> Firstly, the G7 want a global minimum tax rate so as to avoid a "race to the bottom" where countries can undercut each other with low tax rates.
> Secondly, the rules will aim to make companies pay tax in the countries where they are selling their products or services, rather than wherever they end up declaring their profits.
Good. It’s a shame that Biden had to back down from the initial 28% because of domestic opposition.
The actual rate is the least important part. What is important is jurisdictional issues, accounting standards, corporate law, deferral rules and the like.
This is the problem with corporation tax generally. You can't really have a conversation about it in "normal" terms, that a journalist, politician or MOP can understand. It can only be understood via scenario plans and spreadsheets. It's a million little details. There is no "big picture."
And furthermore, I'd say however they harmonize the taxation shouldn't even matter, because the the G7 countries (or at least the euro ones acting zone wide) have no structural constraints preventing the money printer.
The real important thing here is establishing the importance in preventing the race-to-the-bottom, so more important things like multinational carbon taxes, developing country capital controls, etc. are newly inside the Overton Window.
IDK what you mean by "constraints preventing the money printer," but in the eurozone we have the opposite problem. Only the ECB can "print" money, or rather, only the ECB can create primary loans to national governments. National banks can't.
In practice, expanding national debt requires eurozone-wide unanimity. Ask Greece.
I feel the need to point out that currency debasement is a fundamentally different thing from taking out loans/issuing bonds/other debt. If anything, currency debasement reduces national debt in real terms, by devaluing the currency it's denominated in. I'm not especially clear on the situation, but I was under the impression that Greece's problem was that noone was willing to lend them money due to a expectation that they wouldn't be paying it back, not that they were prohibited from borrowing by EU law, but even that would be a different thing from being prohibited from printing money.
Extremely short analysis. After 2008 Greece's GDP crashed by 50% over several years and stabilized 2016. It's pretty obvious that when you have a shrinking economy that your real debt burden is going up over time. 100% debt to GDP will turn into 200% and it's not because of irresponsible spending or low taxation.
If anything you have to lend more money to Greece and only give the most productive companies/sections of the government access to loans, if Greece's GDP was 355 billion € in the past it can recover up to that old level.
I feel like I need to point out that they are identical, inasmuch as debasement means anything in our current currency systems.
Debasement of gold happens because gold isn't printed. You need to dilute it in order to make more coins. In a gold currency system, it's the gold that's the "real" currency. Gold value rises and falls, but that's not debasement. The coins are debase. It's theoretically possible for a gold coin to be debased, but also worth more because the value of gold has increased by more than the coin has been diluted.
Euros and dollars aren't redeemable for anything, so debasement doesn't really mean anything.
In the Eurozone, when a national government runs a deficit (all of us, currently) then the ECB issues a loan. That money is then available for the government to spend. This is where Euros come from.
The ECB refused to loan/print money to the Greek government until they agreed to certain demands. Ireland, my country, did agree to the demands and the ECB made some euros for us to pay our banks with.
It works in a similar way in the US. The Federal Reserve Bank gives their government dollars, and they US government give them bonds in exchange... a loan. The Fed can then sell those bonds to anyone who wants them, or hold them.
The one unbreakable eurozone rule is no printing your own money. The "Greek Crisis" was a fear the Greece would try to issue its own bonds, which would trade at a different rate & effectively create their own separate euro... confusing everyone.
But Greece is prohibited from printing money because it's currency is the Euro, and like all countries that have it, Greece had to sign the stability pact and, more importantly, also had to sign off the right to print more Euros. Only the European Central Bank can print money, and Greece can't tell it when to.
So true. It's a fixing the algorithm vs tweaking some parameters situation.
PS: if I were to design a state I would make it a part of the constitution that laws must either be written with placeholder variables for any concrete numbers you'd want to put into them or specify only concrete values for those placeholders and nothing else. And no single vote can contain both kinds at once.
rather than simple placeholder variables, we should employ placeholders for smoothly continuous functions over the relevant parameter space. for taxes, the parameter space might include revenue and profit, over which the tax is smoothly continuous. discontinuities just beg to be exploited.
Yeah, this is basically what got me to that idea of separating formula from parameter: whenever politics should care about some quality of a formula, it gets completely drowned in the noise of people screaming at each other trying to drag the parameters one way or the other. As evidenced by every single discussion about UBI. Sometimes the formula still turns out ok, but far too often not ok at all.
It was in my second or third programming side job when I was asked by the ramshackle finance marketing upstarts I was working for if it was possible to implement the almighty Income Tax Table (in Access, obviously). I had heard scary things about that beast. A few minutes of googling (I think was already Google?) and I realized that the law in question defined a simple linear factor that increases at certain thresholds, with a tax-exmpt base per threshold to correct for any jumps. I was so disappointed! Not so much by a scary mad beast that turned out to be all tame and reasonable but by the professions of finance marketers and tax consultants who routinely acted as if it was some arbitrary monstrosity that could only be dealt with in a lookup table.
yah, the lookup table is just discrete points of a stepwise function, so why not just use the underlying formula instead, and smooth it out while we're at it since it simplifies the calculation?
in this era of handheld supercomputers, we're well beyond having to manually multiply out the formulas anyway. and tax forms are already basically one long formula where you just plug in the variable values in a step-by-step manner (and usually have a computer do the math for you).
exactly. social phenomena in general are many orders more complex than physical phenomena for which mathematical models are generally deployed effectively.
but even so, a zero- (e.g., a single tax rate) or quasi-first-order (like a limited number of tax brackets) model makes no sense, when we can much better fit the desired effect with a slightly higher-order function for only a small complexity trade-off. better fit means reducing the exploitation surface.
tangentially, this is a relevant application of basic linear algebra and calculus to civics, which could be used as concrete motivation in the high school education of those subjects.
Based on pattern-matching on my own political science knowledge, they're saying that a legislative act can either: establish a law, but all numbers must be unspecified placeholder parameters, or: specify the (new) values for the parameters of some existing law, but without changing the text of the law. A single vote cannot apply to both.
Also it seems the agreement is that 7 countries agree that all countries in the world need to have that minimum rate? How would they convince the rest of 180+ countries? Especially, how do you convince the ones who would lose a lot of tax income by closing their tax heaven loopholes.
Dunno. They haven't actually agreed to minimum rates yet. They just said they might in future.
Broadly, you are not going to convince pure tax havens (eg Bermuda) to close tax loopholes. They don't even have corporate tax. You can do other things though.
Part of the problem here is that reporting is mixing up issues. It's not clear how (if at all) the MSFT-Bermuda shenanigans relate. The minimum tax rate hasn't been done yet, and may not be. What they do seem to have agreed on is some sort of joint accounting standards. Accounting standards define what counts or doesn't count as an expense, investment, etc.
Where that (may, we don't know yet) relate to the rest of 180+ countries is, for example: US accounting standards no longer recognize payments to (for eg) the Bermuda entity as an expense transaction.
When you are uncoordinated, discrepancies in these standards allow companies to pick and choose.
Basically, you do not consider payment to non-cooperating countries for tax purposes.
For example ACME Inc. produces widgets with costs of 50 and revenue of 100 in the US. To avoid taxes, it also pays 50 in "licensing fees" to ACME Tax Heaven in the Cayman Islands, so that the profit in the US is 0.
If the payment to the Cayman Islands is not counted, then the taxable profit in the US becomes 50.
These seven countries have a lot of sway, but even if it's only these countries that implement it it will likely affect a number of corporations. There are benefits to being legally located in stable modern economies, so this at the very least minimizes shopping around for the lowest tax rate among them.
