Sunday, 17 January 2016

On defamation and taxation

The Polish Anti-Defamation League (foundation council member: Poland's culture minister Prof. Piotr Gliński) published an open letter to EU Commissioner Günther Oettinger, accusing him of defaming Poland. I want to focus rather on the fifth paragraph of this open letter:
"The Polish government aims i.a. to introduce a tax on international corporations because most part of them don’t pay taxes in Poland and 5 percent of GDP is illegally transferred abroad."
The blunt assertion is as follows: the bulk of foreign direct investors here in Poland ("most part of them") don't pay taxes. And $27.5 billion (of Poland's $550 billion GDP) is being transferred abroad, in breach of the law. Is this true?

Let's think about this for a moment. Back to basics time. Economics 101.

Do we know how much capital has been invested in Poland by foreign companies? Around $200 billion since Poland's transformation, says the Polish inward investment agency PAIiIZ. Do we know how many jobs have been created in Poland by foreign companies? Directly, around two million. Indirectly (suppliers, subcontractors etc) another 1.5 million.

Does this matter? Don't these jobs count? Or is the Anti-Defamation League just using flimsy populist arguments to win favour at home?

Let's get down to business.

What is VAT? It is a tax. It is paid by just about every single foreign investor in Poland on their transactions in Poland. You sell a product or service, VAT gets collected and paid.

What is ZUS? It's called 'social security' but it is a hypothecated tax, to be spent on unemployment and disability benefit and pensions. You employ people, you pay their ZUS.

What is PIT? Personal Income Tax. It is paid by the employer to the state for every employee on a full-time employment contract.

In other words, even Amazon, Apple, Facebook, Google, Starbucks - notorious non-payers of Corporate Income Tax (CIT) in the UK - pay tax in Poland. OK, they may well be wriggling as hard as their tax advisors will let them to avoid CIT through arcane manoeuvres such as transfer pricing or base erosion and profit shifting, but they do employ people here and sell services and get taxed on these activities in Poland. So while they don't pay all the tax they should, they can't avoid all of it.

It irks me greatly that last year Facebook paid less tax to the UK Treasury than my nonagenarian father did (£4,500). But Facebook did this legally. It's up to governments to close tax loopholes. Corporations have a duty to their shareholders to maximise returns on investments. So if it's legal - they will do it.

I've explained before how profit-shifting (or transfer pricing) works but let me do it again. Company X makes €10 million profit in Poland. To avoid this getting taxed at 19% (Poland's CIT rate), a subsidiary of Company X's US, UK, French, whoever, parent company, based in Liechtenstein or Ireland for example, issues Company X with an invoice for, say, €9.8 million, for the rights of using the brand 'Company X' in the territory of Poland. Or for 'management fees'. Or whatever. The €9.8 million goes to Liechtenstein, where an office employing two people makes a vast amount of profit from Company X branches around the world, and gets hit with a tax invoice from the government of Liechtenstein, not for 19% or 20%, but a mere 12.5%.

This will only get sorted by international cooperation (within the OECD, for example). On the one hand, countries should have the right to set their own tax rates. On the other, egregiously low tax rates encourage the shifting of profits to a country that taxes profits at lower rates. But individual countries waging war on their own against corporates are tilting at windmills.

Foreign investors have benefited Poland greatly over the past 26 years. They have invested in buildings - factories, offices, retail centres; in people - spending billions on training; and in machinery. OK, they can always up sticks and go elsewhere. They can take their machinery - but they can't take the buildings nor the skills they've left behind.

And what does the Polish government want to do?

Aim new taxes, based not on profits, which can be artificially reduced, but on turnover, which can't, at two categories of foreign investors - banks and retailers. What will happen? Banks will simply shift the burden to their clients and customers. Higher margins, more for cash machine withdrawals, a bigger handling fee for arranging loans, etc etc. Banks have their ways of clawing back lost revenue.

But the retailers - they will pass the losses on to their suppliers. On to Polish manufacturers, farmers, wholesalers. And their employees and their families. In an era of negative inflation and cut-throat competition, retailers cannot simply raise their prices - they'll lose market share.

In other words, this attack on foreign investors who come to Poland and steal our money is a) misguided and b) likely to backfire.

But this is not to say there's not a problem. Poland is suffering from money leaking out in illegal ways. It's just that it's not the multinational corporations that are doing this. They cannot afford to do illegal stuff. If the law says you can avoid paying tax by doing this, they will do this. So how much money is leaking out of Poland, and who's behind it?

May I direct my readers' attention to this report from Global Financial Integrity. It looks at illicit financial flows from developing countries from 2004-13. In those ten years, the study suggests that $9 billion was illicitly taken out of the Polish economy, putting Poland 20th in the global ranking of countries from which money is being stolen. $9 billion over ten years averages $900m a year. Now, according both the IMF and the World Bank, Poland's GDP in nominal dollar terms in 2014 was $550 billion. So the $900m a year stolen from Poland represents around 0.16% of the country's GDP, nowhere near the 5% 'illegally transferred abroad' that the Polish Anti-Defamation League claims.

Much of this $9 billion is carousel VAT fraud, 'firma słup, puste faktury' - this is Pan Heniek rather than large multinationals. And then there's trade mispricing, and money laundering. And excise duty avoidance. Smuggled tobacco, alcohol and fuel - mrówki on a massive scale, many operating with the connivance of our big eastern neighbour. It is not Pani Halinka's bar mleczny across the way that needs a kontrola skarbowa if the Polish state is to collect the revenues it's missing out on.

If corporations are abusing tax loopholes to transfer more than their fair share of profits abroad, the answer is not to lay a rather poorly planned turnover tax on some them, but to tighten up tax law in cooperation with other tax jurisdictions, within bodies such as the OECD. This requires some serious expertise, not a knee-jerk reaction intended to please the nation's disgruntled.

Using such weak, unresearched arguments against putative defamers of Poland will cut no ice with them. In the meantime, let's keep correcting those ignorant editors who write about 'Polish death camps'.

This time three years ago:
Where's Britain going to be in Europe?

This time four years ago:
Jeziorki under water

This time six years ago:
In a nutshell - the best science book I've ever read

This time seven years ago:
Flashback to communist times

This time eight years ago:
Pre-dawn Ursynów


Adam Kosterski said...

"..akin to a Pakistani Anti-Defamation League weighing in against UK critics of its government's actions as having no right to do so because of Britain's imperial past"

Well no, its not. The link is tenuous and seems a mite ingenuous. The UK is not situated on Pakistan's border, hasn't got centuries of warmongering against Pakistan to reflect on and certainly didn't systematically annihilate a large proportion of its citizens. I read the letter, despite it's unnatural English, as telling the EU Commissioner Günther Oettinger to weigh his words more carefully and to get his facts straight before putting his foot in it rather than denying him any say whatsoever.

Michael Dembinski said...

Adam - you are right. I'm taking out the paragraph as it does nothing to support (and indeed dilutes) my main argument, which is to do with the allegation that 5% of Poland's GDP is illegally syphoned off by multinational corporations.

adthelad said...

After reconsideration, I would suggest you were right too in as much that the letter's argument was a bit contrived - as if everything concerning the Germans invokes a knee jerk reaction in some quarters. A spam word association sketch came to mind but I may be wrong in my recollection - my memory seems not to be firing on all cylinders lately LOL,
best, A

Bob said...

One of your better posts. Would love to see you discuss and debate a Polish pol about it.