Sunday, October 19, 2014

The Taxation Game

The US has an enormous problem, which the national government tries hard to avoid.....individual states benefiting companies....courting them in various ways.....enticing move from one region or state, to another.  I don't think this really started to get noticed until the 1980s, and over the past's gotten magnificent stages.

Roughly five years ago....Volkswagen made a decision to put a one-billion-dollar plant up in the US.  Several states got into the "bidding war".  At the end, it was a decision between what Tennessee could offer with Chattanooga and what Alabama could offer with Huntsville.  Property for the site would have been purchased and offered freely by the benefits were offered....roads would have been built with no cost to Volkswagen and it's new factory.  It was a long list of great deals.  In the end.....Volkswagen selected Chattanooga.  In terms of jobs and tax revenue from those's a big deal to the state for the decades to come.

In Europe over the past decade.....the same type of environment has been found to exist.  Big companies like Fiat, Amazon, Google, Dell, Microsoft and Apple have looked around and found great deals.  These deals were noticed, and various countries have been complaining that these giant companies just aren't paying their fair share of taxes....mostly to the rest of the EU members.

I noticed INFORWORLD discussing the matter with Google in Ireland for 2013....their headquarters in Europe.  They employ 2,500 Irish folks....a hefty number and a big deal to the local economy.  In exchange....for the twenty-two billion in revenue they made for that year.....they had a tax percentage rate of .16 percent.  In Germany, Google would have paid fifteen-percent.  That's a difference of 14.84 percent.  You can add the twenty-two billion in various ways and figure there's at least thirty billion that should have flowed into the normal country revenue pot and the EU taxation pot.  Instead, it's less than one billion.

The EU this past week sent the "dogs" out on the issue.  Several countries were selected (Ireland, Netherlands, Luxembourg).  Wrapping up this investigation quickly? I doubt if anyone hears much on the EU team and it's finding until the summer of 2015.  It'll take a while to dig into what was promised and guaranteed by each state.

The problem here, if you sit and look over the strategy.....major companies create a significant number of jobs, and European countries are fairly desperate now for job creation.  Every single member of the EU has an unemployment situation which puts undue pressure on the leadership of various communities and the states themselves.

You can walk around Frankfurt in a normal year and note that small shops and companies....come and go.  A guy will create a new shop....hire six employees....make a marginal profit....and five years later give up, with the six employees dismissed and on the unemployment line.  A new grocery will appear at one end of town, employ thirty employees at a minimum wage, and somehow do well enough to survive for decades.  These are all small fronts, with limited results.

Look around Frankfurt for new companies that appear and offer up 500 or 1,000 jobs?  It's rare that you see these.  If someone showed up and talked with some lobbyists or political figure in Frankfurt, over the possibility of 1,500 jobs being created from a new factory or industry.....they'd quickly get city interest, and quietly.....they'd sit and figure out ways to entice the company into coming.  A new bus-stop or run by the industry in a remote area?  Maybe helping pay for the parking situation with city money?  They would find various ways to get the jobs into Frankfurt.  But then you find this corporate taxation deal standing there.  Fifteen-percent is the German standard.....which is not a waiverable thing.

Generally in Germany.....there just aren't that many big new factories or industry operations being created.  Around fifteen years ago, in the Kaiserslautern area.....some company got a great deal on property out around 10 km away from town, and built up a specialized type factory which employs roughly 500 folks.  It's in the middle of nowhere....a farming area....with plenty of open parking and no hindrances.  Yeah, they pay the fifteen-percent taxation but they have easy access to a local autobahn, and can expand out with no issues. They picked an area with high unemployment, and know that they can offer minimum wages for the local area, and avoid high cost employees.  That was the plus-up.

I suspect as the weeks go by, and this EU taxation review team settles into work there in Ireland, Luxembourg, and the Netherlands.....someone will quietly point out various deals that Austria, Germany, France, and the UK have also offered.  But they aren't the gold-deals that Google or Apple got.....but they fit into the same bucket.....something free offered in exchange for job creation. The EU folks will start to realize that it's a bigger issue, with no real solution.

The truth is.....the EU needs jobs creation and industry taxation.  All of this great infrastructure and social benefits stuff....cost money and someone has to pay for it.  Gimmicks are a part of the game, and if you were desperate enough to want 2,500 jobs created out of thin will play the game.

My humble guess is that everyone in Europe will come to agree by 2016 to some new minimum corporate tax rate.  It won't be fifteen percent, like in Germany.  My bet is that they say the minimum should be eight to ten percent.  And with that.....Google, Apple, and Dell will all have to rethink their strategy and decide if it's time to move further east.....into Turkey or some non-EU country to get the benefit they desire.  Heck, they might even decide that Switzerland with it's high cost of living, but non-EU status.....might be a wonderful place to escape to and operate their business front.

In this taxation game....someone has to win, and someone has to lose. If you look at California today.....various big and medium sized companies are discussing an exit from the state because of taxation and high-cost of living influencing the profit margin.  The state has become something that was not in the original planning strategy from decades ago.

The same may happen to Ireland, Luxembourg, and Netherlands.

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