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This is a good overview. I honestly don't understand how these IP transfers are legal and continue to be legal. In the example from this article if the Delawar

• meowkit 6y ago
  1) How does this get enforced? What stops Ireland, Camans, Monaco, or Luxembourg (note: I am not familiar with the most popular tax havens) from continuing to have low corporate tax rates? 2) How to prevent corporations from paying individuals/employees to manage property? Or giving them a cut?
  • yokaze 6y ago
    > 2) How to prevent corporations from paying individuals/employees to manage property? How should managing the property make them tax exempt? Do they transfer the ownership?
    • dsr_ 6y ago
      Let's say that BigCo wants to buy a $50M office building on the outskirts of the capital city of Taxis, where corporate owners of real estate are taxed at 8% of the market value of the property each year but individual owners are taxed at 1% per year. BigCo writes a contract with Jane Schmidt, a citizen of Taxis. BigCo will loan Jane $50M to buy an office building, and Jane will lease the building only to BigCo. At the end of thirty years, Jane will have paid back the loan via the payments that BigCo has made, including necessary maintenance (handled by a BigCo subsidiary) and insurance (handled by BigCo's main insurance company). BigCo will also pay all reasonable and actual legal fees arising from Jane's ownership of the building. The contract provides that at any three year boundary or in the event of Jane's death, BigCo can direct Jane or her estate to sell the building to an entity of BigCo's choosing; Jane will get a fee but owe the remainder of the sale price to BigCo. Jane is happy because she makes some money for the next three to thirty years. BigCo gets to avoid 7/8ths of the tax burden in exchange for a much smaller sum going to Jane. BigCo doesn't show the building as an asset but as a rent expense plus an income-generating loan. At the end of the contract, BigCo directs Jane to sell the office building to Steve Jones for the current market price of the building, Steve having a similar deal in place with another company.
      • a1369209993 6y ago
        > BigCo will loan Jane $50M to buy an office building, and Jane will lease the building only to BigCo. Jane is a corporate owner of [this particluar piece of] real estate, and is taxed at 8%. > The contract provides that at any three year boundary or in the event of Jane's death, BigCo can direct Jane or her estate to sell the building to an entity of BigCo's choosing Also (seperately from the previous bit), Jane doesn't actually own the building.
      • yokaze 6y ago
        First off, I agree with you on principle. I do think it is too prone for circumvention. Whatever criticism is thrown at you in detail, it can likely be adjusted in the contract accordingly. So, keeping that in mind, (and that IANAL) lets develop it further. I have trouble seeing that as being a legal contract, as all the rules are in favour/at will of the BigCo. I believe that renders such passages void in some jurisdictions. E.g. It is hard to claim that you can sell at market-rate, if there is no free market, since the buyer is at BigCo's choosing. Assuming it is legal, it leaves Jane completely at the risk of deprecation and the will of BigCo to make use of it, and leave Jane with the debt of the difference. Selling a property is usually accompanied by a property sale tax (at least in Europe). One of the reasons a lot of private people found companies to actually own their property. Worst problem though I see is, that BigCo is here at risk that there could be a regulatory change, which renders parts of the contract invalid, making Jane not only owner in name, but also in fact.
        • lumost 6y ago
          These contracts are private, as long as neither party seeks to break the deal - then no regulatory agency will intervene. Jane would be fighting a long battle with BigCo. In terms of economic bindings in the contract. It's possible to require Jane to have a nominal loan equal to the market value of the property due to BigCo. Jane would need to both claim ownership (hard), break out of the loan (harder), or go bankrupt.
          • yokaze 6y ago
            > These contracts are private, as long as neither party seeks to break the deal - then no regulatory agency will intervene. Not sure about the US, but in many parts of Europe, contracts are subject to law, and cannot override it. But new laws can override existing contracts. I assume it is the same in the US, because all US contracts I saw contained an "Invalid Clauses"-clause: https://www.lawinsider.com/clause/invalid-clauses https://www.lawinsider.com/clause/invalid-clauses Aren't there any rules on loans in the US too? To my knowledge, there are strict limitations as to bundling of services. > Jane would be fighting a long battle with BigCo. Or not. If the case is clear cut.
  • cletus 6y ago
    > What stops [tax havens] from continuing to have low corporate tax rates? Nothing. But if Apple has $100B (out of $300B), as an example, in revenue in the US then the US gets to tax 1/3 of their income. If other countries decline to do likewise, well that's their choice. But tax havens are a scourge. We've gone full Ayn Rand here where the people whose wealth was made possible by the stability and infrastructure in the countries they made that wealth in want to avoid at all costs paying for that stability and infrastructure. It's ludicrous and unsustainable. Eliminating transfer pricing (both IP and non-IP) is a way of avoiding this race to the bottom as globally mobile capital perpetually moves chasing the lowest tax rates and short-term incentives.
    • thaumasiotes 6y ago
      > But if Apple has $100B (out of $300B), as an example, in revenue in the US then the US gets to tax 1/3 of their income. That is already happening.
• yokaze 6y ago
  2. I would suggest to have the same tax for everyone, but make it (and rent) deductable to a certain degree, if it is for your primary residence . Ideally, it should be net-zero for people living there.
