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Taxing multinational corps is pretty difficult. Let's say a parent company UsTech, which makes money from ads on a ubiquitous digital platform, has an Irish su

Taxing multinational corps is pretty difficult. Let's say a parent company UsTech, which makes money from ads on a ubiquitous digital platform, has an Irish subsidiary UsTechDublin,LLC and a German subsidiary UsTechBerlin,GMBH. UsTechBerlin hosts a bunch of very well paid engineers who work on app performance and backend infrastructure efficiency; UsTechDublin hosts a bunch of low paid customer service reps that provide support to end users. Both offices clearly provide something of value that helps the parent company UsTech make money, but nobody has paid a (euro)cent to purchase ads from either the Irish or German offices while those offices have paid a bunch of money in salary and benefits. So, how much should they owe the tax man in each country? That's up to UsTech. The "revenue" "earned" by UsTechDublin is an accounting-only transfer from UsTech for providing customer service. The "revenue" "earned" by UsTechBerlin is an accounting-only transfer from UsTech for performance improvements and infrastructure designs. If corporate tax rates in Germany and Ireland are higher than those in the US and UsTech accountants aren't total morons, the transfer payment to each subsidiary will be exactly enough to ensure that revenue matches expenses and there's no profit to be taxed on the books of either UsTechDublin or UsTechBerlin. If, on the other hand, the corporate tax rate in Ireland is lower than in the US and the corporate tax rate in Germany is higher then magically services of the customer service reps of UsTechDublin may be "sold" to UsTech at usurious rates while those of the software engineers of UsTechBerlin are "sold" for a pittance. The "lost" tax revenue being claimed here is essentially saying that multinationals chose their transfer payments in such a way as to not have their profits appear in high-tax EU nations. Well … duh. The problem is that it's hard to envision a governmental bureaucracy capable of challenging and very accurately assessing the true rates on intra-subsidiary transfers without it being breathtakingly large in scope and stifling to the functioning of the economy in question. Current rules for it [1] leave plenty of wiggle room. [1] https://en.wikipedia.org/wiki/Transfer_pricing https://en.wikipedia.org/wiki/Transfer_pricing

