If I glossed over that correctly, it seems more like a "Bank tax rule tightening", they estimate 5B over 5 years, 4 of which come from changing/tightening banking regulations and 1B (over 5 years) of which comes from mutlinationals operating in the UK. Not sure if that's ~200M a year or if there's some front/back loading and I really have no clue as to UK revenue/profits for all multinationals combined but (fuzzy math) is 200M a year for all of them a significant change? Does this only target companies of a certain size/category?
I don't know about overseas, but here in the states every time politicians give out an estimate on how much revenue a new tax will generate they tend to be grossly incorrect at the end of the year. The reason is that if you tax an activity then people do things to avoid paying the tax for that activity; stop, move, or avoid.
Sad thing is, the politicians make the revenue announcement so they can go ahead and spend the money as if they've already collected it.
As far as I can tell, they shift profits overseas by shifting extra, semi-fictional 'costs' to the UK subsidiary - for example, if the UK subsidiary of Starbucks makes $100m profit, but has to pay the Canary Isles subsidiary $100m in licensing costs, suddenly the UK subsidiary owes no tax.
Given this structure, how does the HMRC plan on distinguishing between legitimate costs and semi-fictional ones? I imagine as soon as the law is changed, the companies will alter their books so that they shift all their 'legitimate costs' to the UK subsidiary.
I suspect that this shift will end up benefitting tax accountants and lawyers.
The Irish company licenses intellectual property from an Apple registered company in the Cayman Islands, and of course the Royalties are so high that the Irish company makes no profit.
So all this money accumulates offshore and can't come back to the US unless some taxes are paid, which is why Tim Cook meets with Congress to try and lobby for a tax repatriation holiday.
Which is also why Tim Cook is raising money in the debt markets to pay shareholders dividends - it's cheaper to pay a tiny bit of interest than pay tax. Absurd that such a rich company is doing this.
Ironically, the money is already back in US - the Caymans entity invests the money in the US stock market via Braeburn Capital, a hedge fund based in Nevada and owned by Apple Inc!
>So all this money accumulates offshore and can't come back to the US unless some taxes are paid, which is why Tim Cook meets with Congress to try and lobby for a tax repatriation holiday.
Ironically a lot of this money would probably be repatriated tomorrow (with taxes fully paid) if Congress ruled out a tax holiday and committed itself to gradually raising rates.
It's just the tantalizing hope of a tax holiday that keeps it abroad.
Or if they just made taxes low enough that it's not profitable to do crazy things like the double-Irish. If we had a permanent lowish tax rate on corporations, they wouldn't save money doing the weird stuff, the money would move to the USA, it would be more liquid (not being tied up in the Cayman islands etc), and the government would get more tax revenue.
It's a race to the bottom. Corporate tax in Ireland is a mere 10% which is what you'd pay if you did a "single Irish", but these companies still find it worthwhile to avoid even that much tax through a more complicated scheme. I'll wager the only "low enough" would be zero.
How exactly do you plan on the US staying solvent charging companies a corporate tax rate of 0%? Because that's what their cost is doing the double-irish.
They waste a lot of money setting this all up, changing it all around when policy changes, paying armies of lawyers, not to mention the liquidity problems I mentioned. Sure they "own" the money but it's stuck outside of the USA.
Edit: how do they stay solvent now, when the money is periodically re-imported during tax holidays?
In 2013 US government receipts totalled $2.78tn of which corporation tax constituted $273bn (~9.9%)[1]
I imagine most of the boost in margins to be brought down increasing compensation or numbers employed so most of that gets brought in to tax coffers via personal income taxes.
The US is solvent either way because it is sovereign in its own currency. It cannot physically run out of dollars.
The low corporate tax rates do not hamper the government's ability to spend, but they are inflationary (in a limited sense). The price of investment goods (property, shares, etc.) is driven way, way way way way up because most of the dividends are simply reinvested.
the end play is for non-us countries to be shafted off their tax receipts while US gets its cut.
I am very surprised that other countries have left this situation to get this far..
We have mining companies in Australia playing this game essentially depriving the Australian public of their tax receipts. Some day these tax receipts will be enjoyed by US public.
This works because under Irish tax law (until 2015) it is possible for a company to be incorporated in Ireland but tax-resident in Bermuda.
An example of how this might work:
A US tech company A, wants to sell to customers in the UK.
They transfer the rights to their patents to a Bermuda "headquartered" but Irish incorporated company B.
They set up a sales company in Ireland C (this one is Irish tax resident).
They set up an IP company D in the Netherlands which has favourable tax treatment for income from intellectual property - the same reason that U2 transferred the rights to their music catalogue to a holding company there.
They (may) set up a company E in the UK for doing support.
Now if you're in the UK and spend £1000 to buy a product from the company:
1) You buy from C which records revenue of £1000
2) C pays £990 in IP licensing fees to D in the Netherlands.
2b) After covering its sales costs from the remaining £10, C makes barely any profit so pays little tax at Ireland's low 12.5% corporate tax rate.
3) D transfers the money to B after paying a very small amount in Dutch taxes
4) B is incorporated in Ireland but tax resident in Bermuda. Since the money has come in as a transfer from a group company within the EU, there is no withholding tax to be paid.
5) Money is safely in Bermuda.
Of course if A ever wants to bring money back from B it will then have to pay US corporate income tax on it.
Which is why tax law should be a judgement call by authorities rather than a mathematical operation. As long as you follow the spirit of the law you pay the mathematical tax. If you are found to evade tax by any scheme such as expensive international inter-company loans or excessive license fees, then the authorities step in and simply tax you for the amount you would have paid withiut using those schemes.
Judgement and law interpretation is used for all other areas of law. It's still "rule of law", still subject to appeal and so on. If laws can't be made that covers loopholes then just outlaw loopholes.
Laws are always interpteted, that doesn't make it arbitrary. Decisions can be appealed. I'm not saying change laws, I'm saying that when an it can be ruled that a loophole is used to circumvent a law, one should often rule as if the law was broken (and later close the loophole). For example, a company charging itself interest on loans to a parent company in a tax haven should simply not be able to deduce that interest. That was never the lawmakers intention.
> As far as I can tell, they shift profits overseas by shifting extra, semi-fictional 'costs' to the UK subsidiary - for example, if the UK subsidiary of Starbucks makes $100m profit, but has to pay the Canary Isles subsidiary $100m in licensing costs, suddenly the UK subsidiary owes no tax.
Canary Isles?? The Canary Islands are Spanish jurisdiction and hardly a tax haven. I guess you mean the Caymans or maybe the Channel Islands?
It has become so complex that no-one can really keep on top of it other than the obvious fact that big companies seem to be able to avoid tax and suck whopping pay packets for their elites (again without any inconveniences such as tax).
The Canary Islands have some special treatment with respect to mainland Spain in things like VAT and petrol tax, which are still in line with many European countries (and you don't go that far to buy retail petrol, it defeats the purpose). By the way the data on that site is outdated, the general IGIC (VAT) is up to 7% since 2012 and the maximum is 20%.
