Quite clever! I wonder if their plan really is easy enough for other small businesses to follow with minimal overhead. I couldn't find any other sources for this yet, though.
The article doesn't make it clear or explicit which particular methods are being used here, but the methods used by the companies mentioned to 'avoid' tax are not 'loopholes' they are standard tax regs for providing companies with access to the EU single market.
That you can (for example) register a company in a single jurisdiction and only pay tax there, and the whole transfer pricing thing are not oversights or loopholes, they are the point and purpose of the law.
Now, one may in good conscience take a position that this should not be so - though that amounts to an argument for leaving the EU - but tax activists make fools of themselves by insisting that companies behaving in ways the EU explicitly intends them to behave are somehow cheating.
If any of the Welsh traders sold goods or services into another EU country they would themselves automatically be using the same 'loophole' by only being taxed in the UK. This happens on purpose.
I assume they've not given the methods out as the programme is only on TV early next year - maybe it's the usual transfer pricing etc but as they're all clubbing together the costs of administering this are significantly reduced.
Whether it works or not you know the Government (of any colour) will start to get scared when these tactics get down to the level of small businesses.
Speaking of VAT, it's also fubar as far as I'm concerned. My small company is using the Simplified VAT plan, which implies I don't claim VAT on my expenses and costs, but only pay back 13.5% or so to the .gov of the 20% I charge on my invoices.
So far, sounds like a good deal right?
Until you try to invoice anything outside of the EU! In that case, you /can't/ add 20% to the invoice (as it doesn't apply) But you still need to pay 13.5% of that to HMRC! I'm not joking -- it's a nightmare -- it means that you can't do business oversea at all, or have to leave the scheme which implies extra overhead+costs of a full fat VAT return.
When you see such a /simple/ user case being overlooked (in this case, against the tax payer), can you imagine what other holes there must be in the system?
That's exactly the case... I /almost/ been had last year, and I was only saved because the canadian company I worked for still had a remote small (nearly unrelated) office in the UK, so I had to re-invoice everything to them.
Sorry if this is naive, but what stops you from adding a 13.5% service charge to the invoice, or just bumping your rates to make up the difference? (Apart from pissing your clients off.)
Well, I don't like to reneg on a deal, and I'm already expensive. the 'service charge' is not something I'd like to see someone do to me :-)
No the only technical solution is either to do the full fat VAT, or, play the megacorp and keep the money outside of the country. In a way, it's not difficult to see why bigger companies would do that when you get into a knot like that. I'm just too honest :-)
This was the advice my account gave me when we started billing work outside of the EU - that work is simply not counted when calculating your flat rate amount.
VAT MOSS is the only thing that makes sense. The only thing that's really bad about it is that it doesn't apply to all goods and services, but just virtual ones. Yes, the execution is lacklustre, but the principle of paying VAT where the customer is located is spotless.
I'm honestly a bit surprised, come to think of it, that all supermarket sales aren't actually accounted as online orders from a webshop hosted on the Isles of Man with express delivery from warehouse at the customer's location. Then the sale would be on the Isle of Man, and VAT would be correspondingly low.
Of course it's not intended (or, if you're cynical, ideal) that companies should be allowed to shift profits to tax havens and subsequently pay no tax. It's a loophole. Duh. Yes, there are justifications for the laws as they are, but the implementation is being abused so hard that it's essentially more of a loophole than a sensible set of laws.
To the EU's credit there's been some talk of solving the problem through "tax harmonization", although I think that's the wrong way to solve it and also very unrealistic.
I'm honestly a bit surprised, come to think of it, that all supermarket sales aren't actually accounted as online orders from a webshop hosted on the Isles of Man with express delivery from warehouse at the customer's location. Then the sale would be on the Isle of Man, and VAT would be correspondingly low.
Given majority of food types are already zero rated for VAT what is the benefit to either the supermarket or consumer?
> "are not 'loopholes' they are standard tax regs for providing companies with access to the EU single market."