alkonaut 9y ago
What you are describing is exactly the issue with the current system, correct? That is, taxation based on physical presence only, and the arbitrary ways corporationsn can do intra-subsidiary transfers. A tax for megacorps based on revenue seems a lot simpler.
- elgenie 9y ago
  Taxing on revenue is simpler but utterly non-sensical. If selling a phone that cost $800 to make for $805 incurs an 80x tax liability compared to selling hammer that cost $5 to make for $10, then the modern economy of long supply chains and specialization grinds to a halt. Another way to think about it: a single year in which the tax on revenue is higher than profit would require the business to be go into debt or be sold to pay the tax man; except then what's the value of that business to a creditor / acquirer if it has that threat hanging over its head?
  - alkonaut 9y ago
    Perhaps I was unclear: The suggestion is not to tax the revenue, but to tax based on revenue - that is: the tax would still be on $5 profit but where that tax is extracted is decided by where the company was doing business, rather than where it is incorporated.
    - ringtail 9y ago
      Hmm thats effectively consumption tax of very significant rate (eg 33%).
      - alkonaut 9y ago
        How is that? The same corporation could be paying exactly the same corporate tax rate on exactly the same base, under such a scheme.
        ringtail 9y ago
        In my understanding what you are saying is, a country will tax profit on revenue generating from its own territory by its own tax rate. For the sake of simplicity, assume 100% profit margin. Let R and R' be revenue generating without and with such tax law. Let T be tax rate. So a company was hoping R into its bank account. But with the new taxes it would be (R - RT). Naturally the company would just increase the revenue to R' (by increasing prices) where it would give R'T to Govt and keep (R' - R'T). R'(1 - T) = R R' = R/(1-T) Actually I underestimated new tax, for T=33% it would be 49.25%.
jakubp 9y ago
Majority of revenue is coming from ads. If Google were taxed for each ad income based on the country of where the ad buyer is located, they couldn't manipulate it as easily. Also clients wouldn't be inclined to set up shop in tax havens, because why would they? It's not their problem. I'm not sure this is a good solution, it might also be possible to game it, but at least that would make sense from the perspective of assigning benefit to a territory: if a myriad small businesses in, say, France, need Google ads, why not tax Google in France for that amount? It is in a sense Google's access to French market that we are taxing. Could that work?
- ptaipale 9y ago
  What? In EU, Google is taxed for each ad income, as well as app sales, based on the country of where the sale takes place. It's called Value Added Tax. Countries can set the rate. Mostly the rates are in the order of 20 %.
  - user5994461 9y ago
    I am not sure if it's still ongoing but any immaterial good you buy on a major website used to be taxed at the Luxembourg rate, which is the smallest in Europe. It's a pretty clear sign that sales are not attached to the country of the customer.
    - germanier 9y ago
      That has changed. Companies are now required to charge the VAT rate of the customer's country for digital goods (and have to store some data to prove that they picked the correct country).
    - ptaipale 9y ago
      This changed long (10-15 years) ago. When I (resident in Finland) buy stuff from web shops in Germany, I pay tax at the higher Finnish rates, and it is withheld by the seller. (When I buy from e.g. China, I pay VAT at the customs, including VAT on freight.)
  - 9y ago
aembleton 9y ago
Require UsTech to run their sales to their Ireland and German customers through their Ireland and German subsidiaries. Then tax them based upon the result of their (sales to Irish customers - Irish costs) and in Germany, the equavelent (sales to German customers - German costs). It's quite possible in those two places, they would pay no tax because their costs are higher, but this is also an incentive to keep employing people in said countries. To help enforce this, other companies in Ireland and Germany would only be able to reduce their taxes by purchasing from Irish and German registered companies (tax based on Irish costs - Irish sales) which would mean that they would be incentivised to buy from these rather than UsTech global corp.
- theptip 9y ago
  A problem with this solution -- as a US company without a German subsidiary (but as with most online businesses, with German customers), do I now have to pay taxes in Germany? If the former, the logical conclusion of that approach is that every startup has to pay taxes in all 195 countries of the world, as soon as they open for business. This could be on $0.01 of ad revenue. If the latter, I'm strongly incentivized to move my labor from the high-tax countries to the low-tax ones, which will push business out of the former. (I.e. at the margin, if I have a small office in Germany, it's probably not worth my while to keep it open since it incurs a massive tax liability).
  - aembleton 9y ago
    No, you wouldn't have to pay taxes in Germany. But, if you sell to German businesses, such as providing hosting services then they wouldn't be able to deduct that as costs when calculating their taxes. They would only be able to deduct German costs, defined as the employment of someone with a NI number (or German equivalent) or another business with a tax number.
    - taysic 9y ago
      So you disincentivize using any services in countries other than the one your subsidiary is in? They would have to be significantly better than other options to be worth not being able to deduct those costs.
zerebubuth 9y ago
I thought that a necessary part of the "Double Irish with a Dutch Sandwich" was that a company in a tax haven can license IP to its subsidiary at an arbitrary price. Therefore, that company can offset any profit its own subsidiary might make. To do this requires two things: 1. That the license arrangement with the subsidiary is unique to that subsidiary. 2. That the license fee can be set to any value at any time. For more concrete assets, for example a bag of coffee beans, it's easier to see when a parent company charges a subsidiary a different amount than the market rate. However, there is no comparable market for IP, so it's harder to see what a "fair" price for a copyright, trademark or patent might be. One option might be to tax all IP licenses at the corporate tax rate. Another would be to adopt a "most favoured licensee" rule, requiring all licensees to pay whatever the cheapest rate was (or taxing the difference).
- elgenie 9y ago
  The Double Irish + Dutch is merely the most extreme example of the transfer pricing morass (and will go away in a few years). There are a bunch of other funky methods described in the wikipedia article I posted on the topic; defining and proving in court that a particular method of determining "market rate" was unreasonably chosen and incorrect enough to be worth the trouble is quite involved and, in normative terms, a big waste of economic potential (brain power on both sides is devoted to … that, rather than something useful). As for "taxing IP licenses at the corporate tax rate", that seems nonsensical given that it's profit (aka value added) that is subject to tax, not revenue.
  - zerebubuth 9y ago
    I wasn't suggesting that anyone define or prove a "market rate" for intangibles. I agree that would be a waste of time. The reason I mentioned it was as a contrast to IP licenses, for which no market exists. Profits are subject to tax, as are people's incomes, consumer sales, assets such as cars, TVs and homes, and goods which cross customs borders. I was suggesting that another tax (or duty) be created to discourage the offsetting of profits using IP licenses.

alkonaut 9y ago

What you are describing is exactly the issue with the current system, correct? That is, taxation based on physical presence only, and the arbitrary ways corporationsn can do intra-subsidiary transfers. A tax for megacorps based on revenue seems a lot simpler.

elgenie 9y ago
Taxing on revenue is simpler but utterly non-sensical. If selling a phone that cost $800 to make for $805 incurs an 80x tax liability compared to selling hammer that cost $5 to make for $10, then the modern economy of long supply chains and specialization grinds to a halt. Another way to think about it: a single year in which the tax on revenue is higher than profit would require the business to be go into debt or be sold to pay the tax man; except then what's the value of that business to a creditor / acquirer if it has that threat hanging over its head?
- alkonaut 9y ago
  Perhaps I was unclear: The suggestion is not to tax the revenue, but to tax based on revenue - that is: the tax would still be on $5 profit but where that tax is extracted is decided by where the company was doing business, rather than where it is incorporated.
  - ringtail 9y ago
    Hmm thats effectively consumption tax of very significant rate (eg 33%).
    - alkonaut 9y ago
      How is that? The same corporation could be paying exactly the same corporate tax rate on exactly the same base, under such a scheme.
      - ringtail 9y ago
        In my understanding what you are saying is, a country will tax profit on revenue generating from its own territory by its own tax rate. For the sake of simplicity, assume 100% profit margin. Let R and R' be revenue generating without and with such tax law. Let T be tax rate. So a company was hoping R into its bank account. But with the new taxes it would be (R - RT). Naturally the company would just increase the revenue to R' (by increasing prices) where it would give R'T to Govt and keep (R' - R'T). R'(1 - T) = R R' = R/(1-T) Actually I underestimated new tax, for T=33% it would be 49.25%.