As for the other exemptions, they are hardly "tax haven" label worthy. Nothing compared to the Channel Islands, Luxemburg, etc and more in line with countries like the Netherlands.
I have yet to know of anyone not from Spain who'd choose the Canary Islands to dodge taxes, and I know plenty of people with offshore accounts (work in the other Canary - Canary Wharf, London).
Yes but if you make up the 'price' of licensing the various IP from the tax haven subsidiary each year, and the eventual profit equation for the UK subsidiary adds up to 0 every year over several years, it's clear that the IP licensing purchases are just being used to avoid taxes.
Starbucks is not a good example for several reasons. First, they really do have global recognition through the American culture (movies, etc).
Second, this is a fairly simple scheme where a subsidiary pays for using the brand. Sure, it's hard to price and the company will tend towards price that optimizes their taxes rather than the one in line with real benefit but it's not fictional, there's a rational reason for the licensee to license.
Finally, Starbuck's business model makes it really easy to just tax the transactions with VAT. They churn out coffee, not sophisticated financial products, not ephemeral ads. They physically have to be where they operate. And they mostly sell to regular customers, not other businesses. (Well, I'm guessing here.)
It's not like having a chain of companies across Europe and Bermuda. Not even like serving the entire EU from Luxembourg.
> Finally, Starbuck's business model makes it really easy to just tax the transactions with VAT. They churn out coffee, not sophisticated financial products, not ephemeral ads. They physically have to be where they operate. And they mostly sell to regular customers, not other businesses. (Well, I'm guessing here.)
Starbucks' products are already VAT rated where appropriate. But VAT is paid by the customer, not the business. If more of the Starbucks product range was brought into VATable goods Starbucks would just push prices up with big signs saying "TAX INCREASE MEANS HIGHER PRICES".
Unless you're asking for a radical change to tax law to make companies pay VAT?
All taxes and all costs of any viable business are ultimately paid by the customer. You cover everything from their CIT to inventory shrinkage. Companies don't have any other source of income.
The only difference is that VAT is explicitly listed on the receipt. You can count on price stickiness for a while but eventually tax increases will lead to price increases.
I'm going to assume that any significant off-shore charges from subsidiaries will be considered profit and the company will need to prove otherwise. Should cause a few cases to go through the law courts.
It's not a charity, it's a non-profit. The comparison with the Gates Foundation makes no sense, there's no expectation that it should have a charitable purpose, it's simply a legal entity that has other goals instead of having a fiduciary duty to shareholders.
In particular, it only receives tax benefits if it's classified an "Institution for General Benefit" (ANBI) by the Dutch IRS, which IKEA isn't.
"What emerges is an outfit that ingeniously exploits the quirks of different jurisdictions to create a charity, dedicated to a somewhat banal cause, that is not only the world's richest foundation, but is at the moment also one of its least generous. The overall set-up of IKEA minimises tax and disclosure, handsomely rewards the founding Kamprad family and makes IKEA immune to a takeover."
Funny how the say banks and multinationals will pay, I really think they should in turn put on every receipt how much the end consumer is actually paying in tax, all under the idea of disclosure.
Food places like starbucks and McDonalds they could put it next to the mandated calorie count. This sandwich will cost 400 calories and 40 cents in built in taxes and twenty cents in sales taxes.
People really need to understand just how much they are truly taxed, far too many see only the sales tax and not many more understand payroll. Indirect taxes is the big skeleton in the closet.
The tax incidence of profit taxes falls pretty much entirely on the shareholders. The consumer is unaffected.
Companies that have their profits taxed at higher rates would sure LOVE to raise their prices to compensate for lost profits, but a little thing called competition prevents them from doing so.
>People really need to understand just how much they are truly taxed
Indeed. The level of tax literacy and misunderstanding among the general population appalls me sometimes. I can think of at least one example right now...
> The tax incidence of profit taxes falls pretty much entirely on the shareholders. The consumer is unaffected.
Well, only if you believe profits aren't used for anything except dividends. The "consumer" can be affected when they don't get new products, or existing products are worse, or when they fail to be hired as an employee, etc.
Theoretically if the profit tax approaches 100% then nobody will form companies because what's the point?
Rest assured, though, the levels we are discussing here will have zero effect on Starbucks' ability or desire to bring us new pumpkin vanilla spice lattes every winter season.
If the incidence of the tax doesn't fall on consumers it doesn't necessarily fall entirely on shareholders. You would expect the incidence to be shared between workers and shareholders.
<quote>The market value of labor is unaffected by the level of profit tax.</quote>
Only if you can guarantee that changing levels of profit tax would not cause any wide scale lay-off or hiring sprees that would certainly effect labor market saturation and thereby the market value of labor.
I guarantee that Starbucks and Google will not be pulling out of the UK if they do raise these rates to the proposed levels (or even higher). It would be cutting off their nose to spite their face.
"how much the end consumer is actually paying in tax"
None? In AdWords auction model it is supply and demand that determine prices, not whatever Google wants to charge.
It's just that now Google will have to pay some of that back as taxes.
And McDonalds is not there - they already pay whatever taxes they have to for serving you a physical burger. And yes, it is present in my receipts from McDonalds. So I know how much taxes I paid.
Taxes are often based on profits, not sales. Profits are reduced by costs. Costs can be marginal costs (eg. the money McDonalds spent buying the contents of your sandwich) but they can also be fixed costs (eg. the cost of constructing the building housing the McDonalds you're buying from). Whether you buy the sandwich or not, the fixed cost remains the same.
So because the taxes paid end up being based in part on the fixed costs, it isn't really possible to determine what amount of tax is based on the sandwich you just bought. It depends on how the cost of the building (for example) is apportioned amongst all the sandwiches they sold. Along with everything else they do that makes money.
Not really. McDonalds can't charge a price that is much higher than local companies (i.e. companies that are both based in and operate in e.g. the UK). If they both operate with equivalent efficiency, they should both have the same profit margins. The difference is then only the fact that McDonald's shareholders are not charged for the tax on corporate profits, while the local company's shareholders are.
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.
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.
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.
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.
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.
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.
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.
At least in the UK, these two words have entirely different meanings when applied to tax. Tax evasion is not paying tax which is due. Tax avoidance is arranging your activities to reduce or minimise the taxes which are due.
Only if we pretend that individuals don't do the same thing.
When I check the box to count my daughter as a dependent, I am "avoiding" taxes. When a multi-national corporation inverts their company to Canada, they are "avoiding" taxes. So long as all of the above are within the rules, neither act is immoral.
Or both are. Here in the UK I've never made any attempt to optimize my taxes; I called HMRC once (when I saw a big increase in how much tax I was paying over the previous month's payslip) and they told me everything was fine, and that's the total extent of my interaction with them. (I even avoid ticking the gift aid box on charitable donations, as I think that's immoral). I agree that there is no legal obligation not to minmax your taxes, but I think there is a moral one.
Gift aid is a specific scheme created by the government to increase charitable giving. At the 20% income tax bracket, it makes no difference to you but helps the charity, and at the 40+% brackets it makes a difference to the charity and provides you with a fraction back.
You still end up with less money than had you not given to charity, and it's MEANT to work this way. It's a very different kettle of fish to exploiting tax loop holes.