Focusing on the legal technicalities of what constitutes tax evasion/avoidance is kind of missing the point. The rule should be that you pay tax in the country that you earned the money, based on the tax laws of that country. Any games that involve laundering earnings through foreign subsidiaries in order to avoid paying tax that would be owed based on the tax laws of the place where profits were made is tax avoidance. I do not care whether laws have been put in place to encourage tax avoidance, that does not excuse the behavior.
>The rule should be that you pay tax in the country that you earned the money, based on the tax laws of that country.
So now instead of following one tax code and dealing with one tax authority you have to deal with 28. The whole point of EU is to cut down on stuff like that and reduce the cost of doing business between members.
Yes, if you trade in 28 countries then you should have to deal with the laws chosen by 28 different governments.
Trade harmonisation is one option a government can pursue, but the more you follow this path the further you give up the autonomy of the member state, in this case it's debatable whether the medicine is worse than the disease.
Should also point out that despite the harmonisation goals of the EU, tax avoidance still occurs within the EU by exploiting differences that exist, such as the infamous Double Irish with a Dutch sandwich:
> Yes, if you trade in 28 countries then you should have to deal with the laws chosen by 28 different governments.
Except that increases the cost of doing business even further. The whole point of EU was increasing and simplifying trade and creating a open market so that Europe can be more competitive.
> "Except that increases the cost of doing business even further."
Yes, but there's a tradeoff at play here between what's best for companies and what's best for the citizens of each of the countries. If a law protects the will of the citizens but also hinders companies then so be it. Company profits are not the be-all and end-all.
This is exactly what the VAT MOSS regulations have done, and it's been a total failure. The only people it has really affected are small businesses who don't have the resources to deal with it, so it comes out of their bottom line.
A failure? Sounds like if it's a failure it's because it's only a partial solution, it's not fair to have these tax laws if you still allow big business to circumvent them. If the loopholes can be closed can you see it working then?
If it's too onerous, then don't trade there. Simple. Facebook is welcome to abandon Europe if paying fair tax is not to it's liking. Something else will rise in it's place.
It's like the arguments against the Australian MRRT for the mining industry - a tax that only kicked in if you were making 5% or more profits[1]. "The miners will go to other countries!" was the shrill cry from the mining industry. Uh, no they won't, and not just because the resources are physically here. As long as it's still reasonably profitable, companies will keep doing business in a location.
[1] In a monumentally bad bit of PR, the initial public-sell name for the Minerals Rent Resource Tax was... drumroll... the Super Tax.
I think the problem is that it's really hard to pin down, in a legally operational way, which country "really" produced the good, when intelligent people are trying to tax-optimize it all.
Let's say you concoct a scheme (pretty sure this is typical) where you have the artwork for a movie actually done in the UK, but on paper, you write it up like your selling the British workers' output to Luxembourg, then having the latter work on it, then buying it back into the UK at a huge markup.
Certainly, to an expert, it will be obvious that it's a sham to say any art was produced in Luxembourg. But this would have to be a distinction that can be seen by a tax accountant. All they see is, "Lux bought IP, UK bought their IP, seems legit".
The application of taxation would vary depending on the type of tax, but if we're talking about sales taxes then these should apply in the country where the sale is made. This also includes business-to-business sales, so using your movie artwork example, if the artwork was "sold" in the UK, sales taxes from the UK would apply. It doesn't matter where the artists that produced the artwork were from.
It's mainly an issue with corporate taxation. The scheme in the example wouldn't shift the sales tax (or VAT), but the UK firm could show zero profit while the low-taxed Luxembourg one would show huge profits, and it would be really hard to notice the sham when you're an expert on accountancy rather than IP or art.
Okay, so exploring this example further, do the UK company and the Luxembourg company need to have the same owners (or linked owners, e.g. family members) for this to work?
Yes. (Btw, might be more efficient for you to flesh out the implications of a question like that in same comment, so the exchange doesn't have to wait for the response if you want to pre-empt it.)
