This at the same time happens frequently, but also some amount of intercompany shifts in profit are reasonable. Google Ireland might be the actual owner of the asset. Company ownership might be fuzzy as well - maybe foreign subsidiary is only partially owned by the parent and partially owned by another company. Drawing the line can be very hard. Do we make it so companies are not allowed to sell or transfer assets overseas?
Probably the best solution is a minimum tax worldwide. This reduces the incentives to shift profits around, since the tax rates are the same everywhere.
You are supposed to be able to prove that the deal between your different international entities is an arms-length agreement. That is to say that the revenue sharing agreement is similar to what would be negotiated between unrelated companies.
In order to do that you are supposed to be able to show evidence that the deal is similar to other deals in your industry and such.
I don’t know how Google would get away with a licence fee of 100% under those laws so I kind of doubt that that is what they have in place.
However, let’s say they have a 30/70 split with 70% going to the IP holder (Ireland company) and 30% going to the selling agent (USA company).
Now it’s in the best interest of the company to attribute as many of the expenses of providing the service to the USA company so that we can get its profit down to zero. The profit margin of the US company might be 0% (so no tax) while the profit margin of the Ireland company is near 100%.
What matters is that because the savings are potentially huge, your BigCo is incentivized to reduce that tax exposure and they've got the legal and accounting workforce to find that optimization.
This can be solved by placing a duty on large cross border IP fee transactions.
US is the country that's opposed to putting tariff on IP
You can see their filings here: https://core.cro.ie/e-commerce/company/112189
Google Ireland takes payment directly. Unless they've changed recently, all non-US adwords invoices are paid to here.
Repatriation to pay dividends is fairly moot, since they don't pay dividends. Maybe this is one of the reasons buybacks are preferred.
As for how the money gets to Ireland, most of Apple's non-US operations are subsidiaries of Apple Ireland. For illustration, there's this (somewhat outdated) graph of the revenue flows on wikipedia: https://upload.wikimedia.org/wikipedia/commons/a/a5/Apple%27...
You're right. I was wrong. There is no IP licensing payment from the US entity to Ireland.
IP licensing happens between 3rd party countries and Ireland. Irish tax law (to our great pride) gives IP licensing revenue tax exemption. It doesn't count as revenue for tax purposes. Once here, it can be transferred to a proper tax haven like Bermuda. Since its tax free, it doesn't matter that Ireland (like everyone) doesn't recognise the transaction to Bermuda as a legitimate expense. It didn't count as revenue anyway.
I guess that invoicing to Ireland is neither here nor there, just more convenient when the money needs to come here anyway.
Once the cash is in Bermuda, the game is done. The Bermuda company can hold it, buy shares, etc. This is why Apple (And MSFT) have moved all their IP to Ireland though.
https://en.wikipedia.org/wiki/Double_Irish_arrangement
Here's the good bit:
Without such IP, if Microsoft charged a German end-customer, say $100, for Microsoft Office, a profit of circa $95 (as the cost to Microsoft for copies of Microsoft Office is small) would be realised in Germany, and German tax payable. With such IP, Microsoft can additionally charge Microsoft Germany $95 in IP royalty payments on each copy of Microsoft Office, ensuring that its German profits are zero. The $95 is paid to the location in which the IP is legally housed. Microsoft would prefer to house this IP in a tax haven; however, higher-tax locations like Germany do not sign full tax treaties with tax havens, and would not accept the IP charged from a tax haven as deductible against German taxation. The Double Irish fixes this problem.[8][9]
The Double Irish enables the IP to be charged-out from Ireland, which has a large global network of full bilateral tax treaties.[g] The Double Irish enables the hypothetical $95, which was sent from Germany to Ireland, to be sent-on to a tax haven like Bermuda, without incurring any Irish taxation.
A Bermuda subsidiary can't repurchase shares in the US parent company without booking those profits in the US.
- Avoid paying corporate tax at a higher rate than in the US, and
- Defer paying corporate tax, often for decades, until theres a more favourable tax situation in the US, or a better opportunity to reinvest their capital comes up.
At the end of the day the profits belong to the shareholders and the only way to return the money to shareholders is by paying US corporate tax. Shareholders usually don't mind these arrangements because the tax savings is often more than the cost of capital having the money sitting unproductively.
Beyond that, the arrangement essentially turns corporate income tax into a corporate dividend/buyback tax. Dividends are always much lower than profits, and many companies don't do them at all.
>> the only way to return the money to shareholders is by paying US corporate tax
"Return" is somewhat ambiguous here. Shareholders already own those profits, and cash is reflected pretty directly in share prices. They don't necessarily have to "return" value this way. Many don't.. eg Berkshire.
