The current state of tax law is that a billion dollar company pays almost no taxes but a million dollar company pays a lot. That can't be good for anyone (apart from the $1B company).
Are countries, simply put, afraid to put an end to tax schemes like this, because it would just mean that Ikea or Google would pack up and leave?
In an "odd" application of market-competition, that is precisely what happened. Countries where Google generally did business wanted to tax Google at some X. Then along came Ireland, or Google found Ireland, and saw that they could do some legal paperwork and pay Ireland's tax rate of X-Y instead of X in the "source" countries.
The point I'm making is that Google did pack up and leave, and it will happen again unless really drastic actions are taken against them. I don't think anyone wants to do that, at this point.
You either bully all countries from allowing loop holes such as this, even though they don't want to. Or you disallow Google from operating in your country if they don't pay taxes on the profit from "sales" you deem occurred in your country. Small countries that want/need that tax revenue from Google, even if it is X-Y, won't like it if you compel them into complying and causing Google to "pack up and leave". It also puts the "bullying" nature of whatever international body is tasked with enforcing this into light.
No they did not. There is a Google Spain and a Google France. They can't escape the Spanish law or the french law if they have an office in these countries, no matter where Google trully is incorporated, and there is an obvious reason why they have officies in these countries.
So what Google Spain and Google France do is that they pay huge fees to Google Ireland for the use of Google brand, so they never make a profit officially, then the money is ex filtrated from Google Ireland to tax havens.
But they did not leave Spain nor France.
If Apple sells an iPhone (developed in the US and built in China) to retailers in Paris, should they have to pay French income tax on the entire profit of the phone? Of course not, that's ridiculous, even if the retailer is an Apple subsidiary.
Neither they are developed in Ireland, but they chose to pay their tax there. Perhaps that's significant.
This is utter nonsense. The problem is US tax repatriation laws introduced during the Clinton administration that allow US companies to leave their profits offshore in countries such as Bermuda or the Cayman Islands. Since they are only taxable on repatriation to the US, they pay no tax on them. Instead, they pressure Congress to introduce 'one-off' tax amnesties that allow them to repatriate at a much lower rate. This problem could be solved tomorrow if US politicians rescinded those tax laws. Ireland has no legal right to tax those profits, since they are earned by parent US company e.g. Google US. Which is perfectly correct, since the foundation of most of those profits are the intellectual property created primarily by the parent company. Don't let US politicians pull the wool over your eyes that this is a problem over which they have no control. In case you're interested, here's a good article that gives more background: http://www.rollingstone.com/politics/news/the-biggest-tax-sc...
While I'm sure it can be minimized, the US doesn't have a particularly low corporate income tax rate.
> And if they paid that tax in the US [...] how would that help Spain and France?
Companies like Google not having to pay tax on revenues outside the US is essentially a government subsidy. One that creates a "slush fund" for US companies to acquire their European competition. We're essentially in a trade war, just that Europe hasn't realized it.
Except that "US companies" incorporated in Ireland aren't US companies. Can't European companies also incorporate in Ireland?
A company whose primary employees are in Europe and whose primary customers are in Europe can still be incorporated in Delaware and traded on the NYSE. These tax avoidance mechanisms aren't for "US companies," they only work if you're in practice an international company. A "European company" which is also in practice an international company could do the same by becoming nominally a "US company" without changing anything of consequence about their operations. Because international companies don't really care where they're incorporated.
The trade war isn't between US companies and European companies, it's between companies big enough to be "international" and everybody else.
Getting some stronger wording in the tax legislation on EU level should be doable, but of course the Netherlands would squirm a bit.
Maybe in order to do business in jurisdiction X, where "doing business" == "selling ads" in Google's case, you have to pay taxes to X.
How would that even work? The costs are actually costs.