I don't mind waiting for responses, find it best to keep focused on only one or two points, hope that's alright.
So if the companies are linked through their owners, could we not have more restrictions placed on sales made between companies that have the same/related owners? Could government bodies oversee such sales to check for market manipulation?
Welcome to the world of stooges. There is a queue of people ready to sign anything in exchange for quick cash. It's fairly common in Italy, and only caught when such intermediaries turn out to be exceptionally poor.
Doing this cross-border becomes extremely difficult, unless you set up an EU-wide body charged with doing that, and you integrate databases, and before you know it, you have an EU body tasked with enforcing EU-wide fiscal policy, and somebody will have to set that policy, and a real EU government will be born.
I would all be in favour of that, tbh; but I don't see it happening anytime soon across 28 countries.
This isn't entirely true. From what I read the problems are mainly 2:
1) Some companies move profits to very low tax cuntries outside the EU. For example Starbucks in the UK bought coffee beans in from a subsidiary in an offshore country at very high prices so they can claim very low profits in the UK, moving most of them offshore where they pay very little taxes
2) Other companies like FCA and Apple instead are accused of having stuck deals with EU governments (Luxemburg and Ireland) where in exchange of having their HQ there they would get to pay very low taxes which other than being morally questionable (in my opinion) is possibly illegal because it amounts to state aid since other companies don't get the same treatment
If it's not, and the governments that make up the EU and its citizens don't agree, they can change the law can't they?
It's an absurd situation that the law explicitly allows something that's continually covered in the press as immoral, and to have governments complain about the status quo through the press, instead of changing the law which is what they're empowered to do.
So yeah, I hope everyone does the equivalent of registering in in Luxemburg, because that'll force a resolution to the issue. Either we say that's OK and that becomes the new norm, or we fix the tax code.
This is not a case of there being no applicable law, and some parties doing something obviously sociopathic.
I do agree that you can have situations where there's no law covering something (because of its novelty etc.) and someone exploits that to their own gain in a way that's malicious to society.
The tax law is not such a law. There's few things that governments put as much effort into as their tax laws. Have you seen the sheer volume of it for most developed states? You could print it out, drop it on someone's head from a modest distance and stand a good chance of killing them.
What is absurd, and what I'm objecting to, is that the government clearly knows what it's doing with tax law, and what it's getting itself into. Yes there will be unintended loopholes, but if they keep getting exploited noticeably year after year without getting closed they're not really loopholes are they? They're there by design.
What various countries in the EU are doing when it comes to their tax rhetoric is absurd and disgusting. Their politicians are badmouthing individuals and specific corporations who are in full compliance with the tax code for not doing their part, while not exercising their power as legislators to actually fix the situation that they're complaining about.
They're doing this because it gains them cheap political points from a certain part of the electorate, while taking money from those same individuals and corporations that are exploiting these "loopholes".
So yes, it is absurd and not morally right. But the politicians are being immoral in singling out individuals in the court of public opinion while making no effort to actually fix the issue, and it's absurd that some members of the public are eating up this obvious publicity stunt of theirs.
What are you supposed to do as a business owner in this climate of political sniping? Cave in to public opinion and pay higher taxes, and subsequently get replaced by a more tax optimized competitor that doesn't pay the same attention to bad press?
I love Crickhowell, lovely little town - I have a base not very far in Newbridge-on-wye.
I love the idea too, we were just discussing how the .gov is trying to squeeze the IT contractor field, while at the same time still leaving the obvious loopholes used by the megacorps to screw the system.
Seems that the lobbyists of the megacorps are still earning their keep...
I think that was a perfectly valid change, frankly. Acting like a full time employee and claiming the tax and pay perks of a contractor was obviously not the intent of the law.
I'm 50/50 on it. Was a contractor at the time and it was a blunt hammer instrument that denied me the benefits a multinational would get when I plainly wasn't a disguised employee.
It's like with the tax credits thing at the mo - I think people would stomach the cuts more if the government was as ravenous about squeezing large multinationals as the smaller guy.