The parts that bother me most here is (a) all the wasted effort going into what is essentially a silly ritual. If we had to explain this to aliens, they'd bucket it into the same category that they use for whatever pharaonic priests. were up to. and (b) the unfairness. A small, unsophisticated company doesn't get to (eg) reinvest its profits tax free. If a farmer buys more land, its an investment. It isn't an expense. If Apple buys land, its effectively expensed.
I'm not sure exactly what you mean by this
> Dividends are always much lower than profits, and many companies don't do them at all.
Dividends are lower than profits only for companies that have opportunities to reinvest profits into growth. For companies that don't, in principal, you'd expect dividends to be exactly profits.
> Shareholders already own those profits, and cash is reflected pretty directly in share prices. They don't necessarily have to "return" value this way.
There's large opportunity cost to shareholders for companies to hold onto cash, which is usually in low-risk investments, compared to how that shareholder would invest it themselves. That's what I mean by cost-of-capital.
> Many don't.. eg Berkshire.
This is a bit of a special case because Berkshires core business is making investment decisions (and doing so through a holding company is itself tax advantaged). When the day comes the value of Berkshire companies consistently underperforms the market, shareholders will absolutely demand Berkshire start distributing profits instead of making investment decisions on their behalf.
> A small, unsophisticated company doesn't get to (eg) reinvest its profits tax free.
It absolutely can reinvest its profits tax free! It just can't build up a long-term cash pile tax free.
I mean that they could have just paid royalties to the US entity, avoiding Ireland and Bermuda.
Beyond that, you're taking a very naive, textbook approach. Tomorrow never comes, in the sense that you are talking about. Tax deferral should be thought of like an accounting equivalent of equilibrium in economics. It's never reached, but affects how some things work in the present. Dividends<profit isn't explained by the accounting point you made, it's accounted for that way. It actually doesn't require any explanation. It's simply true empirically. In many cases, companies don't pay dividends. Berkshire is one such company. There are other ways, many using less legible, more complex structures to do so.
Berkshire's "special case" is not arbitrary. They're structured in such a way for tax advantage. Restructuring can happen, as do rule changes. One of the reasons why tomorrow never comes.
>> It (small, simple company) absolutely can reinvest its profits tax free!
Ask a farmer what happens when they buy land. Ask a store what happens when they increase stock. This is emphatically untrue. If it were, we wouldn't call this an income tax. We'd call it a dividend tax.
As with the first point, if the tax was intentionally applied only to dividends, there would be no need for shenanigans. Apple & MSFT could be housing their cash where they are actually headquartered.
I don't have any opinion on corporate tax generally. IMO, the whole thing advantages financial & software firms unfairly, relative to companies that need to make real capital investments in order to grow. I do have an opinion on the fairness of it.
Second, because it is actually moving money. If I’m a Canadian software company that does most of its sales in the US through an American subsidiary (not uncommon), the way it works is the American subsidiary pays the Canadian company back for the sales of the Canadian company’s IP. Otherwise the money would never get back to Canada and the developers wouldn’t get paid! Furthermore, would be silly and tax-suboptimal to ignore the IP-money-flow and treat the Canadian company as nearly pure loss while treating the American one as nearly pure profit.
> Otherwise the money would never get back to Canada and I wouldn’t be able to pay my developers!
It doesn't have to be paid for the right to sell the IP. You can just move all revenue back into headquarters' coffers, and use it to finance the various cost centers. Just write the law so that it cannot be called a sale.
So it's actually moving money! And you need a reason to move money from one company (in the US) to another (in Canada). Call it sale, call it IP licensing...
The context was "If I’m a Canadian software company that does most of its sales in the US through an American subsidiary (not uncommon), the way it works is the American subsidiary pays the Canadian company back for the sales of the Canadian company’s IP."
The IP production occurs in Canada where the R&D departments exist and salaries have to be paid and the US subsidiary company pays to the Canadian parent company.
They cannot just "move all revenue back into headquarters' coffers."
By forcing all revenue to go through a single point (the headquarters) it's much harder to establish fake licensing like Apple Ireland's.
But I don't think that the meaning of "forcing all revenue to go through a single point" is clear at all.
From the point of view of most countries sending money out to Cupertino wouldn't be an improvement over sending it to Cork if that still means that they don't get to tax it.
I saw a similar comment earlier this week. I don't understand why first world people think developing countries would agree to this minimum tax and not undercut them on day 1 to attract investments and jobs.
There are no global tax authorities. Nobody is going to enforce these things. Even this G7 treaty is going to be a mess in practice because multilateral treaties are flawed like that.
I also disagree that the developing world is that much of a problem. Currently, in the developing world, money flows to places like the U.S. Virgin Islands, Bermuda, etc. While I'm sure they are not the only places that could act like as tax havens, there's probably a limit. Multinationals probably aren't going to want to relocate their headquarters to a developing country like Egypt for a variety of reasons like language, currency, corruption, weaker property laws, ease of moving cash, etc. Tax havens could also be disabled with tools like sanctions on a G7 or G20 basis. Bermuda doesn't want to play ball? Sure, then the G20 banks and governments will not allow their citizens to deal with Bermuda.