  • cletus 6y ago
    So real estate has a number of problems: 1. It's clearly used for money laundering and hiding money from hostile governments. In Europe, this is a huge factor in the London real estate market. 2. Cities die when people can't afford to live in them. This is exacerbated by restricting supply to simply park money. Often the ultra-wealthy buy a place where they'll spend 3 days a year because they like that place (eg NYC). In doing so, they're contributing to making that place worse. This behaviour should have a cost; 3. There are cities around the world that have pockets that are essentially vacant because of (2). Condos in Manhattan have a notoriously low occupancy rate. I've heard Tel Aviv has this issue as well. There are many others; 4. In many places it's more profitable tp produce (unoccupied) ultra-luxury property. A lot of the building in NYC is north of $4000/square foot. That's... insane. 5. Property taxes in NYC, as one example, are highly regressive. a $1m condo may have property tax of $1200/month. A $100m apartment may only incur $16k/month in property tax. The counterargument is that the more expensive apartment uses just as many services. Personally I think subsidizing ultra-luxury property is just bad. Some jurisdictions (eg Vancouver) have tried to punitively tax "non-working" real estate, which is to say real estate that sits vacant. I don't think this has had much impact and it's probably really easy to game (eg rent it out to a family member notionally). My philosophy is that: 1. Ultra-luxury properties are generally speaking bad for a city. They take up a disproportionate amount of space and tend to add nothing to the city. It's fine that they exist but we shouldn't be subsidizing their construction and continued existence; 2. Providing rental units for people who live in the city is a better use of capital than parking foreign money. As such, both parking money and foreign investment should be taxed at a higher rate. Local landlords are better than remote landlords (since those local landlords are part of the city). Personally I think that if you own property in NYC, for example, then the state and city of New York gets to tax your income as if you were a resident. LLCs to hold property are the obvious dodge so these need to be taxed punitively.
• thaumasiotes 6y ago
  > Profit apportionment. If 20% of your revenue comes from a particular state or country, that jurisdiction gets to tax 20% of your profit. There's already a local tax on revenue. Sales tax.
  • Retric 6y ago
    Sales tax isn’t collected on components of products. So an apple farm sells apples to a factory without any sales tax etc. Taxing on point of sale is very useful if you want to capture externalities, but it’s got minimal effect on the supply chain.
    • thaumasiotes 6y ago
      How is that relevant here? The notional problem consists of Apple Inc. selling an iPhone and then paying a royalty on the trade dress to Delawapple Inc. There is no supply chain involved, so it doesn't matter if the supply chain is unaffected. The proposal above is that California should get to assess taxes against Apple based on Apple's revenue from California. And they do. That's what a sales tax is.
      • gamblor956 6y ago
        As discussed in other comments, the notional problem doesn't actually exist. The article was simply wrong on the Delaware Loophole in general; it still works in a handful of small states but it hasn't worked in any respectably sized state for longer than most people on HN have been alive. Apple wouldn't get a California deduction for its "payment" of a "royalty" to Delawapple for an iPhone sold in California. It would get assessed a tax on the income it makes selling the iPhone to a buyer. Note also: sales tax is a tax owed by the buyer of a good, not the seller. It is simply collected by the seller because it is more efficient for the seller to handle sales tax remittances than for each of their customers to do so. It's less overall work, it's easier to audit, and the seller can simply send the collected amounts in with their other periodic tax payments.
        • 6y ago
• gamblor956 6y ago
  The tax strategy in the article (aka the "Delaware Loophole") doesn't actually work to avoid state taxes. In fact, the "Delaware Loophole" as it was called has not worked in most states for decades. (As another commenter noted: the sole example given of this loophole was a miserable failure. The Toys R US group ultimately ended up owing more money to South Carolina after its maneuver than it did before. https://casetext.com/case/geoffrey-inc-v-south-carolina-tax-comm https://casetext.com/case/geoffrey-inc-v-south-carolina-tax-.... ) Two reasons the "Delaware Loophole" doesn't work: 1) In most states, related companies are treated as a unitary group for tax purposes. (See for example, California.) This means that generally, intercompany transactions between the related companies are treated as not existing for tax purposes. 2) In states which don't have unitary group methods, they simply tax the IP lease itself on nexus grounds, as South Carolina did in the Toys R Us/Geoffrey case (Geoffrey LLC was a subsidiary of TRU that existed solely to lease the TRU IP). TRU's IP-expense deduction in South Carolina ended up being fairly small, after taking into account their low profits, so SC simply granted the deduction to TRU...and decided to tax Geoffrey on the IP lease on nexus grounds. Unfortunately for the subsidiary, they had no expenses apportionable to South Carolina (which is usually the case for IP holding companies), and so all of the lease was taxable in South Carolina. The TRU group ended up paying significantly more in taxes to South Carolina after attempting the Delaware loophole than it did doing things the honest way. (And this result was predictable from the very beginning based on the nexus laws even as they were back then, which is why companies don't do this within the U.S.) Edit: On your proposal #1: this is how income taxation generally works in the U.S. States already get to tax a company's income earned in the state, so long as (a) the company has a physical presence in the state or (b) isn't physically located in the state but does enough volume or revenue in the state to justify imposing tax. (See "nexus"). At least in the U.S., the real game is about how to apportion expenses to a state. Every state uses a different formula, and some, like CA, let taxpayers choose the formula most beneficial to them. (Note: apportionment is nothing like transfer pricing.) Outside of the U.S.: If a business earns 20% of its revenue from directly Country A, then taxability is not a transfer pricing issue, it's a tax treaty issue. But you presumably mean the following: a big (foreign) business sets up a smaller business locally, and "leases" that IP to the local subsidiary, reducing the profits (and thus tax) the smaller company pays to the local tax authority. In that case, there isn't really anything the local country can do, because the situation is no different than the case of Unrelated Local Company A licensing an IP from Big Company in Other Country B. Many countries wouldn't allow that sort of tax discrimination based on company ownership, and in the countries where it would be allowed, foreign investment would drop precipitously because it would be riskier and less profitable to do business in that country.