Good. I didn't think such a global minimum was politically possible. There was recently an article on HN where the author claimed that high tax rates don't impact high net worth individuals because they have already made their money. It just makes it harder for others to join the club. Perhaps what we need is a global maximum wealth (rather than income) cap, as a multiple of global median per-capita wealth. Perhaps start with a large multiplier (say 10,000x) and reduce 1% annually?
The trick is to not own things (personally) but control them, e.g. if you want a yacht, you create a holding somewhere that buys the yacht and owns the yacht, and you can use it whenever you like. The holding then has contracts with other companies renting you out. And you work for 0 EUR for the holding and have no income. The holding also owns the house you live in. If you're a high risk person the company can be owned by your wife(example is simplified, the setup is more complex and implemented my EY e.g.).
For example I want a computer. If I pay for the computer as a private citizen, I have to pay income tax, social security on the money before I can spend it and then I have to pay VAT on the item.
Hamilton got too greedy here [1] and the setup wasn't the best, but you get the idea:
"Hamilton set up another Isle of Man company to purchase a €1.7m motorhome that he uses at racetracks. [..] He is contracted to Mercedes, with whom he secured his fourth world championship last month, via a Guernsey company."
See Hamilton doesn't get the money from Mercedes, his "Guernsey company" does. He doesn't own the motorhome, he owns the company that owns the motorhome. No VAT payed, no income tax payed. And the company he owns might be through several shell companies so no IRS knows what he owns. And when it knows, the company only makes losses (see Trump setup), so no taxes payed on owning the company either.
But these arrangements are clearly fake to avoid tax. There are already laws that see through it, just there is nobody that would dare to do anything about it.
In the UK for example, for a long time people paid themselves in loans, to completely avoid tax. This was at first available only to the rich, HMRC knew about it and did nothing. Only when the "pleb" learned about it and started using it, they woke up and applied the tax retrospectively and called it "disguised remuneration". Many people lost everything they had, many committed suicides.
Why HMRC does not do the same with companies using fake charges to hide profits? Those companies got huge competitive advantage over local small companies who cannot afford such creative accounting. So many businesses didn't happen because of that.
I think it's time HMRC doubled down and destroyed this gravy train.
I am sure we have clever people that would build a new Facebook, that is ethical and pays taxes.
"Some folks are born silver spoon in hand
Lord, don't they help themselves, yeah
But when the taxman comes to the door
The house look a like a rummage sale"
-Fortunate Son, Creedence Clearwater Revival
It will then take slightly over 229 years until the multiplier has shrunk from 10,000 to 1,000.
After another 229 years the multiplier will have shrunk another order of magnitude, from 1,000 to 100. And it makes sense mathematically that if it shrinks an order of magnitude in the first 229 years then it will shrink another order of magnitude in the next 229 years.
I mean, that clearly doesn't seem reasonable long-term to any mathematically literate layperson, since after ~917 years, the maximum wealth would be less than the median. (10'000x * .99^917 = 99.42%) But I suppose it's not like it'll last that long before corruption sets in anyway.
The problem is a wealth tax is almost impossible to implement. People will form crappy charities or put the money in their kids' names or move it to the Caribbean or some other gymnastics that will make worse use of the money overall.
If the wealth tax is uniform it doesn't matter if they put it in crappy charities or their kids names or whatever - the crappy charity or kids will still need to pay the tax.
I see bigger problems with evasion and valuation. Evasion can be solved by coupling the wealth tax with enforcement of property rights. You own an offshore bank account, somebody steals from that offshore bank account, you show up in court to prosecute them, and the government says "I'm sorry, we don't have any record of your ownership of this bank account, and you have never paid taxes on it." Oops. Also makes logical sense, as the function of the state is to enforce property rights.
Valuation is tricky, as a lot of wealth-producing assets are illiquid and it's hard to pin a specific value on them in the absence of a specific transaction. The way LVTs handle this is through statistics: you know what comparable land sells, you know what improvements are on it, you can run a regression against all the features that impact valuation and subtract them out to get a reasonable estimate of the value of the land itself. Something similar could work for income-producing assets: you know all the cash flows from the asset (because you've been declaring your income, right?), you can do a discounted cash flow analysis that smooths them out and arrives at an estimate of the NPV of the asset under current cash flow & interest rate conditions.
Tying property rights to declared wealth only, is how I envision solving this problem as well. The proposal may have flaws, but I suspect it's still better than what we have now.
This'll be hard to do when voting power in corporations is directly tied to paper wealth.
Although one idea I was playing around with in my mind was around whether the tax could be made payable in public stock, provided that the voting rights are still assigned to the holder for a guaranteed minimum window (5 years?) that could extend pretty much indefinitely until the government chooses to close a position, e.g to pay for things.
I have no idea how good or bad an idea it is, but it's an idea.
15% is a more reasonable minimum tax rate if there is a guarantee this is a loophole-proof, concrete floor rate. 28% would probably never fly without loopholes that would bring the effective rate to 15% anyway.
I agree with the minimum tax rate. But I think the criterion for taxing profits should not be where the products are sold (for that, we have the sales tax or the VAT). The right criterion is where the value is created, which is usually the country where the most expenses/employees are.
For example, if an Australian mining company digs up iron ore and sells it to China, it would seem unnatural to tax the company's profits in China. Of course, China might impose tariffs or a sales tax, but the profits should be taxed in Australia.
A strange side effect of this would be that the law of one price on international markets would no longer hold. Imagine you manufactured a product for 10$ that you could either sell for 50$ in a country with a low profit tax of 15% or for 60$ in a country with a profit tax of 40%. Then the rational choice would be to sell it for 50$ in the low-tax country, because after taxes, you still get 44$, whereas in the high-tax country, you would only get 40$ after taxes.
Consequently, a destination-dependent profit tax will lead to lower prices for consumers in low-tax countries and higher prices for consumers in high-tax countries, essentially making the consumers pay for it just like with a sales tax or VAT.
Then the effect would be that all the taxes on facebook, google etc go to the US, not in the countries where they earn the money. The problem exist for example with internet advertising - the local agencies are all doing badly, advertising has moved to the internet - to google and facebook, so they receive most of the money that otherwise would be spent on local radio, print and tv advertisements, the local ad agencies organizing that would pay taxes in our country but now all the money and the taxes leave our countries and we get nothing - no taxes, and no money spent locally. this is what all the countries except the US want to avoid.
The Facebook value is created in the countries they operate through the data they harvest. The work is done by people who use this service.
Any Ad revenue that used targeting in the UK should be taxed in the UK. Simple as that.
Unfortunately HMRC is only strong towards individuals. They wouldn't dare to go after company like Facebook. Even if they did, I am sure, given how little inspectors earn, they'd happily accept an offshore bearer account and quit.
It's complicated. "Money they made in their country" is hard to define. Large companies abuse intangible assets to shift profits around, but it's hard to say at what point abuse starts. For example, Google USA sells advertising to its clients. But, the assets it is selling are actually owned by Google Ireland. Google Ireland charges Google USA a license fee of 100% of the revenue they made. Suddenly, Google USA has net profit of 0 and Google Ireland has a large net profit.
This at the same time happens frequently, but also some amount of intercompany shifts in profit are reasonable. Google Ireland might be the actual owner of the asset. Company ownership might be fuzzy as well - maybe foreign subsidiary is only partially owned by the parent and partially owned by another company. Drawing the line can be very hard. Do we make it so companies are not allowed to sell or transfer assets overseas?
