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> Everyone know they make boatloads of money in Europe (just as everywhere else). Of course they should pay taxes on this profit. The difference between revenu

> Everyone know they make boatloads of money in Europe (just as everywhere else). Of course they should pay taxes on this profit. The difference between revenue and profit is really important here. You can have a lot of revenue without any profits if you're reinvesting the money, I think? So even if there are a lot of games you can play in terms of which profits you reinvested, I don't think it's as simple as "doing lots of business = owing lots of taxes".

sandstrom 10y ago
Yes, totally, this is the trick. They come up with bogus costs, usually something vague. "We have to pay our headquarters Y billion to use 'their' very valuable logo". And this amount Y just so happened to match our gross profit X in market A. So X - Y = 0 profit in market A. My point is that this doesn't make any sense. If the company actually didn't make any profit year after year they wouldn't stay. Everyone knows this is true. Any other argument is just PR-bullshit to justify the tax dodging. ––– Another common trick is to buy something with intangible assets, for example software, in a market where you have untaxed profits (as described above). Then you wait a few months and suddenly realize that this was a stupid mistake and that all this software is now worth zero. You make a huge write-down (which is a cost) that can help you reduce your (bookkeeping) profit to 0. You still actually made money though + your 'worthless' asset [the software] is still around, and will keep generating money in the future.
- bcheung 10y ago
  There's something called an Arms Length Test. Basically the criterion is that a business can not set up an arrangement purely for tax benefits if they wouldn't be willing to make the same arrangement with another company they didn't own. It is designed to prevent abusive income shifting practices. They might be able to make this case for Apple but it's really a subjective call. Apple can argue that any other company would agree to the same Ireland IP licensing because they can make a profit. It really comes down to a subjective argument of how much profit is needed to make it attractive to 3rd parties at arms length.
- danudey 10y ago
  I think the best known example for this is Hollywood Accounting, which is how a $19m movie with $150m worldwide can 'lose money'. https://www.techdirt.com/articles/20121018/01054720744/hollywood-accounting-how-19-million-movie-makes-150-million-still-isnt-profitable.shtml https://www.techdirt.com/articles/20121018/01054720744/holly... I've also seen this happen in real estate. You can make a ton of profit, but if your on-paper amortizations outweigh your in-real-life profit then you on-paper lose money even though in the real world you're richer than you were before.
Maarten88 10y ago
They also make boatloads of profits. Somehow they argue that those profits are largely happening in the Bermuda's, not in the EU and also not in the US. How convenient for them, that there's no corporate tax in the Bermuda's, and also no transparency. Everyone can see that these are all tax avoidance tricks that may or may not be legal, but they certainly are not based on economic reality, they are not in line with the intentions of law and can't be defended to public opinion. These companies get access to markets, use public infrastructure and get support of the US and EU governments. They should simply pay the taxes where they are due, mostly in the US and also in the EU.
- bluecalm 10y ago
  Then introduce a tax they will pay. Otherwise you will always be in the business of "how much that investment strategy/brand/trips" to Bermuda were really worth. It's the game that can't be won. It's frustrating to me that this point is missed. I suspect it's because people who write tax law rarely has any meaningful business experience and little understanding of economic reality.
  - Maarten88 10y ago
    > It's the game that can't be won. Only as long as countries and politicians don't really try you are right. Giving up on trying to make corporations pay taxes they should pay because "you can't win" seems like a very weak way to handle this. Corporations will immediately start discussing income tax or VAT and invent avoidance schemes on that, playing countries against each other, and that game also can't be won. There's no end. The big economic regions like EU and US should completely stop accepting all these transfer pricing and IP deals, and tax these multinational companies on something that is based on the profit that they report to their shareholders, divided by the approximate regional share of the company's total market.
- caminante 10y ago
  Insurance companies keep re-domiciling to Bermuda and Ireland. Hedge funds have preserved material gains via Bermudan tax laws for years. They park money in Bermudan insurance companies whose investment arms manage the funds, while deferring tax payment on trading profits. Eye-opening to learn about...
bcheung 10y ago
To be more specific, what they are doing is called income shifting, not reinvesting. Tax agencies typically use the Arm's Length Test to determine if this income shifting is allowed. The basics of the test come down to: Would another company agree to the same arrangement if they weren't owned by the same company / person.
- bluecalm 10y ago
  Only Ivory Tower mad scientist can come up with idea like that. I mean, it's not at all realistic to assess "real value" of those transactions. Investment strategy from Bermuda for 5M, are you going to argue it should really be 3.5M? How are you going to go around proving it? Is this really something public resources should be dedicated to? I mean it just can't work and is ridiculous idea.
  - bcheung 10y ago
    This is not some proposed idea from an Ivory Tower, this is common practice and common sense, practiced by pretty much every tax agency in the world. Like many laws, there are subjective components and that is what precedents and courts are for. Tax agencies understand that businesses exist to make a profit and try to come up with systems that are compatible with that.
    - bluecalm 10y ago
      Just because everyone is doing it doesn't mean it's a sensible idea. It's a huge failure which makes honest ethical people to pay more in a world where everyone else "optimizes" to bigger or lesser degree. It's a system where the only question is how much you go into shady area. This is a problem at every scale from micro companies to big corps. >>Like many laws, there are subjective components and that is what precedents and courts are for. But this is not similar to subjective laws where you need to come-up with interpretation for some case. Here you would need to assess "real value" of every transaction out there which is just not possible. >>Tax agencies understand that businesses exist to make a profit and try to come up with systems that are compatible with that. This is not an argument. There exist taxes which are simple in structure and which are not possible to evade without committing forgery. VAT is one such tax, taxing revenue (but not income) is another idea. Income tax isn't like that.