Do you know what? It didn't bug me so much that Facebook paid ~5k tax by playing the system. It bugged me that my tiny company paid more because they couldn't afford to play the system. As it stands small business has a huge disadvantage because it can't afford the amazing accounts and legal team. It's somewhere between sad, annoying and painful.
Talking about interesting tax tactics: the other day I got an email from an Indiegogo project saying 'we ship directly from the EU, so EU customers don't pay VAT.' At first I was like 'huh?', but after a while it turned out to be true: they are supposed to charge VAT only if they are selling from within the EU. They're not, they're a US company, collecting money through Indiegogo (not sure if Indiegogo is a reseller or not, but doesn't matter for this case). So they don't have to charge VAT to their customers. But VAT for foreign purchases is charged only by customs; if they ship from within the EU, no VAT. Meanwhile, if their EU production facility is a subsidiary of the US one (or of an umbrella concern), they can still both reclaim VAT they paid, plus they can shift profit offshore. No VAT paid anywhere (by anyone - not even the customers, so a 20% competitive advantage!), low corporate taxes if they choose so, it's awesome.
So I wonder: why don't more companies do this? I can see that for mass produced cheap trinkets the 20% would not be profitable vs how much cheaper it is to produce in China; but say for high-end furniture, manufactured in the EU. Why don't they just 'sell' from their online (US, or Hong Kong for all I care) shop which would give them a legal 20% advantage?
Shipping time? Billing cost? Custom clearing?
Don't forget, many customs have quite low thresholds before they tax the hell out of imports. In Germany I think you can have an item shipped up to 20 Euro. Also, many products could be confiscated (dietary supplements, "medicine", food, electronics (certifications)). Try to ship ANYTHING to Brazil. Good luck with that. And hope you don't have to return anything.
Furniture? Good idea. I don't know what "high end" means but the shipping costs are likely going to kill you.
On the other handL I shipped once a pallet from LA to Germany via Airfreight. If you use a small provider, costs are quite low. The provider buys a kg air freight US<>Europe around 1 US$ and resells it to you with a mark up. Still, you have to clear customs and have to get it to the airport and then again from the airport. Funny thing: The company who delivered it for me to the airport included a bill for their services. It was only for finalizing the product that I shipped to them. The EU customs charged him import taxes based on that bill, not mine. Hence my customer saved a shit load of money.
No, you'd ship from within the EU, so no customs clearing, low shipping time, etc. My point was, it seems that as long as you sell via a company outside the EU, but produce and ship from within the EU, you don't have to charge your EU customers VAT.
It's inevitable that more companies will follow the lead shown here and the difficulty of doing this will drop exponentially. At that time the government will have to act and the best thing is that the game of follow the leader will follow until either the tax regs are rational OR their are explicit rules put in for the bigger companies.
Weird idea, but individuals pay taxes based on their income not on their profits. What would happen if companies would pay taxes after their revenue broken down per country not after their profits? I think the tricking the tax system problem would be solved.
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[ 3.7 ms ] story [ 93.1 ms ] threadThat you can (for example) register a company in a single jurisdiction and only pay tax there, and the whole transfer pricing thing are not oversights or loopholes, they are the point and purpose of the law.
Now, one may in good conscience take a position that this should not be so - though that amounts to an argument for leaving the EU - but tax activists make fools of themselves by insisting that companies behaving in ways the EU explicitly intends them to behave are somehow cheating.
If any of the Welsh traders sold goods or services into another EU country they would themselves automatically be using the same 'loophole' by only being taxed in the UK. This happens on purpose.
Modulo VAT MOSS which is just stupid.
Whether it works or not you know the Government (of any colour) will start to get scared when these tactics get down to the level of small businesses.
So far, sounds like a good deal right?
Until you try to invoice anything outside of the EU! In that case, you /can't/ add 20% to the invoice (as it doesn't apply) But you still need to pay 13.5% of that to HMRC! I'm not joking -- it's a nightmare -- it means that you can't do business oversea at all, or have to leave the scheme which implies extra overhead+costs of a full fat VAT return.