> it makes no difference to you but helps the charity
And penalizes the government. I'm happy giving my own money to Music For Rich Old White Dudes, but I don't think it's moral for me to take money away from the general taxation pool for that.
The argument isn't that it isn't "technically legal", but that it's expressly legal. I fill out a government provided form using government provided instructions, and answer them with complete and total honesty.
The result of that is that I pay less in taxes than if I had lied.
Are you honestly suggesting that lying is morally superior?
You do realize that setting up entities expressly for the purpose of avoiding tax is illegal in most jurisdictions right?[1-3] The absence of aggressive enforcement doesn't obviate the illegality of the actions.
In your scenario, those humble multinational corporations who are so beholden to the truth have to tell the tax authorities that the dozens of subsidiaries all have actual and legitimate business purposes and that they weren't set up merely to avoid taxes. I mean, it really is obvious why Apple transferred most of their IP to an Irish subsidiary for non-tax reasons, isn't it?
"You do realize that setting up entities expressly for the purpose of avoiding tax is illegal in most jurisdictions right?[1-3]"
I don't believe that is true. There are ~200 countries in the world. The UK, a pretty advanced nation when it comes to tax, did not implement general anti-avoidance legislation until last year. (See your footnote [1] for the exact date.)
Moreover, this anti-avoidance legislation is specifically targeted at what HMRC calls 'abusive avoidance'. It is not targeted at all avoidance.
Good luck with that. There is no way short of global world government to force a company with subsidiaries and business all over the world to pay taxes everywhere.
Don't think it's about everywhere. What they are trying to stop is the profits made in the UK being offset against artificial debts from another division of the same company in a different more tax efficient country.
The problem is profits aren't made in the UK at all. For big tech companies usually they have a subsidiary in a given country, and that subsidiary charges the parent company for access to its work/innovations/whatever. The subsidiary does not itself receive payment for the global companies operations in that country, despite how unintuitive it is.
This is why the UK arms of these companies don't make any profit - they charge the parent companies more or less at cost. Meanwhile people who want to buy their services sign a deal with the Irish subsidiary. But legally these are different companies.
Additionally it's impossible to say how much profit is being made in a particular country. You can count income quite easily, but then what percentage of the cost of developing Facebook can be accounted to servicing the UK market? It wouldn't make sense to allocate ALL the cost of creating Facebook to the US market and treat every other country as pure profit, as obviously there are costs involved with being international.
I'm not convinces Osborne has any real clue about the morass he's wading in to here. It gets worse when you think about the possible future impact. Imagine Google and Facebook didn't have any UK presence at the moment but were looking to hire people there, because of an abundance of skilled people in, say, London. But entering the UK suddenly means a 25% tax on their UK sourced income. Why would they ever hire the first employee? If they stay out entirely, they aren't in UK jurisdiction so there'd be no reason for them to pay any tax there.
Amazon is a classic example of this, an apparently UK based selling business that in fact sells via Luxemburg with Amazon UK only being a fulfillment/delivery service.
I think this is good news. Companies such as Google and others have been avoiding paying taxes for too long. They do this in ways which up until now were fraudulent but technically legal, by creating fictional companies or by laundering money via havens.
"Profit" is very easy to hide. Income, not so much.
The difference is 'net' vs 'gross'.
The horrid nature of current tax law is geared towards lawyers and accountants being creative. The system is geared to reward con-men and punish the honest.
A flat-rate tax system based on income might be more effective but the real danger is the tax-breaks that companies get. I see this all the time with Ford/Chrysler/GM. "We will build a factory in your city/state/county if you give us X-billion in tax breaks."
My thoughts: You want to sell your product don't you? In Canada we had a law called "The AutoPact" [1] which basically said that for every 3 cars that you sell in Canada, 1 must be built here.
Corporate welfare will always be a greater hindrance to tax-coffers then personal welfare will ever be.
Why are we paying companies so they have the privilege of taking our money?
Taxing profit is silly because you care about the "pointer management" that companies do, which requires things like costing QA done in another country. It is far easier to just tax property, sales, dividends, personal income, and capital gains than it is profit. Roughly in that order too.
To be fair -- taxing profit does encourage companies to spend their money.
Also, taxable personal income and capital gains are taxes on profit -- I don't understand how that's easier. Any money spent on personal needs is taxable (see "The Situation" who tried to say tanning was a company expense) regardless of whether a person or company spends it. You're also able to write off business expenses whether you're a company or a person just the same too. Income tax is really a tax on profit, not total income. It just happens that people tend to have mostly profit (since they save their money or spend it on personal needs) and for most close to 100% of their income is taxable so they assume big bad corporations are getting some advantage they aren't entitled to which isn't really true at all.
> Income tax is really a tax on profit, not total income.
If you run a business, that's largely true, as your sole-proprietor income tax is calculated very similarly to how business profits is calculated. But individuals who earn their income via employment (which is most of them) more often pay a tax on their income rather than profits. Some expenses are deductible, but many of the most common ones are not. For example, commute expenses are typically not deductible [1], even though they are probably the most frequent cost incurred solely as part of earning income. Work clothes are also often not deductible: they are only deductible if they are both formally required by the company, and of a kind that is dissimilar from non-work clothing. So e.g. buying a suit for interviews and/or meetings is not deductible, even if you only bought it for and only wear it for income-earning purposes (I have personally never worn my suit in a non-work context). It's also difficult to deduct the cost of a computer, even if your field is computing and you use it mainly for work and skills development (though it's possible in some cases, if the employer formally requires you to have one at home and doesn't provide it).
I'm generally not a fan of income tax, since I think it creates a bunch of problems and economic inefficiencies, like the middle class cleaning their own houses while there is a sizeable unemployed section of the economy, but the huge difference between corporate profit and personal income is that a person has citizenship (generally), has to live somewhere, cannot expense the majority of his or her purchases, and cannot be financially controlled by a foreign entity with differing laws.
Yes it does create problems like "is driving to work a work expense?" but those problems are generally solved.
Yeah, it sounds like this is specifically geared around a disincentive for moving jobs out of the country. I couldn't see anything like this being applied in the digital world, since it's not as easy to move your offices out of Toronto of Vancouver to Mexico or China as it is to move your factory.
Actually, I suspect the law was in place more to entrench existing Canadian factories than promote new ones. (eg, 1 or more of the 3 cars were already made in Canada)
The bridge between Windsor, Ontario and Detroit, Michigan is likely the most-travelled on the continent, carrying 25% of US-Canadian trade, and $13Bn of assets, mainly due to the large auto industries of both countries.
The devil is in the details but the principle of taxing money where it is made is sound.
Taxing revenue instead of profits could be a solution for example by shifting all the tax to the VAT (and then having a single VAT rate in the EU). Then Apple and Google would start paying back on the property rights, patent rights, copyrights, trademark rights, infrastructure, rule of law and well educated consumers they enjoy in Europe.
A single EU VAT rate would be very harmful because no gov would be able to boost consumption by reducing VAT rate, it would also force small business to collect VAT as soon as they sell their first product.
