4 ms·

If you are dealing with physical goods then establishing where a taxable profit was made is relatively straightforward. For tech companies which only distribute

by jcfrei 9y ago

If you are dealing with physical goods then establishing where a taxable profit was made is relatively straightforward. For tech companies which only distribute their services over the internet it's much more difficult to determine (from an accounting perspective) which parts of your costs belong to which revenue streams and where exactly a profit was made (geographically).

krutzger 9y ago
This is exactly what it is. This will allow EU to tax virtual goods.
derriz 9y ago
Is it really relatively more straightforward with physical goods? With modern supply chains, components and raw materials are flying around the globe in a complex dance before they end up on your local store shelf or in an amazon warehouse. I believe there is decades of international tax case law which attempts to cover this with transfer pricing rules. Often it seems tech/IT is simpler. A software engineering team in California write the code, then it's clear that nearly all of the value was created in California. It's fairly easy to price the cost of foreign datacenters for cloud hosting.
- doktrin 9y ago
  > Often it seems tech/IT is simpler. A software engineering team in California write the code, then it's clear that nearly all of the value was created in California. It's fairly easy to price the cost of foreign datacenters for cloud hosting. I don't follow. Just because the software was written in California doesn't mean they don't have customers and derive profit from other regions. Likewise, sales tax on physical goods is applied at the point of sale, not manufacturing.
  - derriz 9y ago
    I should have made clear that I was discussing corporation tax where the principle is that where the value is created determines how the generated profit should be subjected to tax. This is the principle behind the current international tax system for corporations, I believe. But actually my point was really to try to refute the intuitively attractive idea that intangibles are more difficult to tax than physical goods within this framework. Taxing consumer goods is extremely complex these days because of global supply chains and vertical integration. On the other hand in many cases, services like legal work, consulting, etc. are simple to tax under this system despite the fact that intangibles are being traded.
    - jcfrei 9y ago
      Not intangibles in general but websites in particular make it very difficult. I think there's just not detailed enough reporting available to associate revenue and costs. And if you would create much more extensive reporting frameworks you would likely put a huge burden on small companies. Let's take the facebook news feed as an example. Loading just the page might cause requests from CDNs in three different countries. Then the frontend might have been written in the UK and the backend in the US. The ads manager for the ad you just clicked worked in Germany. I doubt any modern IT company can track expenses on that level of detail. And associating costs with revenues is non-trivial either: Did the front end contribute to the revenue generated with the ad click? Did the backend or just the work of the ads manager in Germany? There's so much leeway for companies right now. IT companies like Google and Facebook have one single product (ads) that generates most of their revenues. The country where the revenue occurred can be easily established (eg. an ad sold to a German company). But the costs to create this product (the whole platform) have been accrued all over the world. Without intimate knowledge of the corporate structure and the technical setup companies can basically tell you any story about where these costs were incurred.
- alkonaut 9y ago
  It’s not. The IKEA example is having the business in individual countries pay “royalties” to a company that in turn sets up whatever Dutch/Irish loophole is needed to not pay much taxes. BUT - and this isn’t irrelevant - even though IKEA might not pay much taxes on corporate profits in (say) Sweden, Selling physical goods in physical stores still produces value. They manufacture in Sweden about as much as they sell in Sweden. So overall, it’s much easier to accept the near zero tax. The corporations whose large profits and zero taxes annoy people are the online giants.
  - merb 9y ago
    > The corporations whose large profits and zero taxes annoy people are the online giants. well SAP is probably one of them, but I never heard that somebody is annoyed by their tax policy. I never heard anything said against them and I'm pretty sure that they follow the same scheme than Apple, Google, Facebook, etc. (P.S. I'm german)
    - pavlov 9y ago
      Where do you get that? SAP's 2017 financial statement says the company paid 970 million euros in income tax on a profit of about 5 billion €: https://www.sap.com/integrated-reports/2017/en/primary-consolidated-financial-statements.html https://www.sap.com/integrated-reports/2017/en/primary-conso...
      - TomMarius 9y ago
        Yes, but (mostly, except for VAT) in Germany, not in the countries where they sold the software.
        pavlov 9y ago
        AFAIK, most of SAP's business goes through local resellers and consultants. They pay taxes in their countries. The iPhone App Store is a completely different animal from SAP's consulting-heavy sales model, and it seems understandable that the EU commission is interested only in the former.
- cdancette 9y ago
  What about the salesman in Europe ? Or you consider that code is the only value in a company?
  - derriz 9y ago
    I’m on my phone now so excuse sloppiness in my reply. Also I’m the very opposite of a tax lawyer but my understanding is that the salesman’s added value is determined by transfer pricing rules. It works as if he bought the good or service from the Californian developers at a certain price. The profit is then calculated in each country deducting local costs and taxed accordingly in each country. The tricky bit is in agreeing the transfer price but there are decades of complex internationally agreed rules to determine a price if the transfer isn’t at “arms length” - for example between related subsidiaries. The picture is muddied by the weird US tax rule that allows companies to defer paying their US split of the corporation tax by keeping the cash out of the US. But the tax is due - this is why the US authorities were aghast at the EU’s Apple ruling. It was viewed as a European raid on money that was theirs (the US government’s) to tax.
- gaius 9y ago
  A software engineering team in California write the code, then it's clear that nearly all of the value was created in Californi Code by itself is valueless. If the code is to show an ad then the value is created when and where is ad is viewed.
EggsOnToast 9y ago
I think there's a second angle to this, which is that the assumption in your example is that the tech company is the one distributing the good within a particular country. There's an argument to be made that, unless the company has hardware housed in the nation, the transaction equally resembles someone crossing the border to purchase a good and then coming back across.