Probably the best solution is a minimum tax worldwide. This reduces the incentives to shift profits around, since the tax rates are the same everywhere.
In theory this is fixed by the the laws around “Transfer Pricing”.
You are supposed to be able to prove that the deal between your different international entities is an arms-length agreement. That is to say that the revenue sharing agreement is similar to what would be negotiated between unrelated companies.
In order to do that you are supposed to be able to show evidence that the deal is similar to other deals in your industry and such.
I don’t know how Google would get away with a licence fee of 100% under those laws so I kind of doubt that that is what they have in place.
However, let’s say they have a 30/70 split with 70% going to the IP holder (Ireland company) and 30% going to the selling agent (USA company).
Now it’s in the best interest of the company to attribute as many of the expenses of providing the service to the USA company so that we can get its profit down to zero. The profit margin of the US company might be 0% (so no tax) while the profit margin of the Ireland company is near 100%.
Yep, this is just the introduction to these kinds of thing. Then, they start to get accountants in both countries to agree on what seems a reasonable rate, say 30%? And the other 70% can be delayed earnings or whatever, and then maybe they decide to reinvest it instead. The list of resources is bottomless and continuously increasing.
What matters is that because the savings are potentially huge, your BigCo
is incentivized to reduce that tax exposure and they've got the legal and accounting workforce to find that optimization.
There are lots of legitimate high-value cross border IP transfers, and since the US creates a lot of valuable IP it makes perfect sense that they’d oppose this.
Technically, we (the irish) create all that IP which we sell to American companies. People like Seamus Jobs and Paddy Wozniak made OSX and stuff, which is why Apple US pays Apple Ireland 100s of $bns to license it. MSFT's IP is Bermudan. Innovative little island.
That's not how it works at all. Apple Ireland is used to defer taxation on non-US sales, but those profits still needs to be eventually repatriated in order to pay out dividends and fund US R&D, which is the majority of its fixed costs. Profits from US sales stay in the US, and on net Apple Ireland pays Apple US 10's of billions a year.
How does Apple's money get to Ireland in the first place? I haven't read those filings (not gonna either, I have drinking to do), but I was under the impression that it was IP licensing.
Google Ireland takes payment directly. Unless they've changed recently, all non-US adwords invoices are paid to here.
Repatriation to pay dividends is fairly moot, since they don't pay dividends. Maybe this is one of the reasons buybacks are preferred.
Apple pays a regular dividend and does regular share repurchases. Since 2012 its paid out about a half trillion dollars to shareholders. These are equivalent from a corporate accounting point of view, share buybacks are paid out after US corporate taxes are paid. Buybacks are preferred recently just because of the better tax treatment from an investor point of view, it changes nothing for the company.
As for how the money gets to Ireland, most of Apple's non-US operations are subsidiaries of Apple Ireland. For illustration, there's this (somewhat outdated) graph of the revenue flows on wikipedia: https://upload.wikimedia.org/wikipedia/commons/a/a5/Apple%27...
You're right. I was wrong. There is no IP licensing payment from the US entity to Ireland.
IP licensing happens between 3rd party countries and Ireland. Irish tax law (to our great pride) gives IP licensing revenue tax exemption. It doesn't count as revenue for tax purposes. Once here, it can be transferred to a proper tax haven like Bermuda. Since its tax free, it doesn't matter that Ireland (like everyone) doesn't recognise the transaction to Bermuda as a legitimate expense. It didn't count as revenue anyway.
I guess that invoicing to Ireland is neither here nor there, just more convenient when the money needs to come here anyway.
Once the cash is in Bermuda, the game is done. The Bermuda company can hold it, buy shares, etc. This is why Apple (And MSFT) have moved all their IP to Ireland though.
Without such IP, if Microsoft charged a German end-customer, say $100, for Microsoft Office, a profit of circa $95 (as the cost to Microsoft for copies of Microsoft Office is small) would be realised in Germany, and German tax payable. With such IP, Microsoft can additionally charge Microsoft Germany $95 in IP royalty payments on each copy of Microsoft Office, ensuring that its German profits are zero. The $95 is paid to the location in which the IP is legally housed. Microsoft would prefer to house this IP in a tax haven; however, higher-tax locations like Germany do not sign full tax treaties with tax havens, and would not accept the IP charged from a tax haven as deductible against German taxation. The Double Irish fixes this problem.[8][9]
The Double Irish enables the IP to be charged-out from Ireland, which has a large global network of full bilateral tax treaties.[g] The Double Irish enables the hypothetical $95, which was sent from Germany to Ireland, to be sent-on to a tax haven like Bermuda, without incurring any Irish taxation.
Broadly, the point of these tax structures for US companies isn't for the company to completely avoid paying US corporate tax, it's to
- Avoid paying corporate tax at a higher rate than in the US, and
- Defer paying corporate tax, often for decades, until theres a more favourable tax situation in the US, or a better opportunity to reinvest their capital comes up.
At the end of the day the profits belong to the shareholders and the only way to return the money to shareholders is by paying US corporate tax. Shareholders usually don't mind these arrangements because the tax savings is often more than the cost of capital having the money sitting unproductively.
Avoiding paying more than the US rate doesn't require any of these shenanigans. They could just charge royalties to the US.
Beyond that, the arrangement essentially turns corporate income tax into a corporate dividend/buyback tax. Dividends are always much lower than profits, and many companies don't do them at all.
>> the only way to return the money to shareholders is by paying US corporate tax
"Return" is somewhat ambiguous here. Shareholders already own those profits, and cash is reflected pretty directly in share prices. They don't necessarily have to "return" value this way. Many don't.. eg Berkshire.
The parts that bother me most here is (a) all the wasted effort going into what is essentially a silly ritual. If we had to explain this to aliens, they'd bucket it into the same category that they use for whatever pharaonic priests. were up to. and (b) the unfairness. A small, unsophisticated company doesn't get to (eg) reinvest its profits tax free. If a farmer buys more land, its an investment. It isn't an expense. If Apple buys land, its effectively expensed.
> Avoiding paying more than the US rate doesn't require any of these shenanigans. They could just charge royalties to the US.
I'm not sure exactly what you mean by this
> Dividends are always much lower than profits, and many companies don't do them at all.
Dividends are lower than profits only for companies that have opportunities to reinvest profits into growth. For companies that don't, in principal, you'd expect dividends to be exactly profits.
> Shareholders already own those profits, and cash is reflected pretty directly in share prices. They don't necessarily have to "return" value this way.
There's large opportunity cost to shareholders for companies to hold onto cash, which is usually in low-risk investments, compared to how that shareholder would invest it themselves. That's what I mean by cost-of-capital.
> Many don't.. eg Berkshire.
This is a bit of a special case because Berkshires core business is making investment decisions (and doing so through a holding company is itself tax advantaged). When the day comes the value of Berkshire companies consistently underperforms the market, shareholders will absolutely demand Berkshire start distributing profits instead of making investment decisions on their behalf.
> A small, unsophisticated company doesn't get to (eg) reinvest its profits tax free.
It absolutely can reinvest its profits tax free! It just can't build up a long-term cash pile tax free.
I mean that they could have just paid royalties to the US entity, avoiding Ireland and Bermuda.
Beyond that, you're taking a very naive, textbook approach. Tomorrow never comes, in the sense that you are talking about. Tax deferral should be thought of like an accounting equivalent of equilibrium in economics. It's never reached, but affects how some things work in the present. Dividends<profit isn't explained by the accounting point you made, it's accounted for that way. It actually doesn't require any explanation. It's simply true empirically. In many cases, companies don't pay dividends. Berkshire is one such company. There are other ways, many using less legible, more complex structures to do so.