What exactly would be the argument for allowing individual small governments to play with their economies like that? The risk analysis gets completely skewed by the fact that the EU implicitly backs the economy anyway. That just sounds like a recipe for another Greece.
The EU implicitly backs Eurozone countries because it has to, the UK is not a Eurozone country. The UK should definitely be able to control it's own taxes, the only alternative is fiscal union.
Sorry, I heard "Single EU VAT" and assumed you were talking about the Eurozone. Unifying taxation in the absence of unified monentary policy makes no sense to me anyway, so sure: I agree then. :)
I'm not sure how your conclusion follows. Why would having a single shared VAT rate imply that you couldn't have a minimum threshold before VAT registration is required?
If anything about VAT is going to cause grief for small B2C tech businesses in Europe, it seems more likely to be the changes affecting them from 1 January 2015 precisely because the VAT rates in different European countries are different.
This might sound reasonable on paper but in reality it's a pretty big deal. Taxing corporate profit (however ineffectively) is very different from taxing consumption like VAT does.
Inasmuch as the tax gets passed on to companies, it can push teetering companies out of business. A company with no profits 9for real) pay no corporate tax. Second, corporate taxes are more or less like capital gains tax, in many cases a capital gains tax on foreign citizens that own shares in that company. Taxing the rich is hard. Taxing the poor is relatively fruitless and morally questionable. This is why a lot of the burden (as a percentage of income) falls on the middle class, who are easiest to tax. A VAT is a "flat" or moderately regressive tax. To replace corporate tax revenues with more VAT, poor and middle class people would have to pick up the share currently paid by rich people and foreigners.
The current tax systems with the various types of taxes are evolved to maximize tax revenue, and to a certain extent GDP. A fairer system that "costs" the tax office 5-10% of their revenue is off the table. Most kinds of taxes are maxed to the point where raising them would either (1) not actual produce more taxes^ (2) produce immediate political reactions (3) harm the overall economy too much.
When you are super-optimzed for one thing, its' hard to optimize for something else, like fairness.
^EG, if the high marginal income tax is 50%, increasing to 70% will not realist in a 40% increase in revenues from that tax bracket because the incentive to earn (declared) income goes down.
Unfortunately, taxing gross income instead of profits simply won't work for corporate taxes. The cost of doing business varies wildly between industry, or even between different business models in the same industry. You'd end up putting low-margin industries out of business, and taxing (e.g.) software companies almost nothing.
It's a hard problem that doesn't lend itself to simple solutions.
Well, those practices for manufacturing have carried over into tech datacenters with all the kickbacks FB/Goog et. al. are getting from States like Iowa (iirc).
Actually one of the strongest arguments against corporate taxation is the corruption/tax-break angle. Big organizations are always going to be able to lobby more effectively than small ones or individuals.
A reasonably fair personal income tax or VAT can be implemented reliably (and has, in virtually all of the industrialized world). A fairly distributed corporate tax is nearly impossible (again, the existence proof being its absence basically everywhere). No matter how well the statutes are written, a big enough entity will be able to lobby the government into changing the law to its benefit.
Congress shall make no law [...] abridging the [...] right of the people [...] to petition the Government for a redress of grievances.
Yes, we're talking about a UK law, but the principle remains valid. "Lobbying" is just the advocacy for the government to do something. Most of the time it's a good thing, because governments on their own tend not to have many good ideas. Making that illegal in general is (quite literally) isomorphic to living in a totalitarian regime.
I suspect what you really mean is that lobbying by "bad people" should be illegal. Well... good luck defining that in statute. You say banana and I say banana.
Let's say you have a horse-and-buggy paratransit company (call it "Unter" for short) that you think is a great idea. But it turns out that existing cities have dumb, ancient laws that disallow horse-drawn carriages. But your users love your service and everyone agrees that it's a great idea. So you call up a legislator to pitch them on the idea of updating the law.
...and end up in jail, because you're a "corporation"?
I think what he means is money should not buy you the ear of government. Using it for this purpose should be illegal, otherwise you no longer have a system where one vote buys you one unit of power, you instead have a system where one unit of wealth buys you one unit of power. Which in some people's opinion, is fascism.
Buying the ear of government with money already is a crime, though. "Lobbying" is regulated already, and certainly does not involve bribery. The problem is far deeper and more complicated than that.
You aren't going to drive much social justice if you paint your enemies as cartoon characters.
I have thought for a while it would be better not to tax businesses at all, instead tax individuals when they draw funds from the business, either as dividends or salary.
I'm not sure how you could get from here to there though.
Really it doesn't matter where, specifically, you draw funds from. Taxing corporations makes their products more expensive. Taxing individuals reduces their purchasing power in the economy, which is sort of the same thing. Taxing all transactions with a VAT is the cleanest expression of this idea, the government basically ends up being (by definition) a fixed size relative to the economy.
A VAT or sales tax has the advantage of efficiency and ease of implementation. A personal income tax can be made more progressive and socially fair more easily. Most western governments have settled on some mix of these for the bulk of their revenue.
I don't disagree, I wasn't arguing about VAT or sales tax, rather corporation tax which international companies seem able to avoid but their smaller competitors end up paying.
But then you use the same loophole where you write all your personal expenses off as business write offs, except its even worse because you can tax exempt everything under the pretense of it being a business purchase.
The real proper tax is a transaction tax. Not a flat sales tax or anything, just whenever money changes hands between entities (personal or institutional) in exchange for goods or services (including you paychecks, which are an exchange of your time for money) you get flat taxed on that.
The exception to this is capital gains, since those are not really transactions, just money you are making for owning some form of the means of production. You would definitely want a strict yet simple progressive tax on that, to curtail wealth concentration of the pandemic nature we see happening today. Rather than tax brackets, they should just use a linear function with no capital gains below the happiness threshold up to, say, (now these numbers are fudged and should be researched) 100% tax on capital gains over 1000 times that threshold.
Those are in fact transactions, at least when they're realized, and are supported by a huge class of apparatus of the State, from property laws to courts to communications infrastructure, and more.
In the UK we already have rules that stop that sort of thing, for instance if you use a company owned vehicle for personal use you have to pay tax on that. You also have the fact that these avoidances are local so are easier for the tax authority to stop.
Why are we paying companies so they have the privilege of taking our money?
Companies don't pay taxes. Ever. Their money comes from customers buying their products and services. If they are not taxed, they can offer a lower price to the customers. If they are taxed, that simply means higher prices for customers.
I don't think it does. Any sensible business avoids tax i.e., minimizes its tax bill. If it gets up to what are perceived as evident shenagans to do this, governments can change the law (as has been announced today in the UK) and consumers can decide if they still want to do business with the company. 'Don't drink their coffee' would be the advice re Starbucks, would it not? Good deals usually but not always add up to good business which equates with making more money. If Starbucks offer a lousy deal then presumably they'll either have to change the deal or go down. Plenty of other places to drink coffee.
It boggles my mind that otherwise intelligent people have a hard time grasping this simple concept. Taxes are simply another cost of doing business, especially if they are applied to whole categories.
