Virtual taxes
The issue of taxation on the internet has worried governments ever
since electronic business became a household phrase in the late 1990s.
A shopper in Melbourne buys a book or CD from the US. The shopper has just
managed to engage in international trade unimaginable a few years ago:
not the act of having goods delivered internationally. That has been going
on for centuries. But the internet has reduced all the complexities of
international trade to a couple of line items on a credit card statement.
In the process, the shopper has also cut the federal and state governments
out of the taxation equation: no sales tax, import duties probably skipped,
no income tax on the workers in the record or book shop. As this example
shows, in the e-business world many of the tax advantages are gained by
the US government as the United States is the leading “new economy”.
The US government has put forward a “neutral” position, stating that
no government should tax any internet activities as this would get in the
way of market forces determining the future of this young area. Of course,
being the beneficiary of much of the internet's commercial activity, the
US government is laughing its way to the bank.
This arrangement was formalised by the Australian government when it
signed a bilateral “Cooperation on Electronic Commerce” agreement with
the US in December 1998. While this approach provides no benefit for the
Australian government, it has been enthusiastic to be seen as closely aligned
to the US in the internet legislation area.
European capitalist governments have been far less enthusiastic, but
the character of the internet has placed them in a bind. If they tax internet-based
businesses then these businesses simply move country: it makes no difference
to what the consumer sees. If they tax consumer activity on the internet
they may be cutting off their own e-business future opportunities for small
short term gain. These are the traditional internet tax issues.
Now it emerges that there is a whole other side to internet taxation,
that of the leading profiteers of the internet, Microsoft and Cisco. While
most e-business companies such as bookseller Amazon.com have lost stupendous
amounts of money, Microsoft and Cisco have been making a killing by selling
the hardware and software that much of the internet and its users depend
on.
Based on the work of forensic accountant Bill Parish and other sources,
the Register (<www.theregister.co.uk>)
ran two articles by Graham Lea last October explaining how Microsoft and
internet infrastructure manufacturer Cisco manage to avoid paying tax on
their billions of dollars profit. Microsoft is reported as running a complex
set of financial activities based on paying employees in share certificates.
The end result is that tax paid by employees who accepted these shares
turns up as a tax rebate for Microsoft, to the tune of US$5.5 billion in
its financial year 2000!
Cisco uses a system called “pooling”, by which it purchases literally
dozens of smaller technologies (24 in its financial year 2000) in place
of internal technology development. These purchases are paid for by printing
share certificates, so don't show up on the company's books. This gives
it the flexibility to show just about any tax result it wants. In 1999
for example it claimed gross profits of US$7 billion for the stock market
while gaining a US$13 billion tax credit (and paying no federal US tax).
Don't think of it as corporate fraud. Microsoft and Cisco obviously
just decided that the first step to a world of virtual reality was to replace
real tax with a virtual alternative.
BY GREG HARRIS (gregharris_greenleft@hotmail.com)
