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> The allocation of the income between the different subsidiaries is almost completely arbitrary Not quite. Each country has provisions in their tax code to as

> The allocation of the income between the different subsidiaries is almost completely arbitrary Not quite. Each country has provisions in their tax code to assess the transfer pricing, and they tend to defend their tax intake quite aggressively. So much so, that e.g. in EU, the EU courts are often needed to reign in the tax collectors. This is then headlined as "EU allows tax loopholes for Google" or whatever. As a random example of pointing out how the transfer pricing regimes work in different countries, see https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-transfer-pricing-country-guide-2015.pdf https://www2.deloitte.com/content/dam/Deloitte/global/Docume... This of course only scratches the surface. A common keyword for the policies is "arm's length principle", which means that allocation of income is not determined by the company, but nor is it determined by the tax revenue activists which infuriates them. It is determined by a legal process - undoubtedly not always perfect, but certainly not arbitrarily decided by companies. Too many people get their education about this from Internet memes.

AnthonyMouse 11y ago
> A common keyword for the policies is "arm's length principle", which means that allocation of income is not determined by the company, but nor is it determined by the tax revenue activists which infuriates them. It is determined by a legal process - undoubtedly not always perfect, but certainly not arbitrarily decided by companies. It effectively is decided by companies though. Because arms length transactions have enough play in them. It isn't a matter of saying "we license you all our intellectual property for $1 and then you license it to them over there for $1 Billion" because they don't actually need that. They only need the difference to wipe out their profits in jurisdictions with high taxes. And they get to decide what transactions to engage in. Here's a made up example which is probably about right. If you have capital and an idea you can pay a consultancy to write code implementing it, and the consultancy is going to pay out in salaries nearly as much as you pay them. Their profit margin is very small. On the other hand, once you have the copyright to some useful software and can then sell it to a billion people, the revenue is pretty much pure profit. If you then license that software through a reseller, the vast majority of the profit goes to the copyright owner, not the reseller. That's what everything legitimately looks like with arms length transactions. Because the person paying the consultancy and then licensing the software is the one risking their capital not knowing whether the enterprise will be a success, so they're the one who makes all the money. So then they put the consultancy in the US, the copyright owner in Ireland and the resellers in the rest of the EU. The company in Ireland then makes all the money, just like arms length transactions say they should. It's tax arbitrage. They say you have to pay a tax on profit, but capital generates profit. Money makes money. So the company puts their capital into a place with low taxes and then can legitimately say "we used that capital to make all this money." It's literally an attempt to tax something that can be instantaneously moved anywhere in the world and then being shocked and amazed that as soon as the rate is lower somewhere else, that's where the money goes.

AnthonyMouse 11y ago

> A common keyword for the policies is "arm's length principle", which means that allocation of income is not determined by the company, but nor is it determined by the tax revenue activists which infuriates them. It is determined by a legal process - undoubtedly not always perfect, but certainly not arbitrarily decided by companies. It effectively is decided by companies though. Because arms length transactions have enough play in them. It isn't a matter of saying "we license you all our intellectual property for $1 and then you license it to them over there for $1 Billion" because they don't actually need that. They only need the difference to wipe out their profits in jurisdictions with high taxes. And they get to decide what transactions to engage in. Here's a made up example which is probably about right. If you have capital and an idea you can pay a consultancy to write code implementing it, and the consultancy is going to pay out in salaries nearly as much as you pay them. Their profit margin is very small. On the other hand, once you have the copyright to some useful software and can then sell it to a billion people, the revenue is pretty much pure profit. If you then license that software through a reseller, the vast majority of the profit goes to the copyright owner, not the reseller. That's what everything legitimately looks like with arms length transactions. Because the person paying the consultancy and then licensing the software is the one risking their capital not knowing whether the enterprise will be a success, so they're the one who makes all the money. So then they put the consultancy in the US, the copyright owner in Ireland and the resellers in the rest of the EU. The company in Ireland then makes all the money, just like arms length transactions say they should. It's tax arbitrage. They say you have to pay a tax on profit, but capital generates profit. Money makes money. So the company puts their capital into a place with low taxes and then can legitimately say "we used that capital to make all this money." It's literally an attempt to tax something that can be instantaneously moved anywhere in the world and then being shocked and amazed that as soon as the rate is lower somewhere else, that's where the money goes.