Even if they are applied to specific companies (to favor domestic companies, for instance), then they still have largely the same effect, since they allow the domestic competitors to compete in the market inefficiently, raising prices on the consumer.
It's easy to understand that taxes are simply a cost of doing business, but intelligent people disagree that prices would decrease with any certainty if taxes were cut.
Companies don't set prices for products to achieve some specific return, they set prices at the highest point the market can bear. Cutting their tax rate doesn't have any impact on the greater market, so it's unlikely that prices would move at all. The more likely outcome is that owners and shareholders would see higher profits -- which definitely isn't a bad thing, but it's a very different proposition than a general price decrease for consumers.
> If they are not taxed, they can offer a lower price to the customers.
This assumes the owners are targeting some set return rather than pricing their products at whichever point the market can bear, which is a giant, unsubstantiated assumption.
If GM was paying an effective 5% tax rate, which was then cut to 0%, do you honestly think they would lower prices? Yes, I know the theory that Ford would get the same benefit, then lower their prices in competition, but history has repeatedly shown that this is unlikely to result in a price war. Informal collusion is fairly easy to maintain and it's unlikely that the marginal loss in sales from a 5% price premium would be enough to offset an additional 5% booked straight to profits.
> If they are not taxed, they can offer a lower price to the customers. If they are taxed, that simply means higher prices for customers.
Conversely, if employees were not taxed, they could work for lower salaries. Individual taxation simply means higher labor costs for businesses.
Corporate taxation is part of a complicated system. It's easy to isolate it and say that companies don't pay taxes because they simply pass the costs onto consumers but the same argument can be made the other way, because they're both part of an integral whole.
When, in naval-gazing films and TV, an entertainer character insists on x % of "gross" revenue, this is why.
There've been many articles and posts cited on HN that go into the tortured, and very profitable, machinations of entertainment industry financing and accounting.
Some argue towards making such finance, e.g. taxes, simple to the point where it can't be gamed. The tradeoff is that finance is used as much if not more so than overt legislation, to steer policy, investment, and ultimately -- imperfect as they are -- outcomes.
I'm not saying simplification is wrong. But keeping your system intact while you do it, is... well, not as simple as it might seem.
But there is a lot of potential benefit. How much further would clean(er) energy be, if we weren't propping up carbon fuels to the tune of billions in subsidies every year (including a substantial part of e.g. the U.S. military budget)? Would the Mid-East be quite such a mess, if no one was continually pouring money into its weapons systems and dictatorships?
Anyhoo, I typed way more than I intended.
When an outfit is doing fantastically well, to all appearances, yet the profit is missing, then start looking at / going after the gross. They have to pay their way, just like everyone else. Perhaps all the more so, the more they insist upon being a "corporate person" with "personal" rights (e.g. speech, et al.).
----
P.S. As an actual person, with a few policy-minded exemptions aside, I am taxed on my gross income. Not my net. (E.g. I don't get to deduct my groceries, nor my auto insurance, nor...) (Although, state sales tax in the U.S. does vary by state and is often, when lowered, meant to lessen the regressive nature of said tax for low income earners with respect to essential goods -- you gotta eat.)
Home owners get to deduct mortgage interest, while renters get no such break even though a significant chunk of their rent may effectively be paying the interest on the landlord's mortgage for the property. Pushing home ownership in the U.S. as a policy that apparently veered into the extreme, providing lots of marginal loans as raw inputs into the financial machinations that propelled the 2008 Great Recession.
Anyway... I'm taxed against my gross income. There's no magic rule that says businesses can only be taxed against their net. It's all policy -- not natural law. And when they game the system beyond all measure, they should expect that, sooner or later, policy will be changed.
The problem is in good part that, if they can make it later enough, they become another "too big". They've captured their regulation.
I get to deduct a select subset of expenses. And if I try to claim I am living from year to year with a negative net, the IRS is going to want to know how this is possible -- in detail.
At one point, I personally rolled up the annual corporate net profit for over a billion U.S. dollars of gross revenue. It came out to (for various reasons I won't go into, here) circa 4 million. That's a much larger percentage of expense than I get to deduct in my personal life.
I realize this is a simplistic example. But when things start to get this extreme, we need to take a look at who is paying the taxes that benefit whom? Is this anywhere close to in balance and each "entity" paying their own way?
Paying their own way not just on principle, but because if they aren't, they may have a distorted and "inefficient" (I might chose the word "destructive") business model.
Should we in the U.S. really have to e.g. provide food stamps and other benefits out of tax revenue -- which has increasingly shifted to come primarily from individuals rather than businesses -- to Wal-Mart employees?
And many of the investment entities and their management that benefit in outsized measure from such... subsidization, are ostensibly paying a 15% rate -- before they whittle this down even further.
It's harder to compete with the "big boys", when you are facing an entirely different cost structure. Not just economies of scale, but finance and policy of scale.
The fact that they wrote it as profit rather than revenue tells me that the people drafting it were either on the Banker's doll such that it is just window dressing, or the legislators are criminally inept.
The incentives to give back don't exist unless you take a chunk of the money before it can be put back into their own pockets. Not that I think this should be done this way, but it's silly to think they are going to be able to recover significant profits from these banks.
It is literally impossible to charge corporations on income instead of profit.
Let's walk through an example. I call a plumber to replace a water heater, which they provide. They charge me retail for that water heater. Plus sales tax. Now of course, they have to charge me corporate income tax for that whole amount. Including the sales tax, by the way, because that's income.
The hilarity doesn't end there. The plumber bought the water heater from the manufacturer. Let's assume that was at some discounted rate, maybe a 20% discount off of retail. Ok, so 80% of the retail value of that water heater is income to the manufacturer. They have to pay corporate income tax on that whole amount now. But wait, corporate income tax was already paid for 100% of it by the pluming company.
We're still not done. It turns out that water heaters are a commodity and there isn't much margin in the business. They already can't afford to pay the corporate income tax, but it still gets better. All the manufacturer does is assemble the parts. They buy the parts from other companies, and some components go through multiple companies. At each step, each of those components was income for the manufacturer or assembler of the part.
Basically you end up triple taxing or more, the various parts of the system.
Believe it or not, it gets worse!!!
An astute observer would notice that the easiest way to avoid as much corporate tax as possible is vertical integration. In other words, if the plumber, water heater manufacturer, and all of the subcontractors and sub-manufacturers involved all worked for a single giant corporation, they'd only have to pay corporate income tax once on the water heater and all of the components within it.
In short, companies would be forced to move to countries that did not implement corporate taxes. Companies that are unable to do that would be forced to combine into as few companies as possible to avoid corporate taxes.
Remember, taxes discourage the behavior that is being taxed. Corporate income tax discourages the transfer of money between corporations. That just means there would be fewer, larger corporations. And of course, more expensive goods and services. Assuming the entire world implemented corporate income tax simultaneously. Without that, there would just be massive shifts of businesses away from countries with corporate income tax.
The OP specifically is advocating for something without loopholes that just looks at top line revenue.
VAT is absolutely not that.
I was illustrating how impossible it is to just look at top line revenue of a corporation.