Berkshire's "special case" is not arbitrary. They're structured in such a way for tax advantage. Restructuring can happen, as do rule changes. One of the reasons why tomorrow never comes.
>> It (small, simple company) absolutely can reinvest its profits tax free!
Ask a farmer what happens when they buy land. Ask a store what happens when they increase stock. This is emphatically untrue. If it were, we wouldn't call this an income tax. We'd call it a dividend tax.
As with the first point, if the tax was intentionally applied only to dividends, there would be no need for shenanigans. Apple & MSFT could be housing their cash where they are actually headquartered.
I don't have any opinion on corporate tax generally. IMO, the whole thing advantages financial & software firms unfairly, relative to companies that need to make real capital investments in order to grow. I do have an opinion on the fairness of it.
Two reasons: they’re not always actually intra company. Apple and Apple Ireland are different companies - and while intuitively it feels like you can just lump them together, it’s often much more complicated than that.
Second, because it is actually moving money. If I’m a Canadian software company that does most of its sales in the US through an American subsidiary (not uncommon), the way it works is the American subsidiary pays the Canadian company back for the sales of the Canadian company’s IP. Otherwise the money would never get back to Canada and the developers wouldn’t get paid! Furthermore, would be silly and tax-suboptimal to ignore the IP-money-flow and treat the Canadian company as nearly pure loss while treating the American one as nearly pure profit.
One is a wholly owned subsidiaries of the other. It's not of course a sufficient condition, but I m sure it's possible to distinguish the relationship between Apple and Apple Ireland from that between say Dell and EMC, or IBM and Red Hat, or the daughter companies of conglomerates like Berkshire Hathaway.
> Otherwise the money would never get back to Canada and I wouldn’t be able to pay my developers!
It doesn't have to be paid for the right to sell the IP. You can just move all revenue back into headquarters' coffers, and use it to finance the various cost centers. Just write the law so that it cannot be called a sale.
> You can just move all revenue back into headquarters' coffers
So it's actually moving money! And you need a reason to move money from one company (in the US) to another (in Canada). Call it sale, call it IP licensing...
The difference is that "IP" production occurs where the R&D departments exist and salaries have to be paid, rather than where the corporate taxes are lowest.
The context was "If I’m a Canadian software company that does most of its sales in the US through an American subsidiary (not uncommon), the way it works is the American subsidiary pays the Canadian company back for the sales of the Canadian company’s IP."
The IP production occurs in Canada where the R&D departments exist and salaries have to be paid and the US subsidiary company pays to the Canadian parent company.
They cannot just "move all revenue back into headquarters' coffers."
The difference between moving money in your situation and in Apple's, where there's no correspondence between where engineers are located and where IP is licensed from.
By forcing all revenue to go through a single point (the headquarters) it's much harder to establish fake licensing like Apple Ireland's.
Ok, I was commenting on the US subsidiary of Canadian firm example (which you didn't seem to agree on).
But I don't think that the meaning of "forcing all revenue to go through a single point" is clear at all.
From the point of view of most countries sending money out to Cupertino wouldn't be an improvement over sending it to Cork if that still means that they don't get to tax it.
Isn't there a way to block internal up transfers and actual IP sales? Is that the issue? Like we want to block google to Google transfers, but not company a to "actually unrelated" company b?
> Probably the best solution is a minimum tax worldwide.
I saw a similar comment earlier this week. I don't understand why first world people think developing countries would agree to this minimum tax and not undercut them on day 1 to attract investments and jobs.
There are no global tax authorities. Nobody is going to enforce these things. Even this G7 treaty is going to be a mess in practice because multilateral treaties are flawed like that.
I agree that this is hard and that there are no global tax authorities, I wasn't trying to say that's something that can just be implemented. It's probably the most realistic solution to the transfer pricing problem though, which probably says something about the scale of this issue.
I also disagree that the developing world is that much of a problem. Currently, in the developing world, money flows to places like the U.S. Virgin Islands, Bermuda, etc. While I'm sure they are not the only places that could act like as tax havens, there's probably a limit. Multinationals probably aren't going to want to relocate their headquarters to a developing country like Egypt for a variety of reasons like language, currency, corruption, weaker property laws, ease of moving cash, etc. Tax havens could also be disabled with tools like sanctions on a G7 or G20 basis. Bermuda doesn't want to play ball? Sure, then the G20 banks and governments will not allow their citizens to deal with Bermuda.
As other people have said, the goal isn't to prevent this from happening, it's to make it too risky or expensive to justify as opposed to just paying corporate tax on profits without shifting them.
It’s like fixing bugs in software: I don’t expect any given proposal to solve everything or to close every loophole and workaround, but it’s still important to put continuous effort into trying.
It doesn’t become effective until the G20, or at least G7, pass it. Part of the law would be automatic tariffs against non-participants. That leaves non-signatories with a choice between compliance and economic decimation.
Why don’t countries do this already? E.g., most European countries and presumably the US dislike that Ireland undercuts corp tax, so why don’t they penalize corporations who operate in their borders but are headquartered in a country that doesn’t have agreeable tax laws?
Well they sometimes do (e.g. fine them) but at a scale where it matters these are companies that also have leverage - if Amazon responded 'Ehhh we might stop delivering to the UK then, Brexit is already an expense, with this too ...' and then the Government is the government that lost/banned/there-is-no-good-spin Amazon.
Within the EU, (or EEA perhaps) I vaguely recall there's some restriction against penalising for things like this, as long as the other nation is also a member state. (Since viewed as a whole, 'one EU', it should be fine, I suppose.) Struggling for the right words ro search though.
If there is no benefit to moving around the income earned, companies would stick to declaring their income at the point of earning (so where they provided the services) because that would likely be the easiest, and would eliminate all sorts of currency based risks, transaction costs, etc.
> Anyway this could be the push that the EU needed to start their own Silicon Valley.
Given the combined market caps of Apple, Microsoft, and Amazon (~$5.6T) is larger than the national net worth of all but the four largest EU countries, I don’t think there’s a lack of motivation here.
By digging a bit into the US data, those numbers are, if anything conservative. According to the US Federal Reserve Bank, in 2014, the US had total assets of $270T and total liabilities of $146T for a net worth of $124T.
Just tax the revenue in the country where the money changed hands. (The client's home) That's the taxable event. So, I think, for your case, Britain (UK)
How did the money change hands in Britain? The British person typed his CC number into a web form that routed to a server in the Cayman Islands that charged a bank in France. That bank in France will then demand repayment at the end of the month from the guy in Britain.
So if you had a completely Australian company selling stuff online, they'd be subject to US corporate tax for profit earned from American customers, French tax for customers from France, etc?
This seems complicated because unlike sales tax, corporate tax is based on profit at the end of the year. It's much more complicated than sales tax. Companies would have to handle corporate tax code for up to 195 countries.
Sure? Why not? I practice it wouldn't be 195. We're trying to fix a tax avoidance issue so we've to fix the money somewhere. Demand-side seems the right choice. I'm assuming there'd be some minimum threshold. Most companies are selling mostly at home. And if you want to play InternationalBigCo game it seems a reasonable burden to me.
To start with, how do you figure out how much profit this completely Australian company made in France? It's not their revenue from France, and all their expenses are in Australia. Does the company calculate expenses according to Australian law, or French law? Calculating expenses is complicated, and each country has different rules. You're effectively forcing companies to file full taxes in every country where they have customers.
