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I'll be interested to see how this is implemented in practice. The way this kind of tax avoidance works is for subsidiaries in low-tax jurisdictions to charge t

I'll be interested to see how this is implemented in practice. The way this kind of tax avoidance works is for subsidiaries in low-tax jurisdictions to charge the ones incorporated in higher tax jurisdictions high fees for things like access to IP. This "artificially" inflates the profits for the low-tax company and depresses the profits for the high-tax company. Artificially is in quotes because it's hard to establish a legal rule to determine what is and isn't fair pricing for IP and services which is why I'm interested in seeing how this will be enforced. Edit: the reason that so many of these were based in Ireland was because until 2015 Ireland won't have rules on this sort of intra-group "transfer pricing" transaction. You can't do this between two US or a UK and a US company because those countries have rules that prevent it.

grey-area 12y ago
I suppose one way to clamp down on any such activities would be to simply class all payments to subsidiaries in low-tax jurisdictions as qualifying for this extra tax. That would avoid any arguments over what exactly is a fair price for certain services or whether certain services/fees qualify.
- Mvandenbergh 12y ago
  You couldn't do that for payments between companies within the EU because of existing treaty obligations. Not to mention, how do you determine what counts as low tax? The UK a has substantially lower headline corporate tax rate than the US. That doesn't reflect the effective rate though.
- notahacker 12y ago
  And intra-group licensing costs and royalties should also be disregarded as costs for tax purposes, since there's no real or opportunity cost to allowing one part of the group to use another's IP except for the cost savings that can be generated by shifting the tax burden.
  - sokoloff 12y ago
    Imagine a scenario where McDonalds corp has both company owned stores and franchisee-owned stores and that both are charged the same, substantial amount for the use of McDs trademarks. Should the McDs owned store be wildly more profitable in the eyes of the tax authorities? Suppose that the franchisee and the company store both use the McDs supply chain to buy ingredients. Are those costs "real enough to count"? If not, why not? If so, why aren't the trademarks "real enough"? If the trademarks don't count intra-group, what if the trademarks are only licensed (for $1) subject to the use of the company supply chain for ingredients? This serves a legitimate purpose of protecting the trademark and giving the customers a uniform experience at all stores, or it serves as an underhanded tax dodge, depending on which reporter is writing the article... I'm merely suggesting that trying to author precise legislation around this area is inherently a slippery slope and "intra group IP licenses are barred" isn't going to be perfectly effective. Lawmakers have a legitimately hard problem to solve and their "attackers" have a lot at stake to find/exploit intended or unintended loopholes.
    - notahacker 12y ago
      Sure, the McDs-owned store generates substantially more profit for its ultimate owner (the shareholders of MCD) than the franchise does for the franchisee, so I can't see any logical reason why McDonalds or its subsidiaries shouldn't pay more tax on that store than the franchisee. Of course there will still be loopholes. But the left hand of the business paying royalties to the (tax-advantaged) right falls under the heading of palpably ridiculous, especially when unlike the hypothetical McDs example the royalty rates are set by the tax planning division of an accountancy rather than the market.
      - sokoloff 12y ago
        My example was meant to consider only the tax generated as a result of the activities of the retail fast-food location. Of course corporate McDs will pay (the same) tax on the IP-related and/or supply chain profits generated by either store.
jimbokun 12y ago
How about simply banning the practice of charging for access to IP when the two corporations are wholly owned by the same parent corporation? The problem arises when one corporate entity is allowed to pose as N corporate entities trading among each other, entirely for the purpose of accounting shenanigans. What am I missing?

grey-area 12y ago

I suppose one way to clamp down on any such activities would be to simply class all payments to subsidiaries in low-tax jurisdictions as qualifying for this extra tax. That would avoid any arguments over what exactly is a fair price for certain services or whether certain services/fees qualify.

Mvandenbergh 12y ago
You couldn't do that for payments between companies within the EU because of existing treaty obligations. Not to mention, how do you determine what counts as low tax? The UK a has substantially lower headline corporate tax rate than the US. That doesn't reflect the effective rate though.
notahacker 12y ago
And intra-group licensing costs and royalties should also be disregarded as costs for tax purposes, since there's no real or opportunity cost to allowing one part of the group to use another's IP except for the cost savings that can be generated by shifting the tax burden.
- sokoloff 12y ago
  Imagine a scenario where McDonalds corp has both company owned stores and franchisee-owned stores and that both are charged the same, substantial amount for the use of McDs trademarks. Should the McDs owned store be wildly more profitable in the eyes of the tax authorities? Suppose that the franchisee and the company store both use the McDs supply chain to buy ingredients. Are those costs "real enough to count"? If not, why not? If so, why aren't the trademarks "real enough"? If the trademarks don't count intra-group, what if the trademarks are only licensed (for $1) subject to the use of the company supply chain for ingredients? This serves a legitimate purpose of protecting the trademark and giving the customers a uniform experience at all stores, or it serves as an underhanded tax dodge, depending on which reporter is writing the article... I'm merely suggesting that trying to author precise legislation around this area is inherently a slippery slope and "intra group IP licenses are barred" isn't going to be perfectly effective. Lawmakers have a legitimately hard problem to solve and their "attackers" have a lot at stake to find/exploit intended or unintended loopholes.
  - notahacker 12y ago
    Sure, the McDs-owned store generates substantially more profit for its ultimate owner (the shareholders of MCD) than the franchise does for the franchisee, so I can't see any logical reason why McDonalds or its subsidiaries shouldn't pay more tax on that store than the franchisee. Of course there will still be loopholes. But the left hand of the business paying royalties to the (tax-advantaged) right falls under the heading of palpably ridiculous, especially when unlike the hypothetical McDs example the royalty rates are set by the tax planning division of an accountancy rather than the market.
    - sokoloff 12y ago
      My example was meant to consider only the tax generated as a result of the activities of the retail fast-food location. Of course corporate McDs will pay (the same) tax on the IP-related and/or supply chain profits generated by either store.

jimbokun 12y ago

How about simply banning the practice of charging for access to IP when the two corporations are wholly owned by the same parent corporation? The problem arises when one corporate entity is allowed to pose as N corporate entities trading among each other, entirely for the purpose of accounting shenanigans. What am I missing?