Also, if by solved you mean prevents double taxing through a production pipeline then sure. But it boils down to a sales tax which in general is regressive compared to typically progressive income tax.
Yes, I meant the former. I didn't mean the latter since that's your conjecture (three in fact: 1. VAT boils to sales tax; 2. sales tax is regressive; 3. VAT is regressive) that I don't necessarily agree with.
A flat-tax based on gross income would be unworkable. Wal-Mart has an operating income of $27 billion on $476 billion in revenues. A 5% flat-tax on gross would wipe out almost all of their profit. Apple, in comparison, has $52 billion in operating income on $182 billion in revenues. A 5% tax on their gross would leave them paying less than what they pay today.
I recommend that everyone read up on the basic mechanics of the U.S. income tax: http://www.amazon.com/Chirelstein-Zelenaks-Taxation-Concepts... (this book is very approachable, and quite short). Things that seem like "creativity" if you're not actually thinking, actually fall out from the mathematics of what you're trying to tax: gains in wealth over time. Things that seem like unnecessary complexity arise naturally in response to the challenge of sampling a continuous function (the value of assets) at discrete points (yearly, or at the time of sale).
The bones of the tax code are pretty elegant. It's complex, but it's complex because accounting is itself very complex. But nobody argues that the complexity of GAAP is a form of corporate welfare. Yes, there's nonsensical cruft layered on top in the form of tax breaks, but those are actually pretty simple in comparison.
Your main point is that there will be winners and losers no matter the tax system. That's a given. There is a point to be made that an abrupt and radical change in the tax code would be a net negative, but I don't think anyone is arguing for that.
If a tax code becomes simpler and some businesses are no longer viable, why should I care? So Wal-Mart doesn't make sense anymore? So iPhones should be more profitable than they are now? I'm not sure why I should care about that.
It's not a choice between two arbitrary systems with different winners and losers. It's a choice between one system that makes sense (taxing net income), and another system that's mathematically and rationally indefensible (taxing gross income).
It's the classic programmer's dilemma: do you implement the complex algorithm that gets the right answer, or the simple one that gets the wrong answer?
I still don't buy your logic. How is a transaction tax (sales tax) practically different than a gross income tax?
I'm all for simpler algorithms, but assuming that's our goal, I'm not sure all this discussion about income taxes isn't starting from the wrong point. We should be looking for taxes that are relatively easier to enforce, like property taxes.
One is a tax on consumption, the other is a tax on income. One is applied to only the final sale, while the other applies at every sale in a production chain. One can never result in a company owing more tax than it makes in profit, the other can. Note that sales taxes that do apply at every step of the production chain (VAT taxes), have the same problem of computing net versus gross: the tax is applied to the difference in value between the outputs and inputs at each step.
Yes, one way to avoid the complexity of implementing a proper income tax is to tax something other than income. But there are reasons we tax income rather than consumption or property. Consumption taxes are regressive--poor people carry more of the overall tax burden. Property taxes have the undesirable characteristic that they often require you to pay money you don't have in cash. Just because your house doubles in value doesn't mean you have the cash to pay double the property taxes on it. Except in certain cases involving inheritance or gifts, income taxes don't force you to sell property that increases in value just to pay the tax on it. Also, with property taxes you run into complexity in defining "property." You'll either draw arbitrary lines (land is property, but stock isn't), and distort the economy as people invest more in untaxable property, or run into trouble valuating intangible property like stock ownership and IPR.
There's a reason why every developed nation has settled on income taxes. The basic principle is something people can get behind. The existence of society and government helps you gain wealth, so it seems reasonable to people to tax a percentage of that gain in wealth. Moreover, people keep track of changes to wealth even without the tax regime (modern accounting predates the modern income tax by centuries), which makes income taxes relatively easier to administer.
Do you care to address the interesting part of what I linked?
A gross receipts tax is similar to a sales tax, but it
is levied on the seller of goods or service consumers.
...I'm thinking this is a distinction without a difference, which is really my point. They're both transaction taxes. And a fair gross income tax rate would probably be set lower than a fair tax on profits since the amount of taxes paid per business should probably be roughly the same, at least on average.
Will some low-profit and no-profit businesses have problems? Sure, but I'm not sure why they shouldn't have to contribute to the general fund just like all the other businesses. If their business models aren't sustainable while paying taxes, I'm not sure why I should be upset. What we have now is overly complex (deducting losses from previous years) and amounts to a subsidy for losing money.
When you're talking about "low-profit" businesses you're talking about every single retail establishment from Amazon to Walmart to your neighborhood hardware store to every single restaurant you've ever been to.
I think you'd be pretty upset if all of those businesses closed their doors due to a massive tax increase.
He did address the gross receipts tax. There's an immense difference between a sales tax and a gross receipts tax: sales taxes happen at final sale, and gross receipts taxes apply to every transaction.
The gross receipt tax distorts the economy: it rewards firms that integrate every step of their production rather than focusing on their comparative advantage. The railroad that owns its own steel mill is tax-advantaged over the one that buys steel. That policy is inefficient: the economy should reward the most competitive steel mill, rather than insuring that the largest consumers of steel are more or less required to operate their own crappy mills.
Here's a more immediate example: imagine a tax policy that essentially fined Dropbox for not owning its own chip fab, and forced it to compete with huge companies like Apple that did.
Wal-Mart versus Apple is a bad example, because the two companies are in radically different lines of business. Instead, imagine a tax policy that fined Whole Foods, which sources the goods it sells from a variety of different vendors, while rewarding Safeway. And, of course, the point Rayiner was making was that turnover taxes penalize all of direct-to-consumer-retail; it doesn't just pick Target instead of Wal-Mart, but rather penalizes companies that rely on logistics and distribution at all.
> What we have now is overly complex (deducting losses from previous years) and amounts to a subsidy for losing money.
Say company A makes $10m in year 1, loses $10m in year 2, and makes $20m in year 3. Net gain in wealth = $20m. Say company 2 makes $10m in years 1 and 2, and breaks even in year 3. Also has a net gain of $20m.
Say the tax rate is 20%. In any sane tax system, both companies will pay $4m in taxes over three years. So how do you handle the loss for company 1? Does the IRS write them a check in year 2 for $2m? If not, company A pays $6m in taxes over three years, versus $4m for company B.
Loss carry-forwards are not a "subsidy for losing money." They're a mechanism for getting the right answer integrating a continuous function at discrete intervals, without allowing for negative tax due. Your solution to the complexity is to just punt and give the wrong answer.
At the basic level, corporations should be able to operate and turn a profit, regardless of whether they're low or high margin. That shouldn't even matter in a discussion, since both high and low margin businesses create jobs, and are a good thing for the economy. Some businesses just need bigger scale, but that doesn't make them worse businesses.
Yes, they're avoiding taxes, but a lot of these companies are still highly profitable without the tax avoidance aspect of it. That's just the 'icing on the cake', and I'm pretty sure if they didn't, some (activist) shareholder could probably force them to do so. This is the world we live in. In the end, tax is just another corporate expense.
This tax problem can't be solved without significant international cooperation, and I'm a big fan of simplifying the tax code of countries globally.