If the company doesn't declare a profit in France, is France going to audit them? They have no presence in France.
Multiply this issue for every country where customers reside. This is bad for consumers. Companies are going to choose which markets are big enough for it to be worth the additional burden. If you're from Canada, too bad; we don't sell to Canadians.
Australia and France have similar tax rates. This doesn't have much effect on how much tax the company pays; just how much goes to France.
We have already have sales tax, which is a much simpler system that taxes revenue, not profit.
> If an American SaaS company sells a product hosted in Ireland to a company in Britain, where was that money "made"?
Britain. If corporations want to pretend that (for example) China has the authority to restrict what users in China see on foreign websites (cf recent Bing tank man mess, among many others), they can apply the same reasoning to tax liability.
> Google Ireland charges Google USA a license fee of 100% of the revenue they made. Suddenly, Google USA has net profit of 0 and Google Ireland has a large net profit.
That's irrelevant; Google USA made a gross profit of X G$ and should be taxed accordingly. If they want to claim some of that as a tax-deductable business expense, the burden of proof[0] is on them to demonstrate that it's a legitimate business expense.
0: If accused of tax evasion, the burden of proof would on the IRS to demonstrate that they intentionally misreported and should suffer criminal penalties, but if they're innocent, they still owe back taxes plus nominal interest.
(Edit: In case it wasn't obvious, I'm talking about what the law should require, not what laws paid for by corporations currently do.)
> Google USA made a gross profit of X G$ and should be taxed accordingly. If they want to claim some of that as a tax-deductable business expense, the burden of proof[0] is on them to demonstrate that it's a legitimate business expense.
They've done this, repeatedly. The laws as written (US, UK, many other countries) make this a completely legitimate business expense.
So, what should the law require? How would you create a law that prevents this from being a legitimate business expense but doesn't eliminate other things that would be broadly agreed as being OK?
Could they create a special category for the clearly profitable tech titans where they are taxed simply on local turnover regardless of whatever legal accounting bullshit they use to avoid paying tax?
This is a terrible solution because it eliminates tax competition between states. The corporate tax rate should be zero-- that is the best solution, as it would free up all of this ridiculous accounting and financial compliance machinery for actual productive uses. Corporate profits are already taxed at the individual owner-level as a capital gain or dividend. The corporate income tax is grand-standing political tax with no basis in science or economics.
Shod google not be taxed twice in this example? Once on the income made in the USA when they sold the actual thing, and once in Ireland when the Irish branch sold the thing to the USA branch? Not to mention sales tax....
If the US branch bought a widget for $90 and sold it for $100, they'd pay tax only on the $10 of profit. If it actually cost the Irish branch $90 to make those widgets then that would be entirely fair and the right way to assign the tax burden. However, if the widget is actually free to "make" and yet the US branch is changed $100 for them we get the current situation.
Google USA made zero profit on those sales due to the 100% licensing fee with Google Ireland, so there's no income to be taxed. Revenue and expenses are exactly equal.
As for sales tax, I don't really know how it works in this situation.
Tax on revenue is just a sales tax on the consumer of that product or service. You might as just increase sales taxes and remove corporate taxes entirely.
In WA sales tax only applies to retail sales. Which means a revenue tax and a retail sales tax are not equivalent.
For example, if a home builder is buying lumber directly from a wholesaler, they aren’t paying a sales tax. Whereas the revenue tax does catch a portion of that income.
Maybe you mean we should broaden the concept of sales tax, and apply it to all transactions? That would be closer to equivalent to a revenue based tax structure, and would probably end up looking very similar to the VAT tax structure in Europe.
I’m fine with a VAT tax, if we want to structure things that way. Honestly it’s a lot more paperwork to manage that way instead of revenue, but either works for me.
Assuming arguendo that a sales and revenue tax were equivalent, a revenue tax would be the much simpler way to manage tax collection. Why would you ever prefer a structure that creates a tax event for every transaction, to an equivalent one that creates a single tax event per business entity?
Yes, conventional sales taxes apply to the final retail sale. But in your example, a home builder buying lumber does pay sales taxes, since there is no sales tax on the sale of the finished home (at least not in my state).
All taxes are ultimately paid by the consumer. In that regard, I agree just impose a national sales tax, get rid of everything else, and be done with it. Gets rid of all the complexity and games played with income taxes.
Give everyone an automatic refund of $X to make it non-regressive. This could be done as a monthly payment, an "advance refundable tax credit" like the stimulous payments.
Taxing revenue would kill small margin high input businesses, lead to double taxation, encourage vertical integration. Makes no sense outside of small business where they get a heavily discounted rate since it's usually there to save them the hassle of keeping expenses.
I’m not sure why double taxation matters so much. If I get a salary then use some of that salary to get a haircut, the money is taxed twice but we think of this as normal.
Human W2 taxpayers are not able to write off expenses such as driving to work (or even a home office), yet these are clearly costs of doing business. Why should corporations get additional rights that aren’t afforded to humans?
Because if I'm Apple and sitting on billions of dollars I get to buy out my supply chain and I pay 0 tax for all components and transitions in the chain - and your random manufacturer X has to pay Qualcomm and gets taxed, who pays TSMC and gets taxed, who pay their suppliers and get taxed, etc. Then multiply this by every component at every step. This is a terrible incentive system for breeding huge vertically integrated monopolies even faster than we currently do.
Double taxation only matters because it complicates the tax code, there is no other justification against double taxation.
For example, if you have one tax there is only one way to optimize it, if you have two taxes there are two ways to optimize it. As you add more taxes you are adding more room for loopholes. Solving the problem by taxing profit by country is just adding more room for loop holes.
If a tax on revenue was used the outcome would be companies would try to increase profits but reduce revenue so high margin products would be the goal which would mean higher prices / fewer sales.
I think the solution should be market based. Whatever rate google US gets from google Ireland should be available to any company and google Ireland should be forced to sell any services/ip to any company who requests it at that rate.
Doing anything else means the cost of the IP google Ireland charges to google US is made up.
The problem in this case is that no other company would agree to pay 100% of revenue to Google Ireland for their services. Google Ireland is overcharging, not undercharging.
Except we already have a minimum tax worldwide - 0%. Perhaps every country should meet the others and offer 0% corporate tax. The solution isn't as simple as "minimum tax" as some places legitimately believe that corporate tax is not the most effective way to generate government profits (Wyoming and South Dakota at the state level).
Actually, we don't - there is no legal/treaty reason why a government could not offer a negative corporate income tax rate (at least in the lowest N-1 tax brackets), and we may actually see that if corporate abuse of political processes is allowed to continue far enough.
No, I'm saying that "this value is not allowed to go below X" is different from "the lowest current value happens to be X" and we have the latter, not the former.
I didn't claim to solve anything. Merely that a world wide corporate tax rate isn't as simple as everyone thinks. For what it's worth, a corporate tax rate doesn't prevent you from doing what you suggest. In fact, you are encouraged to do so to avoid the tax.
What you're describing is a method of deferring taxation, not avoiding taxation. Google is a US publicly traded company so its profits ultimately belong to its shareholders, and it can only pay that out via the US.
The company doesn't have an obligation to pay this money to their shareholders, ever. You might die (of old age) before you get your initial investment in Facebook shares back as dividends.
If that was deemed likely, the company's shares wouldn't be worth anything. Facebook and Google routinely do share buybacks these days (which is equivalent to paying dividends)
Shares, especially in big tech companies, are nowadays mostly valued as a commodity not for the dividend value. Even ignoring meme stocks like TSLA or GME, stocks like Facebook or Google are never going to pay back enough in dividends or buybacks to justify the price.