Imagine it was actually a dozen different companies. One of them is in California and it develops software on contract, one is in Germany and it develops hardware on contract, one is in China and it manufactures hardware on contract, one is in Ireland and it has the original capital which it pays to the first three in exchange for copyrights, hardware designs and hardware, one is in Spain and it buys product/services from the Irish company and sells local advertising, etc.
It turns out the company with that owns the copyrights makes the most money. That's how it honestly works whether the companies are separate or not. If you made the Spanish company liable for taxes on the profits of the whole supply chain, every company in Spain that uses Google ads would owe taxes on the money paid to Google (and the same for anything they buy from anyone). In other words you would have enacted a sales tax. Which is fine, but isn't an income tax and isn't a tax on Google.
What you seem to want to do is to identify that the companies are actually owned by the same party and do something different in that case. But five seconds after you require that, they would separate. Specifically the company that exists in a jurisdiction that cares about that would become independent. You don't need to own the stock of a company to capture all of its profits when you're its only viable supplier. So now there is an independent contractor in Spain that pays Google Ireland for ad space and resells it for just enough money to pay its own bills and makes no profits.
The problem is fundamentally that income tax makes no sense across borders. People will move whatever it is you're taxing into the country with the lowest taxes if the cost of moving that thing is less than the cost of the taxes. The cost of moving profits is very small. You have to tax something which is harder to move, which is then no longer an income tax.
It kind of is, though, isn't it? The online ad market is theoretically super efficient - if the market clearing price for an ad is $1, and then you add a 10% sales tax, it no longer makes sense to bid / pay $1 for that ad, knowing that you will be out of pocket $1.10. Instead you would bid about 90-91 cents, knowing that it would get marked up to $1 with tax. Net effect is that Google only makes 90 cents on that ad instead of a dollar, even though they aren't directly paying the tax.
Not if you have to bid against people in other jurisdictions for the same ad spaces. Then the people in the taxing jurisdiction have to bid the market price or lose the auction to someone in another place that doesn't impose the tax. In theory this could have a negative impact on ad prices, but it isn't going to be anything like the entire amount of the tax.
I'm pretty sure you pay the entity in the country that you are located in, so the Montana rancher is paying Google USA. Basically, you need a corporate presence in most places in order to _sell_ to people in those places. People in Spain pay Google Spain to place ads _as far as I understand it_—I'm not an expert on EU tax regulations.
The actual value of Google is in its business concept, IPR and brand name, none of which are substantially developed in Europe.
I was arguing about the scheme that AnthonyMouse discussed. Also they can't recover all the other taxes "owed" to Spain by means of VAT.
AnthonyMouse > So now there is an independent contractor in Spain that pays Google Ireland for ad space and resells it for just enough money to pay its own bills and makes no profits.
If the VAT rate in Spain were higher than in Ireland the difference would stay in Spain. In that case marginal increse in the VAT rate would increase tax revenues, whereas and increase in income tax would not.
But right now VAT is higher in Ireland(23%) than in Spain(21%) and increasing the VAT rate can have sideffects on the economy as a whole.
I'm not sure how it would work. Corporate income taxes don't make much sense in itself of course. The profits could be taxed as cap gains and everyone would be happy - so long as companies weren't multinational.
The problem here is that a company may be making a huge profit in some country by using resources paid for by tax money in that country (such as roads, in the case of Uber) but due to licensing and the ownership structure, the company does little income in the country and no cap gains either because the owners are elsewhere.
The only solution to this problem if you do have corporate income tax is to establish how much profits Uber actually made in each country, and have the profits taxed correspondingly.
The problem is that's not how profit works. There is no "in each country" to calculate. They paid $15B to employees in 20 countries and then made $20B in revenue from 20 countries. There is then $5B of international profit, but how much of the profit belongs in each country is completely arbitrary. There is no objective reason that it should be where the software was developed vs. where the software is used vs. where the owner of the company lives etc.
