Any sufficiently advanced technology is indistinguishable from magic, and the accountants of Silicon Valley have proved Arthur C Clarke’s third law to be as true of tax avoidance as it is of tech. The most recent outrage is Apple’s $252bn offshore cash pile, as exposed by the Paradise Papers investigation. More valuable than the foreign currency reserves of the US or the UK, it represents all the money that the world’s most valuable company has siphoned out of the global financial system for the benefit of its shareholders.

Tax avoidance is as essential to the tech giants as their products are to our lives. Until 2015, Amazon paid a pittance on its UK sales by sluicing them through Luxembourg. George Osborne’s “Google tax” didn’t cover Google. The creativity of the iPhone pales next to that of the company that exists nowhere, and last year Apple paid just $2bn of tax on $41bn of non-US profits, an effective rate of 4.8%. In total an estimated $500bn is withheld from public coffers by multinationals each year.

An estimated $500bn is withheld from public coffers each year by multinational companies

All of this is possible because the way we tax multinationals is obsolete. At the moment, every subsidiary of a corporation settles its own tax bill separately, and different subsidiaries can buy and sell to one another. A multinational can decide its British customers are served not by its UK subsidiary, but by whichever subsidiary has the most favourable tax residency. Check your last Apple invoice and you will see you’re a loyal customer of Ireland-based Apple Distribution International.

Subsidiaries are supposed to buy and sell to one another at “arm’s length prices” – a value determined by what they would have paid had they bought something similar from somebody else. But what is an appropriate value for the intellectual property behind Google’s search algorithm, or the Amazon logo, beyond what their accountants declare them to be? Although Starbucks is the most famous example of a multinational billing itself for its own intellectual property to reduce its taxable income, Google and Microsoft have used similar practices.



How do we force the tech giants to pay their fair share? The answer could lie in a system called unitary taxation. Multinationals would be taxed based on where they genuinely do business, rather than where they artificially shift their profits.

Let’s take Apple as an example. In 2015 it scraped together £13m for a UK tax bill, while enjoying global profits of £35bn. The company withholds what proportion of its revenue is UK-origin, but it is reported to be about 10%. Were that figure correct, a unitary system based solely on sales would conclude that £3.5bn of those global profits were UK-origin. At a corporation tax rate of 20%, Apple would owe the UK £700m for the tax year – more than 50 times what it actually paid.

A more nuanced model would consider where a company hires as well as where it sells. Apple has 6,500 employees in the UK (1,000 more than in Ireland, its European headquarters), which is about 5% of its worldwide total of 123,000 employees. An equal split between sales and employees would determine that 7.5% of Apple’s global profits were UK-origin, and thus it owed a tax bill of £525m.

Critics of reform argue that it would have to be multilateral, or companies might be hit by unfair double-taxation. It’s an unpersuasive point considering the non-taxation multinationals have enjoyed over the years, though an international consensus would be better. But any reform is better than none, and if the UK could carry out unilateral reform, it should. Another big advantage is that although no system is perfect, a unitary system would be much harder to avoid. It is easy for Apple to shift its profits to Jersey, but shifting its customers there is tricky.

The windfall resulting from a reformed corporation tax could finance better public services, balance our budget deficit, or perhaps even pay for a reduction in the corporation tax rate. But how the money is spent perhaps matters less than the principle that those with the broadest shoulders should bear the greatest burden. The tech giants will never pay their fair share voluntarily. It’s past time it was no longer optional.