by jcfrei 9y ago

krutzger 9y ago

This is exactly what it is. This will allow EU to tax virtual goods.

derriz 9y ago

Is it really relatively more straightforward with physical goods? With modern supply chains, components and raw materials are flying around the globe in a complex dance before they end up on your local store shelf or in an amazon warehouse. I believe there is decades of international tax case law which attempts to cover this with transfer pricing rules. Often it seems tech/IT is simpler. A software engineering team in California write the code, then it's clear that nearly all of the value was created in California. It's fairly easy to price the cost of foreign datacenters for cloud hosting.

doktrin 9y ago
> Often it seems tech/IT is simpler. A software engineering team in California write the code, then it's clear that nearly all of the value was created in California. It's fairly easy to price the cost of foreign datacenters for cloud hosting. I don't follow. Just because the software was written in California doesn't mean they don't have customers and derive profit from other regions. Likewise, sales tax on physical goods is applied at the point of sale, not manufacturing.
- derriz 9y ago
  I should have made clear that I was discussing corporation tax where the principle is that where the value is created determines how the generated profit should be subjected to tax. This is the principle behind the current international tax system for corporations, I believe. But actually my point was really to try to refute the intuitively attractive idea that intangibles are more difficult to tax than physical goods within this framework. Taxing consumer goods is extremely complex these days because of global supply chains and vertical integration. On the other hand in many cases, services like legal work, consulting, etc. are simple to tax under this system despite the fact that intangibles are being traded.
  - jcfrei 9y ago
    Not intangibles in general but websites in particular make it very difficult. I think there's just not detailed enough reporting available to associate revenue and costs. And if you would create much more extensive reporting frameworks you would likely put a huge burden on small companies. Let's take the facebook news feed as an example. Loading just the page might cause requests from CDNs in three different countries. Then the frontend might have been written in the UK and the backend in the US. The ads manager for the ad you just clicked worked in Germany. I doubt any modern IT company can track expenses on that level of detail. And associating costs with revenues is non-trivial either: Did the front end contribute to the revenue generated with the ad click? Did the backend or just the work of the ads manager in Germany? There's so much leeway for companies right now. IT companies like Google and Facebook have one single product (ads) that generates most of their revenues. The country where the revenue occurred can be easily established (eg. an ad sold to a German company). But the costs to create this product (the whole platform) have been accrued all over the world. Without intimate knowledge of the corporate structure and the technical setup companies can basically tell you any story about where these costs were incurred.
alkonaut 9y ago
It’s not. The IKEA example is having the business in individual countries pay “royalties” to a company that in turn sets up whatever Dutch/Irish loophole is needed to not pay much taxes. BUT - and this isn’t irrelevant - even though IKEA might not pay much taxes on corporate profits in (say) Sweden, Selling physical goods in physical stores still produces value. They manufacture in Sweden about as much as they sell in Sweden. So overall, it’s much easier to accept the near zero tax. The corporations whose large profits and zero taxes annoy people are the online giants.
- merb 9y ago
  > The corporations whose large profits and zero taxes annoy people are the online giants. well SAP is probably one of them, but I never heard that somebody is annoyed by their tax policy. I never heard anything said against them and I'm pretty sure that they follow the same scheme than Apple, Google, Facebook, etc. (P.S. I'm german)
  - pavlov 9y ago
    Where do you get that? SAP's 2017 financial statement says the company paid 970 million euros in income tax on a profit of about 5 billion €: https://www.sap.com/integrated-reports/2017/en/primary-consolidated-financial-statements.html https://www.sap.com/integrated-reports/2017/en/primary-conso...
    - TomMarius 9y ago
      Yes, but (mostly, except for VAT) in Germany, not in the countries where they sold the software.
      - pavlov 9y ago
        AFAIK, most of SAP's business goes through local resellers and consultants. They pay taxes in their countries. The iPhone App Store is a completely different animal from SAP's consulting-heavy sales model, and it seems understandable that the EU commission is interested only in the former.
cdancette 9y ago
What about the salesman in Europe ? Or you consider that code is the only value in a company?
- derriz 9y ago
  I’m on my phone now so excuse sloppiness in my reply. Also I’m the very opposite of a tax lawyer but my understanding is that the salesman’s added value is determined by transfer pricing rules. It works as if he bought the good or service from the Californian developers at a certain price. The profit is then calculated in each country deducting local costs and taxed accordingly in each country. The tricky bit is in agreeing the transfer price but there are decades of complex internationally agreed rules to determine a price if the transfer isn’t at “arms length” - for example between related subsidiaries. The picture is muddied by the weird US tax rule that allows companies to defer paying their US split of the corporation tax by keeping the cash out of the US. But the tax is due - this is why the US authorities were aghast at the EU’s Apple ruling. It was viewed as a European raid on money that was theirs (the US government’s) to tax.
gaius 9y ago
A software engineering team in California write the code, then it's clear that nearly all of the value was created in Californi Code by itself is valueless. If the code is to show an ad then the value is created when and where is ad is viewed.

EggsOnToast 9y ago

I think there's a second angle to this, which is that the assumption in your example is that the tech company is the one distributing the good within a particular country. There's an argument to be made that, unless the company has hardware housed in the nation, the transaction equally resembles someone crossing the border to purchase a good and then coming back across.