As other people have said, the goal isn't to prevent this from happening, it's to make it too risky or expensive to justify as opposed to just paying corporate tax on profits without shifting them.
It doesn’t become effective until the G20, or at least G7, pass it. Part of the law would be automatic tariffs against non-participants. That leaves non-signatories with a choice between compliance and economic decimation.
Within the EU, (or EEA perhaps) I vaguely recall there's some restriction against penalising for things like this, as long as the other nation is also a member state. (Since viewed as a whole, 'one EU', it should be fine, I suppose.) Struggling for the right words ro search though.
Wouldn't that make companies pay taxes in countries they are based in (as opposed to where they make money)?
Anyway this could be the push that the EU needed to start their own Silicon Valley.
Given the combined market caps of Apple, Microsoft, and Amazon (~$5.6T) is larger than the national net worth of all but the four largest EU countries, I don’t think there’s a lack of motivation here.
Not sure where you got your info, but I'm afraid it seems inaccurate. The total wealth of the four largest EU nations, as of 2019, are as follows:
Germany: $14.7T
UK: $14.3T
France: $13.7T
Italy: $11.37T
This info is from a Credit Suisse report and is widely cited (https://en.wikipedia.org/wiki/List_of_countries_by_total_wea..., https://www.visualcapitalist.com/all-of-the-worlds-wealth-in..., etc).
By digging a bit into the US data, those numbers are, if anything conservative. According to the US Federal Reserve Bank, in 2014, the US had total assets of $270T and total liabilities of $146T for a net worth of $124T.
No worries, it happens to all of us from time to time :)
As for why… the context is just that EU motivation was being discussed.
(Otherwise I would’ve said something like “Those three companies combined are valued more highly than the entire continent of Africa!”)
So those 4 not included.
If an American SaaS company sells a product hosted in Ireland to a company in Britain, where was that money "made"?
This seems complicated because unlike sales tax, corporate tax is based on profit at the end of the year. It's much more complicated than sales tax. Companies would have to handle corporate tax code for up to 195 countries.
If the company doesn't declare a profit in France, is France going to audit them? They have no presence in France.
Multiply this issue for every country where customers reside. This is bad for consumers. Companies are going to choose which markets are big enough for it to be worth the additional burden. If you're from Canada, too bad; we don't sell to Canadians.
Australia and France have similar tax rates. This doesn't have much effect on how much tax the company pays; just how much goes to France.
We have already have sales tax, which is a much simpler system that taxes revenue, not profit.
Britain. If corporations want to pretend that (for example) China has the authority to restrict what users in China see on foreign websites (cf recent Bing tank man mess, among many others), they can apply the same reasoning to tax liability.
I suppose a company could still move profit wherever they choose, but mostly likely inertia would keep it in place.
That's irrelevant; Google USA made a gross profit of X G$ and should be taxed accordingly. If they want to claim some of that as a tax-deductable business expense, the burden of proof[0] is on them to demonstrate that it's a legitimate business expense.
0: If accused of tax evasion, the burden of proof would on the IRS to demonstrate that they intentionally misreported and should suffer criminal penalties, but if they're innocent, they still owe back taxes plus nominal interest.
(Edit: In case it wasn't obvious, I'm talking about what the law should require, not what laws paid for by corporations currently do.)
They've done this, repeatedly. The laws as written (US, UK, many other countries) make this a completely legitimate business expense.
So, what should the law require? How would you create a law that prevents this from being a legitimate business expense but doesn't eliminate other things that would be broadly agreed as being OK?
Simplify the tax code and there will be no loop holes.
As for sales tax, I don't really know how it works in this situation.
My company is taxed on revenue (under the Washington State B&O tax scheme, and similar local tax schemes).
Taxing based on revenue is viable, it just needs to be done with a little more care up front.
For example, if a home builder is buying lumber directly from a wholesaler, they aren’t paying a sales tax. Whereas the revenue tax does catch a portion of that income.
Maybe you mean we should broaden the concept of sales tax, and apply it to all transactions? That would be closer to equivalent to a revenue based tax structure, and would probably end up looking very similar to the VAT tax structure in Europe.
I’m fine with a VAT tax, if we want to structure things that way. Honestly it’s a lot more paperwork to manage that way instead of revenue, but either works for me.
Assuming arguendo that a sales and revenue tax were equivalent, a revenue tax would be the much simpler way to manage tax collection. Why would you ever prefer a structure that creates a tax event for every transaction, to an equivalent one that creates a single tax event per business entity?