When you see such a /simple/ user case being overlooked (in this case, against the tax payer), can you imagine what other holes there must be in the system?
No the only technical solution is either to do the full fat VAT, or, play the megacorp and keep the money outside of the country. In a way, it's not difficult to see why bigger companies would do that when you get into a knot like that. I'm just too honest :-)
Items outside the scope of VAT do not count towards your flat rate turnover (https://www.gov.uk/government/publications/vat-notice-733-fl...).
At least, that would be my excuse ;)
Perhaps I need to add that this is not professional advice?
I'm honestly a bit surprised, come to think of it, that all supermarket sales aren't actually accounted as online orders from a webshop hosted on the Isles of Man with express delivery from warehouse at the customer's location. Then the sale would be on the Isle of Man, and VAT would be correspondingly low.
Of course it's not intended (or, if you're cynical, ideal) that companies should be allowed to shift profits to tax havens and subsequently pay no tax. It's a loophole. Duh. Yes, there are justifications for the laws as they are, but the implementation is being abused so hard that it's essentially more of a loophole than a sensible set of laws.
To the EU's credit there's been some talk of solving the problem through "tax harmonization", although I think that's the wrong way to solve it and also very unrealistic.
Given majority of food types are already zero rated for VAT what is the benefit to either the supermarket or consumer?
Focusing on the legal technicalities of what constitutes tax evasion/avoidance is kind of missing the point. The rule should be that you pay tax in the country that you earned the money, based on the tax laws of that country. Any games that involve laundering earnings through foreign subsidiaries in order to avoid paying tax that would be owed based on the tax laws of the place where profits were made is tax avoidance. I do not care whether laws have been put in place to encourage tax avoidance, that does not excuse the behavior.
So now instead of following one tax code and dealing with one tax authority you have to deal with 28. The whole point of EU is to cut down on stuff like that and reduce the cost of doing business between members.
Trade harmonisation is one option a government can pursue, but the more you follow this path the further you give up the autonomy of the member state, in this case it's debatable whether the medicine is worse than the disease.
Should also point out that despite the harmonisation goals of the EU, tax avoidance still occurs within the EU by exploiting differences that exist, such as the infamous Double Irish with a Dutch sandwich:
http://www.investopedia.com/terms/d/double-irish-with-a-dutc...
Except that increases the cost of doing business even further. The whole point of EU was increasing and simplifying trade and creating a open market so that Europe can be more competitive.
Yes, but there's a tradeoff at play here between what's best for companies and what's best for the citizens of each of the countries. If a law protects the will of the citizens but also hinders companies then so be it. Company profits are not the be-all and end-all.
It's like the arguments against the Australian MRRT for the mining industry - a tax that only kicked in if you were making 5% or more profits[1]. "The miners will go to other countries!" was the shrill cry from the mining industry. Uh, no they won't, and not just because the resources are physically here. As long as it's still reasonably profitable, companies will keep doing business in a location.
[1] In a monumentally bad bit of PR, the initial public-sell name for the Minerals Rent Resource Tax was... drumroll... the Super Tax.
Let's say you concoct a scheme (pretty sure this is typical) where you have the artwork for a movie actually done in the UK, but on paper, you write it up like your selling the British workers' output to Luxembourg, then having the latter work on it, then buying it back into the UK at a huge markup.
Certainly, to an expert, it will be obvious that it's a sham to say any art was produced in Luxembourg. But this would have to be a distinction that can be seen by a tax accountant. All they see is, "Lux bought IP, UK bought their IP, seems legit".
Edit: rewrite for clarity
(Also just rewrote the example btw.)
So if the companies are linked through their owners, could we not have more restrictions placed on sales made between companies that have the same/related owners? Could government bodies oversee such sales to check for market manipulation?
Doing this cross-border becomes extremely difficult, unless you set up an EU-wide body charged with doing that, and you integrate databases, and before you know it, you have an EU body tasked with enforcing EU-wide fiscal policy, and somebody will have to set that policy, and a real EU government will be born.
