated over the injustice, Cook sounded eerily like the uncool “PC” character from one of those “Hello, I’m a Mac” adverts from the late 1990s. What a way to undermine a brand.

Yet there is one substantive economic argument that the Apple boss advanced this week. “Taxes for multinational companies are complex, yet a fundamental principle is recognised around the world: a company’s profits should be taxed in the country where the value is created,” he said in a statement.

Here’s a serious case to grapple with. So where is Apple’s “value” created? Apple’s implied answer seems to be that it is at 1 Infinite Loop, Cupertino, the address of the company’s California headquarters.

That’s where many of its brilliant designers and engineers work. That’s where its executives like Cook are based. But this raises the awkward question of why Apple registered the profits of all its sales in Europe, the Middle East and Africa in an Irish subsidiary, rather than back in the US parent company.

Or, rather, why did Apple, with the connivance of the Dublin authorities, register those surpluses in a stateless shell corporation, meaning that some €16bn of its profits a year incurred virtually no corporation tax at all?

This suggests that the value of all those billions of dollars of profits was created not in Cupertino, but came out of the ether (or perhaps the cloud). Apple now suggests it always intended to repatriate these profits to the US, at some stage, to be subject in full to America’s 35 per cent corporation tax. If you believe that, Tim Cook has a stylus he’d like to sell you.

The simple fact is that multinational companies have long been able to exploit variations in national corporation tax regimes for the benefit of their shareholders by artificially “shifting” profits across borders with the stroke of an accountant’s keyboard.

They have been effectively picking and choosing where they pay corporation tax. And Apple, with the help of Dublin, pushed this strategy to its extreme by deciding that it would pay corporation tax on a large slug of its profits nowhere at all.

Cook really shouldn’t be surprised when that kind of aggressive tax shopping and dodging sticks in the throat of many people – even the ones who love Apple products.

Leaving that aside for a moment, Apple is right that there is a general principle that corporation tax should be levied in the place where value is created, known as a “source-based” tax.

Yet is it true that the value of a multinational company is created in the place where the firm has its headquarters, or its research base? Apple’s development teams in California are certainly crucial in generating its profits. But so are its marketing and finance teams based around the world. So are its retail teams in every country it operates.

“There is usually no single source of profit,” argue the corporation tax experts Michael Devereux and Rita de la Feria. “Profits arise from many locations as the multinational takes advantage of local conditions to maximise its worldwide profit.”

If this is true, there is a powerful case for a new approach to taxing companies, especially multinationals. Devereux and de la Feria propose a “destination-based” corporation tax.

So instead of trying to work out where “value” is created or the “source” of the profit, national authorities would simply levy the tax on firms where their products or services are sold and consumed by customers.

So for Apple its UK corporation tax bill would simply be calculated by taking its UK sales, subtracting the cost of employing its British-based workforce and other local investment overheads, and taxing the difference.

There are several major advantages of moving to such a system.

It would eliminate the incentive for multinational firms to spend time and energy employing accountants to shift reported profits across borders.

It would fit with the general public view of what constitutes substantive (and thereby taxable) economic activity by a company within a territory.

It could also be introduced unilaterally. The UK is a large enough market that it could face down the inevitable threats from multinationals to desert our shores. Is it remotely plausible Apple would decide not to sell iPhones to Britons? Or that Starbucks would go on coffee strike? Or that Amazon would stop selling us books?

Double taxation would not be an issue as multinationals required to pay extra UK corporation tax under the new regime would be able to proportionately lower their tax dues to governments elsewhere in the world on the grounds their corporate income had already been taxed.

Indeed, this would, helpfully, give a nudge to other governments to follow the UK’s lead in imposing their own destination-based corporation taxes for fear of losing out on their share of the overall multinational taxation pie.

Sensible politicians are aware there is something fundamentally awry with the manner global companies are taxed.

“It doesn’t matter to me whether you’re Amazon, Google or Starbucks, you have a duty to put something back, you have a debt to fellow citizens and you have a responsibility to pay your taxes,” proclaimed Theresa May earlier this year.

If the prime minister wants to live up to those fine sentiments, she should look seriously at imposing a destination-based corporation tax. The alternative could well be an infinite loop of multinational tax dodging and growing public anger.