4 ms·

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

by 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.
- MarkMc 13y ago
  Yes, Hollywood and Silicon Valley executives are tied to California because that's where the jobs are. But people who rely only on investment income (ie. retired people and the very rich) can often be found moving jurisdiction to avoid tax. A corporation may exist only on paper but the value that it creates comes from a mixture of social, human and physical capital - and that occurs at a particular place. Facebook could move its place of incorporation to Delaware overnight, but the place where it 'adds value' is rooted in California. Regarding the widget manufacturer: Yes, in some cases a transfer profit of 20% will be sufficient to wipe out all reported profit in the high-tax jurisdiction. But how common would that be? If Apple were to able to inflate the cost of manufacturing an iPhone by 10% there would still be plenty of US profit left to tax. If Ford could inflate the cost of all the components it imports from low-tax jurisdictions (not high-tax ones like Japan) by 10% would it have a significant effect on reported profit? You are right about the software licences - I made a similar point here: https://news.ycombinator.com/item?id=5731680 https://news.ycombinator.com/item?id=5731680 If the software was developed in Ireland then the UK shouldn't be able to tax the profit.
  - AnthonyMouse 13y ago
    >Yes, Hollywood and Silicon Valley executives are tied to California because that's where the jobs are. That's where the jobs are because that's where the employees are and vice versa. There is a reason you don't see many software companies setting up shop in Des Monies and trying to attract engineers with the low cost of living. >Facebook could move its place of incorporation to Delaware overnight, but the place where it 'adds value' is rooted in California. That's what I'm saying. You should tax the things that "add value" (employees, real estate that implies use of local infrastructure, etc.) rather than trying to tax profit, because profit doesn't have a country. The problem with the alternative is that just because your country contains something that "adds value" doesn't mean a corporate entity in your country can make any profit from it. Suppose your country has great engineers. If the engineers are the valuable commodity and the market is efficient then they'll get paid close to the value they provide to the company and leave little as profit for the corporation. You can have a company which is providing huge value to the economy but is having to pay its employees the lion's share of that revenue in order to retain them. That company won't have very high profit margins because if it kept more of the profits for itself its engineers would quit and join a competitor that pays better. The only way that doesn't happen is if the company has something its competitors don't (strong trademarks, trade secrets, some unusually valuable copyrights or patents, etc.) But then the value of that non-geographically-dependent asset (which is all that keeps the company from having razor thin margins) can be whisked off to an entity in a low tax jurisdiction, leaving the entity within the higher tax jurisdiction in the position of having extremely small margins again while the profits accumulate in the entity associated with the movable asset. >Regarding the widget manufacturer: Yes, in some cases a transfer profit of 20% will be sufficient to wipe out all reported profit in the high-tax jurisdiction. But how common would that be? You're asking how common it is for a company to have a less than 10% profit margin? I would say that covers most companies. The primary exceptions (which Apples clearly falls into) are the companies that sell products covered by high value copyrights, patents, trademarks, etc. Which leads to what we've been discussing with software licenses. The problem simply is that you can't have significantly higher taxes than the next country on anything that can be easily removed from your jurisdiction, or that is exactly what will happen. And the profits of international corporations fall into that category.

by MarkMc 13y ago

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.

MarkMc 13y ago
Yes, Hollywood and Silicon Valley executives are tied to California because that's where the jobs are. But people who rely only on investment income (ie. retired people and the very rich) can often be found moving jurisdiction to avoid tax. A corporation may exist only on paper but the value that it creates comes from a mixture of social, human and physical capital - and that occurs at a particular place. Facebook could move its place of incorporation to Delaware overnight, but the place where it 'adds value' is rooted in California. Regarding the widget manufacturer: Yes, in some cases a transfer profit of 20% will be sufficient to wipe out all reported profit in the high-tax jurisdiction. But how common would that be? If Apple were to able to inflate the cost of manufacturing an iPhone by 10% there would still be plenty of US profit left to tax. If Ford could inflate the cost of all the components it imports from low-tax jurisdictions (not high-tax ones like Japan) by 10% would it have a significant effect on reported profit? You are right about the software licences - I made a similar point here: https://news.ycombinator.com/item?id=5731680 https://news.ycombinator.com/item?id=5731680 If the software was developed in Ireland then the UK shouldn't be able to tax the profit.
- AnthonyMouse 13y ago
  >Yes, Hollywood and Silicon Valley executives are tied to California because that's where the jobs are. That's where the jobs are because that's where the employees are and vice versa. There is a reason you don't see many software companies setting up shop in Des Monies and trying to attract engineers with the low cost of living. >Facebook could move its place of incorporation to Delaware overnight, but the place where it 'adds value' is rooted in California. That's what I'm saying. You should tax the things that "add value" (employees, real estate that implies use of local infrastructure, etc.) rather than trying to tax profit, because profit doesn't have a country. The problem with the alternative is that just because your country contains something that "adds value" doesn't mean a corporate entity in your country can make any profit from it. Suppose your country has great engineers. If the engineers are the valuable commodity and the market is efficient then they'll get paid close to the value they provide to the company and leave little as profit for the corporation. You can have a company which is providing huge value to the economy but is having to pay its employees the lion's share of that revenue in order to retain them. That company won't have very high profit margins because if it kept more of the profits for itself its engineers would quit and join a competitor that pays better. The only way that doesn't happen is if the company has something its competitors don't (strong trademarks, trade secrets, some unusually valuable copyrights or patents, etc.) But then the value of that non-geographically-dependent asset (which is all that keeps the company from having razor thin margins) can be whisked off to an entity in a low tax jurisdiction, leaving the entity within the higher tax jurisdiction in the position of having extremely small margins again while the profits accumulate in the entity associated with the movable asset. >Regarding the widget manufacturer: Yes, in some cases a transfer profit of 20% will be sufficient to wipe out all reported profit in the high-tax jurisdiction. But how common would that be? You're asking how common it is for a company to have a less than 10% profit margin? I would say that covers most companies. The primary exceptions (which Apples clearly falls into) are the companies that sell products covered by high value copyrights, patents, trademarks, etc. Which leads to what we've been discussing with software licenses. The problem simply is that you can't have significantly higher taxes than the next country on anything that can be easily removed from your jurisdiction, or that is exactly what will happen. And the profits of international corporations fall into that category.