Give everyone an automatic refund of $X to make it non-regressive. This could be done as a monthly payment, an "advance refundable tax credit" like the stimulous payments.
I’m not sure why double taxation matters so much. If I get a salary then use some of that salary to get a haircut, the money is taxed twice but we think of this as normal.
Human W2 taxpayers are not able to write off expenses such as driving to work (or even a home office), yet these are clearly costs of doing business. Why should corporations get additional rights that aren’t afforded to humans?
For example, if you have one tax there is only one way to optimize it, if you have two taxes there are two ways to optimize it. As you add more taxes you are adding more room for loopholes. Solving the problem by taxing profit by country is just adding more room for loop holes.
I think the solution should be market based. Whatever rate google US gets from google Ireland should be available to any company and google Ireland should be forced to sell any services/ip to any company who requests it at that rate.
Doing anything else means the cost of the IP google Ireland charges to google US is made up.
I don't really see the whole "let's unmake ownership and property rights" thing being feasible, but I've been wrong before.
Then I have the company buy a car, laptop and every other possible expence I can get away with placing on company. You've solved nothing
I have an even easier solution, and it doesn't require an International Tax Police or Global Government. Lower taxes. Perhaps even eliminate them. There are many ways to achieve this such as eliminating government pensions, removing entitlements, and cutting defense spending and foreign aid. Instead of robbing Apple or Google to buy F35's and ship cash to the Middle East, perhaps we could cut them a break to hire and build things in the USA.
Tax authorities already try to control for arbitrary cross country bills that try to shift profits (at least in some jurisdictions). The downside is more bureaucracy and unproductive friction of course.
But the system is not fixed - people do start exploiting these arrangements, and once the number reaches critical levels they get whacked. An example in the UK was "employee benefit trusts", which were used by a lot of celebrities and footballers. https://www.rossmartin.co.uk/disguised-remuneration-zone/302...
You need to be big enough to (a) pay for enough legal bulletproofing and (b) have political cover against the law going after you.
It only makes sense with large amounts of profits to launder through such a system.
Take Apple selling phones in the UK. Is the money made in the UK, where the phones are sold? Maybe part of it (selling phones), but Apple enjoys a large premium over Android, and that's more debatable. Was the money made in Taiwan, where iPhones are made? Or in California, where iPhone was invented? Personally, I don't really see why UK would tax Apple more than Android makers, simply because Apple (from California) was more inventive... while the profits were realized in the UK, they weren't created in the UK.
Now something like this is bound to come, from the new treaty, to all G7 countries, which hopefully means it will trickle down to the G20 at the least.
The main issue is not rules on sales though - it's cracking down on profit-shifting masqueraded as IP transfers and licensing. Hopefully that too is being cracked down on.
Apple revenues in the UK was about $2B. Which means Apple is already paying $360mil in GST tax to the UK gov. Apple also paid some amount of wage, income, real-estate and other taxes.
Let's imagine companies had to pay income tax on a pro-rated, point-of-sales basis. Thus, apple's pre-tax income for the UK would be 2/274 * 67 = $500M. At a 20% income tax rate, this would net the UK gov an additional $100M.
This is why they want this sort of thing. It has nothing to do with fairness. The US gov is generally opposed to pro-rating profits based on location of sales. Because the US tax code allows companies to effectively deduct foreign taxes from net income, income taxes paid overseas has the effect of reducing income tax paid to the US gov.
No, GST is a VAT (in fact, the UK’s is called a VAT, not a GST), which is not the same as a revenue tax.
The end result is, the consumer pays VAT which is 20% of the price (i.e. 20% of the revenue), and the tax is spread out evenly across the whole production supply chain, weighted by the amount of added value by each company in the chain.
When someone in a small town in some part of the world goes to one of the branches instead of a local independent coffee house - isn't it a large part due to the branding of the company? the coffee is just a commodity costing a few pennies - all the value is made by the brand and the recipe owned by the company in the low tax country.
I don't actually know why exactly a revenue tax isn't more popular, say 1% revenue versus supposed 30% profit tax. (As if any corporation actually pays that tax rate).
Small companies end up paying a higher effective tax rate than larger more integrated companies and it discourages companies from specializing in what they are good at, neither of which is conducive to a robust and vibrant economy.
I think in either case big companies aren't going to be challenged much, the trick is what will be the better outcome for the countries and society as a whole.
Does Apple makes its money in the US, where the company is headquartered and listed? Does it make it in China, where products are manufactured? Does it make it wherever people buy the stuff. Ireland, where the IP is "located."
Since corporate tax is an income tax, it's taxed on profit... the not of revenue and expenses. Revenues and expenses are accrued everywhere. The entity booking them is arbitrary.
Why is this necessary, if countries can just tax companies based on the money they made in their country?