> At the basic level, corporations should be able to operate and turn a profit, regardless of whether they're low or high margin.
Nobody has a right to the profits they are accustomed to. Buggy whip manufacturers have no right to make a living. And businesses that require exotic tax exemptions to exist might fall in the same category. Again, I think it's more fair to gradually phase out current tax schemes and phase in new ones so the economy isn't shocked by a massive rule change, but I don't see why any business has the right to broadly fix the current tax rules in place forever.
And, at the end of the day, any tax increases will be (and are) passed on to end consumers. It's not as if gas stations go out of business because their expenses go up (oil prices, credit card fees, etc.). They raise and lower their prices to accommodate price changes. And longer term, they adjust their business models as well.
All that being said, I don't even really care about gross vs. net taxation. I just believe this line of thinking doesn't add up.
The comment you're responding to is appealing to efficiency, not to entitlement and proprietary rights to profits. The problem with turnover taxes is that they're inefficient, not that they're immoral.
I'd rather see profits in the workers pockets than the UK government's coffers. If we keep ramping up taxes on large corporations, they're just going to move abroad.
Take Starbucks for example, they're not even turning over a profit in the UK... yet they created thousands and thousands of jobs.
We'll keep ramping up taxes, they'll close down stores, move abroad and then wonder why youth unemployment keeps rising.
There is no reason for a company like Starbucks to move its retail locations to avoid taxes. They might move other facilities such as corporate offices or manufacturing, but the stores themselves are either profitable or not and it can only serve the local area anyway. They can't sell cappuccinos to London commuters from a store in the Netherlands. They only leave if they can't make money at all. Although taxes may dissuade them from expanding, if the capital can have better return elsewhere.
Genuine question: Is there any evidence that Starbucks 'created' more jobs than it 'destroyed' through competition? I.e. It's not as if there weren't thousands of people working for coffee/tea shops before Starbucks came along.
I get the impression there were simply a lot fewer coffee/tea shops (a greater proportion of high street space was taken up by now-bankrupt retail, Woolworths and HMV and Borders). And the quality of the coffee was certainly worse.
I'd argue they brought coffee culture more to the British high-street. Coffee shops were few and far between and the demand was fairly low say 10 years ago.
This also coincides with a lot of pub closures due to certain government regulations and increased taxes on alcohol.
Now you're on to something really important! I am not aware (granted - I guess because I happen not to have seen it) of any really wide ranging high level discussion on this massive subject nor do I expect there to be. Sheep probably debate in their sheepish style, pecking orders but probably not the sheering.
Summary: Hodge wants to make it a criminal offence to sell or promote illegal tax avoidance schemes in the first place. So if HMRC challenge a scheme and it's found illegal, the lawyers/accountants who developed it can be criminally prosecuted as well as those who used it.
This sounds like something that isn't defined as illegal yet but might be in the grey area - and if HMRC decides it's illegal later then you are punished ex post facto.
"HMRC can prosecute tax advisers if they try to hide schemes, but has no sanction against those that create and sell artificial trading arrangements designed solely to dodge taxes."
I don't know much about this particular tax issue in the UK, but if you think that lawyers are going to draft a bill which other lawyers will then sign into law that criminalizes the typical day-to-day activities of lawyers - well, I'm sorry to say that you are going to be disappointed.
Low taxes? I almost fell off my chair. With all of the rules, regulations, not to mention v.a
T. A 25% additional because we can tax doesn't seem very low or fair.
If my company was having these taxes imposed on me, I would move all of my offices and companies out of the U.K. within the next couple of years. I will be interested to see what happens to the economy after these changed.
Oh, so you propose a prohibition-style network of underground resellers and whitewashing of money? You know that this way lies the need for a personal army, a white cat and an Italian accent, right?
The only reason this even exists is google caving to wall street pressure. I doubt Sergey or Larry have any objections to paying taxes in the countries in which they generate profit.
In order to make this workable, the government would assume that certain industries make certain profit margins
e.g. 8% assumed profit for the sale of goods to 32% assumed profit for the sale of services. [0][1]
According to the FT:
"the new tax would be a “deemed profits” tax rather than a corporation tax, so as to sidestep issues about double tax treaties.
[...] the Treasury would identify profits that escaped tax in the UK because of royalty arrangements or the absence of a taxable presence.
[...] It seems to be something completely novel . . . It is a huge stick that will stop this artificial avoidance. The difficulty will be how it is defined in practice.” [2]
[0] Similar way to the way the UK flat rate VAT scheme works
Here's a list of all the companies registered in the UK with the string 'Google' in them, that aren't listed as 'dissolved' (there are a lot of those), and aren't obviously registered by morons[0][1][2][3][4][5][6][7][8][9] who think they can infringe on the trademark.
BR017040 GOOGLE COMMERCE LIMITED UK ESTABLISHMENT
FC031970 GOOGLE COMMERCE LIMITED UK ESTABLISHMENT
5903713 GOOGLE PAYMENT LIMITED
3977902 GOOGLE UK LIMITED
9183796 GOOGLE VENTURES UK MANAGEMENT COMPANY, LIMITED
I believe the first two are part of their Double Irish tax dodge: http://vimeo.com/68581263 so those should disappear soon.
Funny how the same UK government propose to have devolution of corporation tax in Northern Ireland (NI), which is still part of the UK so the NI Government can match the corporate tax of the Republic of Ireland.
181 comments
[ 3.2 ms ] story [ 205 ms ] threadSad thing is, the politicians make the revenue announcement so they can go ahead and spend the money as if they've already collected it.
Details aren't very clear. It's called the Diverted Profits Tax, there's a longer article here: http://www.bbc.co.uk/news/business-30306266
Given this structure, how does the HMRC plan on distinguishing between legitimate costs and semi-fictional ones? I imagine as soon as the law is changed, the companies will alter their books so that they shift all their 'legitimate costs' to the UK subsidiary.
I suspect that this shift will end up benefitting tax accountants and lawyers.
http://en.wikipedia.org/wiki/Double_Irish_arrangement
Basically, sending the money from Germany (or wherever) -> Ireland -> Netherlands -> Ireland -> Cayman Islands results in no taxes being paid (or legally due).
The Irish company licenses intellectual property from an Apple registered company in the Cayman Islands, and of course the Royalties are so high that the Irish company makes no profit.
So all this money accumulates offshore and can't come back to the US unless some taxes are paid, which is why Tim Cook meets with Congress to try and lobby for a tax repatriation holiday.
Which is also why Tim Cook is raising money in the debt markets to pay shareholders dividends - it's cheaper to pay a tiny bit of interest than pay tax. Absurd that such a rich company is doing this.
Ironically, the money is already back in US - the Caymans entity invests the money in the US stock market via Braeburn Capital, a hedge fund based in Nevada and owned by Apple Inc!
Ironically a lot of this money would probably be repatriated tomorrow (with taxes fully paid) if Congress ruled out a tax holiday and committed itself to gradually raising rates.
It's just the tantalizing hope of a tax holiday that keeps it abroad.
Edit: how do they stay solvent now, when the money is periodically re-imported during tax holidays?
