Though whole accountancy process has many parallels to a pyramid selling, with the IP being the top of the pyramid located in some tax favourable country of the moment.

It's basically a form of hacking. Except not with computers but with the tax system.

Of course it could be argued that the second company is also making the money in the first country where it’s IP, trademark etc. gets used and has to be taxed there.

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.

AFAIU proposals for taxing companies wherever they do business rather than where they are headquartered often involve paying MAX(X% of profits, Y% of sales), precisely to avoid these kinds of shenanigans.

What stops individuals, sole traders and the self employed from doing this?

There's a fixed cost to administer such arrangements.

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.

They can't afford a legal department and the paperwork and compliance involved in setting up and maintaining a bunch of international subsidiary companies.

It only makes sense with large amounts of profits to launder through such a system.

Restrict expense claims of that nature and/or tax on revenue and minimum expected profit for large companies?