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.
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.