4 ms·

Internationally, the laws need to be changed. All the major players are using Ireland, Bahamas, Cayman Islanda, et al, as avoidance schemes. The firms try to ta

Internationally, the laws need to be changed. All the major players are using Ireland, Bahamas, Cayman Islanda, et al, as avoidance schemes. The firms try to take advantage of every legal loophole, even if in morally grey areas, because their competitors are also all doing so. Really, the major OECD players need to get together and figure out a way to stop the tax loophole arbitrage. Although the tax havens have no incentive to do so.

AnthonyMouse 13y ago
>Really, the major OECD players need to get together and figure out a way to stop the tax loophole arbitrage. It's really a domestic political problem. The source of the problem is that you're attempting to tax something called "profit" in the context of an international corporation. Profit means revenues minus costs. The problem then becomes obvious: The corporation's executives will strive to report more of the international operation's costs in the subsidiary in the higher tax jurisdiction, and to report more of its revenues in the lower tax jurisdiction. So, you say, make them report things accurately. But what does that even mean? If a company produces a product for internal use in one country and exports it to another, what is the "accurate" price to be reported as revenue to one subsidiary and cost to another? Is it the price that the item would cost at retail, or the price that it would cost if purchased in volume, or the cost of the raw materials used to produce it, or what? No matter which you choose, companies will arrange their affairs so that it benefits them. If the price is set at the actual cost of production then subsidiaries in high tax jurisdictions will be found selling everything they produce through subsidiaries in lower tax jurisdictions and eliminating all of their profits that way (minimize taxable revenues). If the transfer price is allowed to include a nontrivial amount of profit then subsidiaries in high tax jurisdictions will be found buying everything they use at a premium through their foreign sister companies in lower tax jurisdictions and eliminating all their profits that way (maximize deductions). The problem is that the entire concept of allocating profits by jurisdiction in an international supply chain owned entirely by a single entity is just totally unworkable. The profit belongs to the entire supply chain; in arms length negotiations the allocation of profit to each component would be determined by negotiating skill. And no matter what value you place on a transaction, corporations can rearrange their affairs to take advantage of that valuation, and it will be profitable for them to do so even if it costs $95,000,000 to save $100,000,000 in taxes. The solution is to stop trying to allocate profits and just tax something else. Which is why it's a domestic political problem: People don't want to hear that. They want to imagine that corporations can pay their taxes for them and, as if by magic, this will get everyone else out of having to pay for the government services they want provided. It's totally possible to tax international corporations, but you can't do it by trying to tax corporate profits. If you want to tax a corporation that makes use of government services and your jurisdiction's people when it produces value, tax real property or labor. If you want to tax them when they make money selling to your population, tax sales. If you want to tax investors, tax investment income. Corporations aren't humans. If you ever did manage to extract tax revenue based on corporate profits, it would inevitably come out of the pockets of one of those groups in any event. Taxes have to be paid by somebody.
- jacques_chester 13y ago
  To add to this, most tax relies on a nexus between the country and the legal personality being taxed. Taxes of profits are particularly weak when a company operates in multiple countries. So instead you pick taxes which can't easily be avoided. The classics are property taxes, sales taxes, payroll taxes, tariffs (ugh) -- anything where there is an unavoidable, physically local transaction.
- MarkMc 13y ago
  The problem with taxing people instead of profit is that it is easier for a person to move to a low-tax jurisdiction than is is for a company to move the place where it adds value. I'm not convinced that allocating profits by jurisdiction is unworkable. You ask, "If a company produces a product for internal use in one country and exports it to another, what is the 'accurate' price to be reported as revenue to one subsidiary and cost to another?". My answer is, "The price an independent supplier would have charged for the same quantity". Now I agree there is some wiggle room here, but only up to a point. If the average profit margin in the widget industry is 10%, your widget subsidiary might be able to book a transfer profit of say 20%, but not 200%.
  - AnthonyMouse 13y ago
    >The problem with taxing people instead of profit is that it is easier for a person to move to a low-tax jurisdiction than is is for a company to move the place where it adds value. What makes you think that? Here's one example: California has some of the highest taxes in the U.S, but everyone in Silicon Valley and Hollywood making big money still lives there. Why don't all of those people leave and move to Texas or Nevada to take advantage of lower personal income and sales taxes? It's far easier for the corporation to "move" because the corporation only exists on paper. It can incorporate and hold its trademarks and copyrights in Delaware or an offshore subsidiary even though its headquarters is in California, etc. > If the average profit margin in the widget industry is 10%, your widget subsidiary might be able to book a transfer profit of say 20%, but not 200%. But they don't need 200%. They only need 20%, which when applied systematically is enough to erase the 10% profit margin they might have made in the high tax jurisdiction. There is also the matter of what an "independent supplier" would actually be charging. Suppose the international operation decided that it would like to close all of its offices in the UK and stop doing business there, but continue selling software licenses in bulk to third party UK distributors who come to do business with it at its headquarters in Ireland. In that relationship the international operation is an independent supplier, but they have all the power. The third party distributors have no other source for licenses, but the international corporation has a large variety of willing distributors, so it can force them to sell at razor-thin margins in the UK and claim all the profits for itself in Ireland. What you see them doing is largely what you would see if they were independent entities.