The standard they try to use for these things is what would be negotiated in arms length transactions, i.e. as if each of the subsidiaries had separate ownership. So one entity pays $1000 to develop software, another can make $1200 in revenue if they buy the software, what price do they negotiate? It's ostensibly going to be something between $1000 and $1200, but whether it's $1020 or $1180 is down to the negotiating skill of the parties. Both numbers are completely reasonable and might be seen in actual transactions. But the difference determines where 90% of the total profits go! It's clearly then going to be quite plausible to arrange for the profits to end up where you want them, which is what happens.
Maybe what it all comes down to is that it makes more sense to tax transactions and charge corporations for services (e.g use of roads) that are tax funded.
To avoid doubly charging companies that do pay taxes for profits one could charge fees for use of infrastructure and count taxes collected against those fees.
Companies like Google and Uber that use public infrastructure could be charged for it, and unless they paid enough taxes they'd owe the difference.
How much of the internet infrastructure Google should finance, or how much the cost of Ubers road use is will be somewhat arbitrary of course, just like the current situation - which is the lesser evil comes down to whether one is more comfortable leaving arbitrary decisions for tax authority bureaucrats or enterprises.
The whole problem with taxes is that you want tax revenue but you don't actually want to tax anything because taxing things causes people to avoid doing them. That's why everybody wants corporate income tax -- who cares if we discourage "corporate profits"? The problem is what you really end up doing is discouraging corporate profits in your country, so the profits end up somewhere else instead.
The best possible tax seems to be to impose VAT on everything, so that the rate stays low because there is a broad tax base and you're not discouraging anything in particular very much.
Fees for infrastructure are the opposite of that. A 20% VAT makes the thing 20% more expensive, which isn't that bad. An infrastructure fee for what would otherwise have been zero cost makes the thing infinity percent more expensive. It's basically the worst case scenario.
So for example a high tax on network usage is basically going to kill YouTube (and every other streaming video service) because the amount of bandwidth it uses for the amount of revenue it generates would no longer be worth it. Then your total network usage has been cut by 80% which means you need to quintuple the fee to make the amount of revenue you were expecting and it quickly snowballs from there.
Tax ownership of assets.
It's rather difficult to hide that /someone/ owns a phone, a car, a house, some land. Tax the ownership of value, not it's transfer.
Globally you would see the impact of sales increase taxes most where the profit actually accumulates; assuming that those types of values are taxed properly. In practice I would imagine that this would be increasing taxes on ownership of 'financial instruments'.
I'm making this example up but it's the general process of Transfer Pricing. Tax authorities now make you justify the prices which is why Google negotiated a settlement with UK Chancellor George Osborne, his superbowl seats and job for his son were just coincidences.
The then prime minister and ex-finance minister of Luxembourg Jean-Claude Juncker is now EU Commision president. So either he is incompetent and did not know about this, or he was involved. He claims he is only incompetent.
With the EU leadership being corrupt or incometent, it is no wonder the big companies are dancing circles around the national tax authorities.
Well, it’s more like the EU can not do anything while the national authorities can veto them, and the national authorities still have the competence for that, and the right-populists in the EU are proposing even less power for the EU authorities.
There was this moment during the crisis where I think we could have moved forward with EU bonds, a proper banking union, increased EU budged and debt relief for Greece. But now we are stuck with a deteriorating status quo.
I blame Merkel for lack of leadership but maybe she just knows the limits of what she can push through.
In the United States, one of the biggest powers of the Federal government is its power to regulate interstate commerce. No one in the EU is willing to give it so much authority.
To be fair, if the US is the model, you can imagine why they wouldn't want that. I don't think the people who wrote the commerce clause were imagining federal micromanagement of local schools or the War on Drugs.
So even Germany is less integrated than the US on that. Even after 200 years of every closer integrations.
Other career politicians you should know: David Cameron, Boris Johnson, Hillary Clinton, Barack Obama, Angela Merkel, etc.
They do not have much of an own opinion they want to push – often they couldn’t care much, as both solutions would be okay for them.