While yes liquidity drives share prices over the short term, as a general rule that's nonsense. What do you think it means for them to be "valued as a commodity"? Why do you think shares have any value at all, or have any connection with company performance? Over just the past 3 years facebook has paid out almost $30 billion to shareholders through repurchases and has plans to pay out $25 billion more. That's the majority of what its market cap was just 8 years ago, and it's still a growing company. Do you think it does that just for the fun of it?
> It's complicated. "Money they made in their country" is hard to define. Large companies abuse intangible assets to shift profits around, but it's hard to say at what point abuse starts. For example, Google USA sells advertising to its clients. But, the assets it is selling are actually owned by Google Ireland. Google Ireland charges Google USA a license fee of 100% of the revenue they made. Suddenly, Google USA has net profit of 0 and Google Ireland has a large net profit.
I have an even easier solution, and it doesn't require an International Tax Police or Global Government. Lower taxes. Perhaps even eliminate them. There are many ways to achieve this such as eliminating government pensions, removing entitlements, and cutting defense spending and foreign aid. Instead of robbing Apple or Google to buy F35's and ship cash to the Middle East, perhaps we could cut them a break to hire and build things in the USA.
Because in practice if you make 1 million in a country, you’ll claim 1 million in expense in another country (with little to no taxes) for things like IP, trademark, etc.
Though whole accountancy process has many parallels to a pyramid selling, with the IP being the top of the pyramid located in some tax favourable country of the moment.
Of course it could be argued that the second company is also making the money in the first country where it’s IP, trademark etc. gets used and has to be taxed there.
Tax authorities already try to control for arbitrary cross country bills that try to shift profits (at least in some jurisdictions). The downside is more bureaucracy and unproductive friction of course.
AFAIU proposals for taxing companies wherever they do business rather than where they are headquartered often involve paying MAX(X% of profits, Y% of sales), precisely to avoid these kinds of shenanigans.
There's a fixed cost to administer such arrangements.
But the system is not fixed - people do start exploiting these arrangements, and once the number reaches critical levels they get whacked. An example in the UK was "employee benefit trusts", which were used by a lot of celebrities and footballers. https://www.rossmartin.co.uk/disguised-remuneration-zone/302...
You need to be big enough to (a) pay for enough legal bulletproofing and (b) have political cover against the law going after you.
They can't afford a legal department and the paperwork and compliance involved in setting up and maintaining a bunch of international subsidiary companies.
It only makes sense with large amounts of profits to launder through such a system.
Take Apple selling phones in the UK. Is the money made in the UK, where the phones are sold? Maybe part of it (selling phones), but Apple enjoys a large premium over Android, and that's more debatable. Was the money made in Taiwan, where iPhones are made? Or in California, where iPhone was invented? Personally, I don't really see why UK would tax Apple more than Android makers, simply because Apple (from California) was more inventive... while the profits were realized in the UK, they weren't created in the UK.
This has already been settled in the EU - from a tax perspective, the sale is happening where the customer placing the order lives, which typically coincides with an address in the same country.
Now something like this is bound to come, from the new treaty, to all G7 countries, which hopefully means it will trickle down to the G20 at the least.
The main issue is not rules on sales though - it's cracking down on profit-shifting masqueraded as IP transfers and licensing. Hopefully that too is being cracked down on.
First, this is not a treaty, it is an annoucement. To make the announcement a "real thing", each country needs to go back to their own legislatures and pass laws, and in those countries that are federal, they need to somehow get their states to pass laws. That then needs to trickle down into account changes, jurisdictional changes, etc. None of that has happened. What has happened is that leaders got together in a conference and issued a joint press release of an intention to address a certain problem within a framework of certain types of solutions. Think of it like the Kyoto agreement -- there is a big difference between popping some champagne corks and actually getting stuff done.
The UK already has an 18% GST rate, which is equivalent to an 18% tax on revenues. In 2020, Apple had revenues of $274B and pre-tax net income of $67B. On which, they paid $10B in income tax (a 15% rate).
Apple revenues in the UK was about $2B. Which means Apple is already paying $360mil in GST tax to the UK gov. Apple also paid some amount of wage, income, real-estate and other taxes.
Let's imagine companies had to pay income tax on a pro-rated, point-of-sales basis. Thus, apple's pre-tax income for the UK would be 2/274 * 67 = $500M. At a 20% income tax rate, this would net the UK gov an additional $100M.
This is why they want this sort of thing. It has nothing to do with fairness. The US gov is generally opposed to pro-rating profits based on location of sales. Because the US tax code allows companies to effectively deduct foreign taxes from net income, income taxes paid overseas has the effect of reducing income tax paid to the US gov.
Bingo. The reason that non-US governments (like the UK) want to get a share of the tax on profits is because they lack domestic innovative high-profit companies. They want to take a share of the added value created / subsidised by another government (US in this case). It's bad incentives all around.
VAT excludes the VAT paid when the company purchased the raw materials, i.e. it's paid net.
The end result is, the consumer pays VAT which is 20% of the price (i.e. 20% of the revenue), and the tax is spread out evenly across the whole production supply chain, weighted by the amount of added value by each company in the chain.
I'm not sure what you mean. If you assume all sales were to consumers it's true that the government receives ~~18% of Apple's revenue compared to if Apple sold nothing. Or are you just referring to the small difference between counting "revenue" as inclusive of VAT or exclusive of VAT?
Take for example an international coffee bar company with locations all over the world. They can transfer the ownership of the name, brand, styling, product recipes to a country with zero or low tax. Each cafe takes care of buying its own coffee but pays a license to use the name and branding
When someone in a small town in some part of the world goes to one of the branches instead of a local independent coffee house - isn't it a large part due to the branding of the company? the coffee is just a commodity costing a few pennies - all the value is made by the brand and the recipe owned by the company in the low tax country.
This is the whole difference between a revenue tax and a profit tax.
I don't actually know why exactly a revenue tax isn't more popular, say 1% revenue versus supposed 30% profit tax. (As if any corporation actually pays that tax rate).
Revenue taxes create predictably perverse incentives with fairly pathological outcomes. There is wide agreement that it is a poor way to tax business entities, with many undesirable side effects. Notably, the most tax efficient business structure is one that is maximally vertically integrated to minimize the number of transactions with suppliers.
Small companies end up paying a higher effective tax rate than larger more integrated companies and it discourages companies from specializing in what they are good at, neither of which is conducive to a robust and vibrant economy.
Well right now big companies can just move profits offshore by saying that they make no profit in any given location.
I think in either case big companies aren't going to be challenged much, the trick is what will be the better outcome for the countries and society as a whole.
As always with tax, the concepts that we want to discuss are not discreet enough to translate into tax law. Revenue, profit, location and such are arbitrary decisions that can be made by an accountant.
Does Apple makes its money in the US, where the company is headquartered and listed? Does it make it in China, where products are manufactured? Does it make it wherever people buy the stuff. Ireland, where the IP is "located."
Since corporate tax is an income tax, it's taxed on profit... the not of revenue and expenses. Revenues and expenses are accrued everywhere. The entity booking them is arbitrary.
"It’s a shame that Biden had to back down from the initial 28% because of domestic opposition."
You are misrepresenting the situation. A 28% global minimum was never on the table. 28% was Biden's proposed domestic rate (which to your point, he is backing down from). But these are two separate rates so we should be clear what we are discussing here.