AnthonyMouse 13y ago

>Really, the major OECD players need to get together and figure out a way to stop the tax loophole arbitrage. It's really a domestic political problem. The source of the problem is that you're attempting to tax something called "profit" in the context of an international corporation. Profit means revenues minus costs. The problem then becomes obvious: The corporation's executives will strive to report more of the international operation's costs in the subsidiary in the higher tax jurisdiction, and to report more of its revenues in the lower tax jurisdiction. So, you say, make them report things accurately. But what does that even mean? If a company produces a product for internal use in one country and exports it to another, what is the "accurate" price to be reported as revenue to one subsidiary and cost to another? Is it the price that the item would cost at retail, or the price that it would cost if purchased in volume, or the cost of the raw materials used to produce it, or what? No matter which you choose, companies will arrange their affairs so that it benefits them. If the price is set at the actual cost of production then subsidiaries in high tax jurisdictions will be found selling everything they produce through subsidiaries in lower tax jurisdictions and eliminating all of their profits that way (minimize taxable revenues). If the transfer price is allowed to include a nontrivial amount of profit then subsidiaries in high tax jurisdictions will be found buying everything they use at a premium through their foreign sister companies in lower tax jurisdictions and eliminating all their profits that way (maximize deductions). The problem is that the entire concept of allocating profits by jurisdiction in an international supply chain owned entirely by a single entity is just totally unworkable. The profit belongs to the entire supply chain; in arms length negotiations the allocation of profit to each component would be determined by negotiating skill. And no matter what value you place on a transaction, corporations can rearrange their affairs to take advantage of that valuation, and it will be profitable for them to do so even if it costs $95,000,000 to save $100,000,000 in taxes. The solution is to stop trying to allocate profits and just tax something else. Which is why it's a domestic political problem: People don't want to hear that. They want to imagine that corporations can pay their taxes for them and, as if by magic, this will get everyone else out of having to pay for the government services they want provided. It's totally possible to tax international corporations, but you can't do it by trying to tax corporate profits. If you want to tax a corporation that makes use of government services and your jurisdiction's people when it produces value, tax real property or labor. If you want to tax them when they make money selling to your population, tax sales. If you want to tax investors, tax investment income. Corporations aren't humans. If you ever did manage to extract tax revenue based on corporate profits, it would inevitably come out of the pockets of one of those groups in any event. Taxes have to be paid by somebody.

jacques_chester 13y ago
To add to this, most tax relies on a nexus between the country and the legal personality being taxed. Taxes of profits are particularly weak when a company operates in multiple countries. So instead you pick taxes which can't easily be avoided. The classics are property taxes, sales taxes, payroll taxes, tariffs (ugh) -- anything where there is an unavoidable, physically local transaction.
MarkMc 13y ago
The problem with taxing people instead of profit is that it is easier for a person to move to a low-tax jurisdiction than is is for a company to move the place where it adds value. I'm not convinced that allocating profits by jurisdiction is unworkable. You ask, "If a company produces a product for internal use in one country and exports it to another, what is the 'accurate' price to be reported as revenue to one subsidiary and cost to another?". My answer is, "The price an independent supplier would have charged for the same quantity". Now I agree there is some wiggle room here, but only up to a point. If the average profit margin in the widget industry is 10%, your widget subsidiary might be able to book a transfer profit of say 20%, but not 200%.
- AnthonyMouse 13y ago
  >The problem with taxing people instead of profit is that it is easier for a person to move to a low-tax jurisdiction than is is for a company to move the place where it adds value. What makes you think that? Here's one example: California has some of the highest taxes in the U.S, but everyone in Silicon Valley and Hollywood making big money still lives there. Why don't all of those people leave and move to Texas or Nevada to take advantage of lower personal income and sales taxes? It's far easier for the corporation to "move" because the corporation only exists on paper. It can incorporate and hold its trademarks and copyrights in Delaware or an offshore subsidiary even though its headquarters is in California, etc. > If the average profit margin in the widget industry is 10%, your widget subsidiary might be able to book a transfer profit of say 20%, but not 200%. But they don't need 200%. They only need 20%, which when applied systematically is enough to erase the 10% profit margin they might have made in the high tax jurisdiction. There is also the matter of what an "independent supplier" would actually be charging. Suppose the international operation decided that it would like to close all of its offices in the UK and stop doing business there, but continue selling software licenses in bulk to third party UK distributors who come to do business with it at its headquarters in Ireland. In that relationship the international operation is an independent supplier, but they have all the power. The third party distributors have no other source for licenses, but the international corporation has a large variety of willing distributors, so it can force them to sell at razor-thin margins in the UK and claim all the profits for itself in Ireland. What you see them doing is largely what you would see if they were independent entities.