I would all be in favour of that, tbh; but I don't see it happening anytime soon across 28 countries.
1) Some companies move profits to very low tax cuntries outside the EU. For example Starbucks in the UK bought coffee beans in from a subsidiary in an offshore country at very high prices so they can claim very low profits in the UK, moving most of them offshore where they pay very little taxes
2) Other companies like FCA and Apple instead are accused of having stuck deals with EU governments (Luxemburg and Ireland) where in exchange of having their HQ there they would get to pay very low taxes which other than being morally questionable (in my opinion) is possibly illegal because it amounts to state aid since other companies don't get the same treatment
http://taxodus.net/
P.S. You might want to edit line 1 of point 1. ;-)
It's an absurd situation that the law explicitly allows something that's continually covered in the press as immoral, and to have governments complain about the status quo through the press, instead of changing the law which is what they're empowered to do.
So yeah, I hope everyone does the equivalent of registering in in Luxemburg, because that'll force a resolution to the issue. Either we say that's OK and that becomes the new norm, or we fix the tax code.
I do agree that you can have situations where there's no law covering something (because of its novelty etc.) and someone exploits that to their own gain in a way that's malicious to society.
The tax law is not such a law. There's few things that governments put as much effort into as their tax laws. Have you seen the sheer volume of it for most developed states? You could print it out, drop it on someone's head from a modest distance and stand a good chance of killing them.
What is absurd, and what I'm objecting to, is that the government clearly knows what it's doing with tax law, and what it's getting itself into. Yes there will be unintended loopholes, but if they keep getting exploited noticeably year after year without getting closed they're not really loopholes are they? They're there by design.
What various countries in the EU are doing when it comes to their tax rhetoric is absurd and disgusting. Their politicians are badmouthing individuals and specific corporations who are in full compliance with the tax code for not doing their part, while not exercising their power as legislators to actually fix the situation that they're complaining about.
They're doing this because it gains them cheap political points from a certain part of the electorate, while taking money from those same individuals and corporations that are exploiting these "loopholes".
So yes, it is absurd and not morally right. But the politicians are being immoral in singling out individuals in the court of public opinion while making no effort to actually fix the issue, and it's absurd that some members of the public are eating up this obvious publicity stunt of theirs.
What are you supposed to do as a business owner in this climate of political sniping? Cave in to public opinion and pay higher taxes, and subsequently get replaced by a more tax optimized competitor that doesn't pay the same attention to bad press?
I love the idea too, we were just discussing how the .gov is trying to squeeze the IT contractor field, while at the same time still leaving the obvious loopholes used by the megacorps to screw the system.
Seems that the lobbyists of the megacorps are still earning their keep...
It's like with the tax credits thing at the mo - I think people would stomach the cuts more if the government was as ravenous about squeezing large multinationals as the smaller guy.
So I wonder: why don't more companies do this? I can see that for mass produced cheap trinkets the 20% would not be profitable vs how much cheaper it is to produce in China; but say for high-end furniture, manufactured in the EU. Why don't they just 'sell' from their online (US, or Hong Kong for all I care) shop which would give them a legal 20% advantage?
Furniture? Good idea. I don't know what "high end" means but the shipping costs are likely going to kill you.
On the other handL I shipped once a pallet from LA to Germany via Airfreight. If you use a small provider, costs are quite low. The provider buys a kg air freight US<>Europe around 1 US$ and resells it to you with a mark up. Still, you have to clear customs and have to get it to the airport and then again from the airport. Funny thing: The company who delivered it for me to the airport included a bill for their services. It was only for finalizing the product that I shipped to them. The EU customs charged him import taxes based on that bill, not mine. Hence my customer saved a shit load of money.
Within the EU? True. But who has left money in this hyperfragemented market? Many different languages, regulations, power supplies.
It is easier for Germans and Italians to sell to Americans than to each other (at least B2C).