sandstrom 10y ago

Yes, totally, this is the trick. They come up with bogus costs, usually something vague. "We have to pay our headquarters Y billion to use 'their' very valuable logo". And this amount Y just so happened to match our gross profit X in market A. So X - Y = 0 profit in market A. My point is that this doesn't make any sense. If the company actually didn't make any profit year after year they wouldn't stay. Everyone knows this is true. Any other argument is just PR-bullshit to justify the tax dodging. ––– Another common trick is to buy something with intangible assets, for example software, in a market where you have untaxed profits (as described above). Then you wait a few months and suddenly realize that this was a stupid mistake and that all this software is now worth zero. You make a huge write-down (which is a cost) that can help you reduce your (bookkeeping) profit to 0. You still actually made money though + your 'worthless' asset [the software] is still around, and will keep generating money in the future.

bcheung 10y ago
There's something called an Arms Length Test. Basically the criterion is that a business can not set up an arrangement purely for tax benefits if they wouldn't be willing to make the same arrangement with another company they didn't own. It is designed to prevent abusive income shifting practices. They might be able to make this case for Apple but it's really a subjective call. Apple can argue that any other company would agree to the same Ireland IP licensing because they can make a profit. It really comes down to a subjective argument of how much profit is needed to make it attractive to 3rd parties at arms length.
danudey 10y ago
I think the best known example for this is Hollywood Accounting, which is how a $19m movie with $150m worldwide can 'lose money'. https://www.techdirt.com/articles/20121018/01054720744/hollywood-accounting-how-19-million-movie-makes-150-million-still-isnt-profitable.shtml https://www.techdirt.com/articles/20121018/01054720744/holly... I've also seen this happen in real estate. You can make a ton of profit, but if your on-paper amortizations outweigh your in-real-life profit then you on-paper lose money even though in the real world you're richer than you were before.

Maarten88 10y ago

They also make boatloads of profits. Somehow they argue that those profits are largely happening in the Bermuda's, not in the EU and also not in the US. How convenient for them, that there's no corporate tax in the Bermuda's, and also no transparency. Everyone can see that these are all tax avoidance tricks that may or may not be legal, but they certainly are not based on economic reality, they are not in line with the intentions of law and can't be defended to public opinion. These companies get access to markets, use public infrastructure and get support of the US and EU governments. They should simply pay the taxes where they are due, mostly in the US and also in the EU.

bluecalm 10y ago
Then introduce a tax they will pay. Otherwise you will always be in the business of "how much that investment strategy/brand/trips" to Bermuda were really worth. It's the game that can't be won. It's frustrating to me that this point is missed. I suspect it's because people who write tax law rarely has any meaningful business experience and little understanding of economic reality.
- Maarten88 10y ago
  > It's the game that can't be won. Only as long as countries and politicians don't really try you are right. Giving up on trying to make corporations pay taxes they should pay because "you can't win" seems like a very weak way to handle this. Corporations will immediately start discussing income tax or VAT and invent avoidance schemes on that, playing countries against each other, and that game also can't be won. There's no end. The big economic regions like EU and US should completely stop accepting all these transfer pricing and IP deals, and tax these multinational companies on something that is based on the profit that they report to their shareholders, divided by the approximate regional share of the company's total market.
caminante 10y ago
Insurance companies keep re-domiciling to Bermuda and Ireland. Hedge funds have preserved material gains via Bermudan tax laws for years. They park money in Bermudan insurance companies whose investment arms manage the funds, while deferring tax payment on trading profits. Eye-opening to learn about...

bcheung 10y ago

To be more specific, what they are doing is called income shifting, not reinvesting. Tax agencies typically use the Arm's Length Test to determine if this income shifting is allowed. The basics of the test come down to: Would another company agree to the same arrangement if they weren't owned by the same company / person.

bluecalm 10y ago
Only Ivory Tower mad scientist can come up with idea like that. I mean, it's not at all realistic to assess "real value" of those transactions. Investment strategy from Bermuda for 5M, are you going to argue it should really be 3.5M? How are you going to go around proving it? Is this really something public resources should be dedicated to? I mean it just can't work and is ridiculous idea.
- bcheung 10y ago
  This is not some proposed idea from an Ivory Tower, this is common practice and common sense, practiced by pretty much every tax agency in the world. Like many laws, there are subjective components and that is what precedents and courts are for. Tax agencies understand that businesses exist to make a profit and try to come up with systems that are compatible with that.
  - bluecalm 10y ago
    Just because everyone is doing it doesn't mean it's a sensible idea. It's a huge failure which makes honest ethical people to pay more in a world where everyone else "optimizes" to bigger or lesser degree. It's a system where the only question is how much you go into shady area. This is a problem at every scale from micro companies to big corps. >>Like many laws, there are subjective components and that is what precedents and courts are for. But this is not similar to subjective laws where you need to come-up with interpretation for some case. Here you would need to assess "real value" of every transaction out there which is just not possible. >>Tax agencies understand that businesses exist to make a profit and try to come up with systems that are compatible with that. This is not an argument. There exist taxes which are simple in structure and which are not possible to evade without committing forgery. VAT is one such tax, taxing revenue (but not income) is another idea. Income tax isn't like that.