Agreed. You have to wonder how establishing a global minimum lessens or even removes the incentive to make local government more efficient. It may even establish an acceptable level of grift.
Top marginal income tax rates in many countries now exceed 50%, not even considering payroll tax, property tax, sales tax, etc.
The question is: how can anyone seriously support tax rates that high? After a certain level, more than half your time is spent working for the government - failure to pay means fines and possible jail time. This is serfdom.
Higher corporate tax rates should not be applauded by anyone. Higher corporate tax rates invariably increase cost of living because companies can simply raise prices to compensate. If all of your competitors have to pay the same (higher) tax rates as you, the correct game theoretic move is for everyone to simply bake the higher tax rates into the price of their products/services.
Almost all forms of taxation ultimately impact the middle class in one way or another, either directly or indirectly. So while nobody is "seriously arguing" for, say, a 70% top marginal tax rate, it's easy to get there when you actually look at the entire tax burden across all levels of government, including price increases caused by higher tax rates.
> Top marginal income tax rates in many countries now exceed 50%
You mean, for people right? I have never heard about any place that taxes anywhere near 50% of a corporation revenue, but yeah, it's not rare to find places that tax more than 50% of a worker's income (all taxes in, if you are talking exclusively about income tax, I never heard about it either).
Why do corporations need lower taxes than individuals?
Shareholders and employees are people. Corporate income taxes represent a form of double-taxation because shareholders are taxed on realized gains (in capital gains or dividends), and employees are taxed on income.
Moreover, capital gains taxes are lower than income taxes because they roughly account for inflation - capital gains are typically incurred on long-term appreciation on assets, and if you're holding something for, say, 10 years at 2% annual inflation you're talking about 21% inflation. So if you have a 21% capital gains rate and a 21% rate of inflation, your effective "tax" rate is really more like 42%.
This is one reason why higher corporate tax rates are generally considered to be a poor economic choice - additionally, corporations can relocate, restructure, and do all number of things to minimize taxable income, and are strongly motivated to do so as rates increase. So you don't even ultimately collect much in additional taxes this way.
Oh, and higher corporate tax rates also raise the price of the goods and services they produce, which is reflected in substantial cost-of-living increases for low and middle-income individuals. That's why it's good politics but bad economics to target corporate taxes in this way.
Between 1951 and 1963, the highest marginal tax rate in the US exceeded 90% [0]. This is a period of time generally regarded as one of booming economic growth in the US, an exceptionally good time to be in the middle class, and a time span looked upon fondly by your stereotypical American conservative.
Edit: Why do people put up with it? Because of the progressive tax system. If my choices are a) earn $517k b) earn $1m but get taxed 37% on everything over $518k, I know what I'm picking. (Numbers come from the 2020 US tax brackets)
During the same period, only a handful of families paid that rate. There was an enormous amount of tax avoidance[0], with the real rate actually paid by top incomes under 50%[0]. When the official rate was lowered by JFK, tax receipts surged. This is the "real" laffer curve. Now it's not clear where the Laffer point is, but it's certainly to the left of 90%.
Economics devoid of morality is a poor governing principle, in my view. Even if 90% tax rates could be economically justified as not impacting growth (obviously not true), it is morally reprehensible because it is tantamount to indentured servitude.
This taxes everyone along with the multinationals. The complex deals they do mean they always pay a lot less than the 12.5% or whatever the tax rate is so i don't see how raising it for everyone else will help
A flat tax on business without deduction seems like it would squash smaller players that must devote a larger percentage of their profits to fixed costs.
This is currently the top comment and it includes obvious misinformation. 28% was never proposed by the Biden administration for the global minimum tax.
> Good. It’s a shame that Biden had to back down from the initial 28% because of domestic opposition.
It's a compromise/balance and as we know of many taxes - easier to raise them than to get them inplace too start with.
Biggest issue in all this would be that it will need the weight of those supporting it to peer-pressure the other countries to join. So Ireland, Luxenburg and other corporate tax over-friendly countries need to come onboard and that will be easier to achieve with a lower bar of 15% than to go in hard at 28%.
Also when negotiating, there are always compromises and by going in high at 28%, left a lot of room to compromise had he gone in at 15% inititialy and with 15%, whilst far from what people demand, it is better than currently and good foundation start.
Far more important though is the second aspect: "Secondly, the rules will aim to make companies pay tax in the countries where they are selling their products or services, rather than wherever they end up declaring their profits."
That is far more important IMHO as currently see countries seeing their taxes due being off-shored and lost - that in itself is the bigger issue and this addresses that aspect.
That's throwing the baby out with the bath water. Apple has a legitimate need for a subsidiary in countries they operate. What needs to stop is the shenanigans around revenue & costs designed solely to generate profit in low tax countries.
Both Ireland and Luxembourg have legitimate activities: Irish whiskey isn’t a big deal compared to tech, but there’s no real reason to ban it. Defining a line is hard, especially when the country’s traditional advantage _is_ finance, like it is in Luxembourg, even outside of tax-optimisation.
It’s easier to have rules against countries with less credibility, but then again, you risk making things complicated for Seychelles, Curaçao, St-Martins. It’s easier to define a minimum tax so that they don’t have to pick between tourism and tax optimisation.
Maybe an import duty needs to be applied. Importing the Irish whiskey will incur a duty. Google US paying a 100% license to Google Ireland should also incur a duty charge for importing the license from Ireland.
Except the reason it's not done today is because back in the 90s, people argued that it's not possible to tell if/when services/IP crossed borders because there's no fixed port of entry.
(They were making this argument because software CDs were subject to import duties but downloads were not and that they were unfair)
Today it's still the case and services/IT are not subject to duties.. but I think large licensing agreements like this should definitely attract import duties
The solution is simple enough: look at the companies books, if money is leaving the country, duty is charged unless it can be accounted for by something else (like the existing duty on physical goods).
IRS: Hey Google, you said you made this much money, so you owe us tax.
Google: No, see, here we paid it to Google Ireland as IP license fees, so we in fact made $0
"Good. It’s a shame that Biden had to back down from the initial 28% because of domestic opposition."
He can always change his mind. Plus--I have a weird feeling Biden would't mind putting off spending trillions on a nebulus bill right now. Of course he won't admit it publically.
IIUC, they are paying taxes on goods sold, but those taxes are then offset by “losses” which they incur by “buying”, say, IP licenses, from their sister company. This sister company get record profits, but this company is then located in a tax haven, and pays no taxes on these profits.
The argument is a tax on revenue is very unfair to low margin business like retail or farming, so corp. tax is usually on profits. Which creates the loophole of where are the profits recognized.
> Good. It’s a shame that Biden had to back down from the initial 28% because of domestic opposition.
28% is a ridiculous minimum to try and impose on the ENTIRE WORLD. You have to be quite clueless about taxation worldwide to think this has a snowflake in hell chance of passing at all. "Domestic opposition" is not a factor at all.
Biden has been consistently good at this, going in with a crazy bold position and letting people argue him down to somewhere that would probably be his real position in the first place.
It's about time people started to elect leaders who can get shit done in the frameworks that exist to get shit done, instead of trying (and failing) to destroy such frameworks.
This is a terrible idea. This “race to the bottom” is what drives efficiency and better ways of doing things. It’s why we don’t have $10,000 desktops in our homes with 386 processors.
If computer chip manufacturers decided to create a floor price for their products that would be collusion and bad for consumers. Same here. It’s bad for citizens of a country.