jakubp 9y ago

Majority of revenue is coming from ads. If Google were taxed for each ad income based on the country of where the ad buyer is located, they couldn't manipulate it as easily. Also clients wouldn't be inclined to set up shop in tax havens, because why would they? It's not their problem. I'm not sure this is a good solution, it might also be possible to game it, but at least that would make sense from the perspective of assigning benefit to a territory: if a myriad small businesses in, say, France, need Google ads, why not tax Google in France for that amount? It is in a sense Google's access to French market that we are taxing. Could that work?

ptaipale 9y ago
What? In EU, Google is taxed for each ad income, as well as app sales, based on the country of where the sale takes place. It's called Value Added Tax. Countries can set the rate. Mostly the rates are in the order of 20 %.
- user5994461 9y ago
  I am not sure if it's still ongoing but any immaterial good you buy on a major website used to be taxed at the Luxembourg rate, which is the smallest in Europe. It's a pretty clear sign that sales are not attached to the country of the customer.
  - germanier 9y ago
    That has changed. Companies are now required to charge the VAT rate of the customer's country for digital goods (and have to store some data to prove that they picked the correct country).
  - ptaipale 9y ago
    This changed long (10-15 years) ago. When I (resident in Finland) buy stuff from web shops in Germany, I pay tax at the higher Finnish rates, and it is withheld by the seller. (When I buy from e.g. China, I pay VAT at the customs, including VAT on freight.)
- 9y ago

aembleton 9y ago

Require UsTech to run their sales to their Ireland and German customers through their Ireland and German subsidiaries. Then tax them based upon the result of their (sales to Irish customers - Irish costs) and in Germany, the equavelent (sales to German customers - German costs). It's quite possible in those two places, they would pay no tax because their costs are higher, but this is also an incentive to keep employing people in said countries. To help enforce this, other companies in Ireland and Germany would only be able to reduce their taxes by purchasing from Irish and German registered companies (tax based on Irish costs - Irish sales) which would mean that they would be incentivised to buy from these rather than UsTech global corp.

theptip 9y ago
A problem with this solution -- as a US company without a German subsidiary (but as with most online businesses, with German customers), do I now have to pay taxes in Germany? If the former, the logical conclusion of that approach is that every startup has to pay taxes in all 195 countries of the world, as soon as they open for business. This could be on $0.01 of ad revenue. If the latter, I'm strongly incentivized to move my labor from the high-tax countries to the low-tax ones, which will push business out of the former. (I.e. at the margin, if I have a small office in Germany, it's probably not worth my while to keep it open since it incurs a massive tax liability).
- aembleton 9y ago
  No, you wouldn't have to pay taxes in Germany. But, if you sell to German businesses, such as providing hosting services then they wouldn't be able to deduct that as costs when calculating their taxes. They would only be able to deduct German costs, defined as the employment of someone with a NI number (or German equivalent) or another business with a tax number.
  - taysic 9y ago
    So you disincentivize using any services in countries other than the one your subsidiary is in? They would have to be significantly better than other options to be worth not being able to deduct those costs.

zerebubuth 9y ago

I thought that a necessary part of the "Double Irish with a Dutch Sandwich" was that a company in a tax haven can license IP to its subsidiary at an arbitrary price. Therefore, that company can offset any profit its own subsidiary might make. To do this requires two things: 1. That the license arrangement with the subsidiary is unique to that subsidiary. 2. That the license fee can be set to any value at any time. For more concrete assets, for example a bag of coffee beans, it's easier to see when a parent company charges a subsidiary a different amount than the market rate. However, there is no comparable market for IP, so it's harder to see what a "fair" price for a copyright, trademark or patent might be. One option might be to tax all IP licenses at the corporate tax rate. Another would be to adopt a "most favoured licensee" rule, requiring all licensees to pay whatever the cheapest rate was (or taxing the difference).

elgenie 9y ago
The Double Irish + Dutch is merely the most extreme example of the transfer pricing morass (and will go away in a few years). There are a bunch of other funky methods described in the wikipedia article I posted on the topic; defining and proving in court that a particular method of determining "market rate" was unreasonably chosen and incorrect enough to be worth the trouble is quite involved and, in normative terms, a big waste of economic potential (brain power on both sides is devoted to … that, rather than something useful). As for "taxing IP licenses at the corporate tax rate", that seems nonsensical given that it's profit (aka value added) that is subject to tax, not revenue.
- zerebubuth 9y ago
  I wasn't suggesting that anyone define or prove a "market rate" for intangibles. I agree that would be a waste of time. The reason I mentioned it was as a contrast to IP licenses, for which no market exists. Profits are subject to tax, as are people's incomes, consumer sales, assets such as cars, TVs and homes, and goods which cross customs borders. I was suggesting that another tax (or duty) be created to discourage the offsetting of profits using IP licenses.