So they vote for whatever polls or lobbies say is popular or profitable.
This isn’t necessarily bad – Merkel has been called at times the "walking infratest-dimap poll", specifically because she always pushed through whatever the people considered important according to polls. Kinda democracy, I guess.
But, in general, it’s nothing awkward, or special – in fact, it’s the way most of politics has been in the past decades.
And considering the alternatives of politicians that are still idealistic, which at the moment are only right-populists like Trump, Farage, Petry, Le Pen, I’m wondering if, for now, career politicians might not be the better solution.
Also seconding vmateixeira: Thanks for your research!
Then Google US and Apple US just have to wait for a tax amnesty in the US in order to bring back oversea un-taxed profits.
I've seen you post this several times. Do you have a source that I could read up on this?
The subsidiaries in the high tax jurisdictions then license the IP from the Bermuda entity which siphons off profits.
Without the IP cross licensing deals the French subsidiary would have access to Google's IP at no cost which would inflate their profits enormously. To offset this Google would need to build R&D centers in each market.
While either scenario would likely benefit France it wouldn't likely be beneficial to Google.
Likewise, it makes sense to loan money to your subsidiaries so they can grow. But making large, unnecessary loans of money from tax havens to sink your subsidiary's profitability doesn't sound honest.
Companies will end up in court when their definition of an arms-length price/interest rate is significantly higher than what the national tax authority considers to be reasonable. However, having worked in the offshore tax-haven unit in the Australia Taxation Office (I even went on a tax raid once), and then subsequently worked in tax policy for a few years, I don't think things clear cut with google (and others). I'm not even sure that transfer pricing and thin cap are particularly relevant issues.
In general, I think this issue is much bigger than a simple case of companies crossing the line on transfer pricing and thin cap rules. 'Tech capital' is extremely mobile; it can literally be moved from one country to another in a matter of hours. This creates strong incentives for countries to undercut each others' corporate tax rates to attract that capital. Tax havens (and Ireland) are extreme examples of this. The only way to extract any meaningful amount of tax from tech multinationals is through some kind of international agreement on minimum corporate tax rates (one that is ratified by countries representing a large enough proportion of the world economy). You'd also have to apply trade sanctions to any country, signatory or not, that goes below this minimum threshold.
In short, it's unlikely google and others will have to pay their 'fair share' of tax any time soon. This might sound defeatist, but I think countries will need to shift their tax burden on to less mobile (and therefore, more economically efficient) bases, such as domestic consumption and land.
> Companies will end up in court when their definition of an arms-length price/interest rate is significantly higher than what the national tax authority considers to be reasonable.
A second issue I see is that smaller countries will often see certain transactions as "at arms length", whereas larger ones (with higher corporate tax rates) will not. But if a multinational can produce valid evidence from, let's say, 3 different jurisdictions that a transaction is at arms length, this will often be accepted by the court as being at arms length. In most countries, the burden is on the tax authority to prove something is not at arms length.
So yes, countries are often screwing each other over. Add to that that each country wants to stop avoidance (loss of tax revenue), and at the same time attract investment (by granting fiscal deduction for special interest groups) and you end up with a big mess.
This whole tax game is essentially basic arbitrage within a complex framework.
“Google has paid €8.8 billion in fees to Bermuda,” S&D group MEP Peter Simon complained. [1]
The irony being that the current president of the European Commission, Jean-Claude Juncker, was Prime Minister of Luxembourg when his administration was organising the low tax environment. [2] [3]
And now the EU claims that "the Anti Tax Avoidance Package is part of the Commission's ambitious agenda for fairer, simpler and more effective corporate taxation in the EU." [4]
[1] http://www.euractiv.com/section/public-affairs/news/google-f...
[2] https://en.wikipedia.org/wiki/Jean-Claude_Juncker
[3] https://en.wikipedia.org/wiki/Luxembourg_Leaks
[4] http://ec.europa.eu/taxation_customs/taxation/company_tax/an...