You damn know some developing country is going to be told “nah, sorry, can’t lower your corporate tax rate too low to spur investment, those jobs are staying in developed countries”.
First, tax competition creates its own inefficiencies —- companies locate production in low tax jurisdictions instead of optimal locations given local skills, factor prices, etc.
Second, this argument only makes sense if you think tax competition leads to “innovation” in tax policy, but it’s not clear why that would be the case. Almost any kind of tax structure is jurisdictional and would be undone by zero-sum competition between countries.
Third, would this hurt developing countries? Right now this is a voluntary agreement between developed countries to achieve a common goal, so that complaint isn’t super relevant. Think of multilateral tariff reduction agreements —- it’s often a good idea to unilaterally put up tariffs if everyone else lowers them, which can result in a high-tariff equilibrium even if each player would like lower global tariffs. Multilateral agreements are the way to achieve the collectively desired outcome that can’t be achieved in a decentralized way.
But a global minimum tax could be also be a good idea for lower income countries, if it’s not set too high. Typically the economic incentives are there to locate especially production in the developing world. If all developing countries had the same minimum tax, then companies couldn’t play developing countries off one another to get lower tax. Lower income countries would reap more gains from globalization and have more funds to eg invest in infrastructure and development.
First, companies don’t optimize for tax at the exclusion of everything else. And calling tax optimization and inefficiency is interesting considering it directly impacts returns.
Second, the innovation isn’t in the tax policy, it’s in the use of the tax revenue. If I come up with a less bureaucratic and less costly administrative process for companies, why shouldn’t I pass the along if I want to?
Third, the implementation goal is global. That’s been stated by Biden.
And I’m guessing the lower income countries will suffer. You want to pay t a similar tax rate for the US for say Myanmar? Abundant corruption, questionable private property rights, untrustworthy courts?
On (1), I’m speaking from an allocative efficiency standpoint (should have been more precise). For example, say I’m a company selling in NY, I can locate production in NJ or AZ, and pretax it is cheapest to locate in NJ. If AZ offers a tax incentive that makes it cheaper for me to locate in AZ I’ll do it, but if you sum up pretax revenue minus costs they are lower than had I located in NJ. So this is a transfer from NJ coffers to company profits + AZ coffers, but it is negative sum.
Not sure I understand what you’re saying on (ii). I think you’re saying that if countries have to compete for business, then, holding fixed their statutory tax rate, they have an incentive to improve bureaucratic efficiency to increase resources available (given the statutory tax rate). But I think the issue is you get competition on the statutory rate, which pushes rates towards zero. I actually think a minimum tax which binds and hence constrains the statutory rate could provide a great incentive along the lines youre talking about to optimize bureaucracy.
On (iii), I’m guessing a minimum tax wouldn’t bind in countries willing to explicitly expropriate FDI. Also having a minimum could limit the scope to vary effective rates for individual companies as carrots / sticks, which if anything could reduce corruption.
If it would be only for the complex tax evasion schemes I would be on their boat but in the end it will reduce competition between countries which is just dystopic.
To add to that, there structural problems with an income tax in general, and a corporate income tax in particular, and there are many arguments for eliminating it altogether, and replacing it with other types of taxes (e.g. a transaction tax, a carbon tax, a land tax, etc). But this locks it in place as a constant for all countries.
This is just G7 isn't it? Seems to me like all the typical very low tax jurisdictions you'd select for as somebody optimizing tax with the freedom to locate wherever you choose are still open.
This is the first step. G7 can then strongarm or cajole their "client states" with coordinated action. Even just the fact that such action is finally happening, is a great step. This was considered a sci-fi scenario 20 or 30 years ago and now it's become reality.
It's one thing to get G7 to agree on something when they're literally in the same club, another to get their client states that might previously have been attractive options like Ireland or Estonia to get on board to some degree. But jurisdictions that are much more independent and less prone to leverage like Georgia or Malaysia on the other hand I just don't see it. And that's before you get off into the weeds of jurisdictions that are more accurately described as oppositional and are raising their own efforts to attract offshore investment which it seems would be even less likely to kiss the ring.
It's easy to forget that the legacy brand countries with the extremely high tax rates and absurd conditions like citizenship based taxation in the most abhorrent cases internationally are the exception, not the rule. Their residents with their political biases make up the majority of participants in forums like this, and this contributes to the perception that their regime is enormously more widely adopted than it actually is, but if you look at the actual numbers by the actual areas that's just not the case.
And worst case scenario then you have crypto, where it goes from the legally difficult realm into the technically impossible realm.
This is just a fight they're guaranteed to lose on a long enough timeline.
Low-tax countries in the EU are being ruthlessly isolated already. This has been happening for some 15 years now, and accelerated after Brexit; covid might well be the nail in the coffin.
I am also sceptical of your claim that jurisdictions like Georgia and Malaysia are "less prone to leverage" - their proximity to large adversaries actually makes them more dependent on soft-power diplomacy to maintain big friends.
Obviously the likes of Russia and China might not play ball - but they have much bigger issues to worry about, from a capitalistic perspective. You put your money into China, you can't pull it out ever again; you put your money into Russia, and tomorrow it might well be Putin's money.
> Low-tax countries in the EU are being ruthlessly isolated already.
In what way? How is life for anyone in say Ireland or the Netherlands or the Bahamas materially different than, say, 20 years ago? Are they not allowed to travel somewhere? Obtain visas? Purchase goods and services from abroad? Are airlines refusing to land there? Even a single example of this "ruthless isolation" would be nice to show, otherwise, I suspect this is more of a dream sequence than a description of reality.
> their proximity to large adversaries actually makes them more dependent on soft-power diplomacy to maintain big friends.
Considering how the west interacted with the Crimea takeover I'm pretty sure these countries have realized by now that the west doesn't really care about their protection.
> This has been happening for some 15 years now, and accelerated after Brexit; covid might well be the nail in the coffin.
Estonia will be a useful barometer to keep an eye on for this in the future, but since their tax rate is actually basically in line with this floor anyway it may well be that this just doesn't affect them at all.
> their proximity to large adversaries actually makes them more dependent on soft-power diplomacy to maintain big friends.
Georgia already has recent experience with such relationships not keeping the bear at bay so may well view the extra capital from remaining an attractive tax friendly jurisdiction as more useful than bowing to parties who have already failed them in the recent past.
Malaysia seems even less likely to buckle to the "international order" as they have neither the cultural homogeneity nor the magnitude of the threat that Georgia has.
> You put your money into China, you can't pull it out ever again; you put your money into Russia, and tomorrow it might well be Putin's money.
When what your money gets you is absolutely nothing, one parasite is just as bad as another in the long run, it just becomes a question of which one costs you more. Russia and China have to restrain themselves in the looting sector less and less to the extent that their US & EU competition go all out in order to look like better alternatives.
And then, there's the implications of an extortion war across the global economy providing capital flight impetus to push the cryptosphere to obscene heights and complete inability to tax in a worst case scenario.
I think the fundamental fact of the issue will remain that as long as it's a forced payment not linked at all to delivery or quality of goods or services, all rational parties will be forever motivated to avoid it to the maximum extent possible, as it resolves to nothing more complex than "burning money" given what it actually buys you.
> Firstly, the G7 want a global minimum tax rate so as to avoid a "race to the bottom" where countries can undercut each other with low tax rates.
> Secondly, the rules will aim to make companies pay tax in the countries where they are selling their products or services, rather than wherever they end up declaring their profits.
Good. It’s a shame that Biden had to back down from the initial 28% because of domestic opposition.