I imagine most of the boost in margins to be brought down increasing compensation or numbers employed so most of that gets brought in to tax coffers via personal income taxes.
[1]http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Doc...
The low corporate tax rates do not hamper the government's ability to spend, but they are inflationary (in a limited sense). The price of investment goods (property, shares, etc.) is driven way, way way way way up because most of the dividends are simply reinvested.
It drives up wealth inequality as well.
I am very surprised that other countries have left this situation to get this far..
We have mining companies in Australia playing this game essentially depriving the Australian public of their tax receipts. Some day these tax receipts will be enjoyed by US public.
An example of how this might work: A US tech company A, wants to sell to customers in the UK. They transfer the rights to their patents to a Bermuda "headquartered" but Irish incorporated company B. They set up a sales company in Ireland C (this one is Irish tax resident). They set up an IP company D in the Netherlands which has favourable tax treatment for income from intellectual property - the same reason that U2 transferred the rights to their music catalogue to a holding company there. They (may) set up a company E in the UK for doing support.
Now if you're in the UK and spend £1000 to buy a product from the company: 1) You buy from C which records revenue of £1000 2) C pays £990 in IP licensing fees to D in the Netherlands. 2b) After covering its sales costs from the remaining £10, C makes barely any profit so pays little tax at Ireland's low 12.5% corporate tax rate. 3) D transfers the money to B after paying a very small amount in Dutch taxes 4) B is incorporated in Ireland but tax resident in Bermuda. Since the money has come in as a transfer from a group company within the EU, there is no withholding tax to be paid. 5) Money is safely in Bermuda.
Of course if A ever wants to bring money back from B it will then have to pay US corporate income tax on it.
The authorities wrote the rules in the first place.
They shouldn't get to change them after the fact based on arbitrary whims, especially based on nebulous concepts like "spirit".
Canary Isles?? The Canary Islands are Spanish jurisdiction and hardly a tax haven. I guess you mean the Caymans or maybe the Channel Islands?
It has become so complex that no-one can really keep on top of it other than the obvious fact that big companies seem to be able to avoid tax and suck whopping pay packets for their elites (again without any inconveniences such as tax).
The Canary Islands have some special treatment with respect to mainland Spain in things like VAT and petrol tax, which are still in line with many European countries (and you don't go that far to buy retail petrol, it defeats the purpose). By the way the data on that site is outdated, the general IGIC (VAT) is up to 7% since 2012 and the maximum is 20%.
As for the other exemptions, they are hardly "tax haven" label worthy. Nothing compared to the Channel Islands, Luxemburg, etc and more in line with countries like the Netherlands.
I have yet to know of anyone not from Spain who'd choose the Canary Islands to dodge taxes, and I know plenty of people with offshore accounts (work in the other Canary - Canary Wharf, London).
http://en.wikipedia.org/wiki/Transfer_pricing
That's profit shifting.
Second, this is a fairly simple scheme where a subsidiary pays for using the brand. Sure, it's hard to price and the company will tend towards price that optimizes their taxes rather than the one in line with real benefit but it's not fictional, there's a rational reason for the licensee to license.
Finally, Starbuck's business model makes it really easy to just tax the transactions with VAT. They churn out coffee, not sophisticated financial products, not ephemeral ads. They physically have to be where they operate. And they mostly sell to regular customers, not other businesses. (Well, I'm guessing here.)
It's not like having a chain of companies across Europe and Bermuda. Not even like serving the entire EU from Luxembourg.
Starbucks' products are already VAT rated where appropriate. But VAT is paid by the customer, not the business. If more of the Starbucks product range was brought into VATable goods Starbucks would just push prices up with big signs saying "TAX INCREASE MEANS HIGHER PRICES".
Unless you're asking for a radical change to tax law to make companies pay VAT?
The only difference is that VAT is explicitly listed on the receipt. You can count on price stickiness for a while but eventually tax increases will lead to price increases.
Without significant simplification of the tax system, no such tax bill will be accountant-proof, or treaty-proof.
[1] http://www.economist.com/node/6919139
In particular, it only receives tax benefits if it's classified an "Institution for General Benefit" (ANBI) by the Dutch IRS, which IKEA isn't.
"What emerges is an outfit that ingeniously exploits the quirks of different jurisdictions to create a charity, dedicated to a somewhat banal cause, that is not only the world's richest foundation, but is at the moment also one of its least generous. The overall set-up of IKEA minimises tax and disclosure, handsomely rewards the founding Kamprad family and makes IKEA immune to a takeover."
Food places like starbucks and McDonalds they could put it next to the mandated calorie count. This sandwich will cost 400 calories and 40 cents in built in taxes and twenty cents in sales taxes.
People really need to understand just how much they are truly taxed, far too many see only the sales tax and not many more understand payroll. Indirect taxes is the big skeleton in the closet.
Companies that have their profits taxed at higher rates would sure LOVE to raise their prices to compensate for lost profits, but a little thing called competition prevents them from doing so.
>People really need to understand just how much they are truly taxed
Indeed. The level of tax literacy and misunderstanding among the general population appalls me sometimes. I can think of at least one example right now...
Well, only if you believe profits aren't used for anything except dividends. The "consumer" can be affected when they don't get new products, or existing products are worse, or when they fail to be hired as an employee, etc.
Rest assured, though, the levels we are discussing here will have zero effect on Starbucks' ability or desire to bring us new pumpkin vanilla spice lattes every winter season.
None? In AdWords auction model it is supply and demand that determine prices, not whatever Google wants to charge. It's just that now Google will have to pay some of that back as taxes.
And McDonalds is not there - they already pay whatever taxes they have to for serving you a physical burger. And yes, it is present in my receipts from McDonalds. So I know how much taxes I paid.
>None?
You misspelled "all."
So because the taxes paid end up being based in part on the fixed costs, it isn't really possible to determine what amount of tax is based on the sandwich you just bought. It depends on how the cost of the building (for example) is apportioned amongst all the sandwiches they sold. Along with everything else they do that makes money.
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.
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.
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.
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.
Of course corporate McDs will pay (the same) tax on the IP-related and/or supply chain profits generated by either store.
What am I missing?
At least in the UK, these two words have entirely different meanings when applied to tax. Tax evasion is not paying tax which is due. Tax avoidance is arranging your activities to reduce or minimise the taxes which are due.
When I check the box to count my daughter as a dependent, I am "avoiding" taxes. When a multi-national corporation inverts their company to Canada, they are "avoiding" taxes. So long as all of the above are within the rules, neither act is immoral.
You still end up with less money than had you not given to charity, and it's MEANT to work this way. It's a very different kettle of fish to exploiting tax loop holes.
And penalizes the government. I'm happy giving my own money to Music For Rich Old White Dudes, but I don't think it's moral for me to take money away from the general taxation pool for that.
I would argue that it's not illegal but if you're defense of an action is "It's not technically illegal", there's a good chance it's immoral.
The result of that is that I pay less in taxes than if I had lied.
Are you honestly suggesting that lying is morally superior?
You do realize that setting up entities expressly for the purpose of avoiding tax is illegal in most jurisdictions right?[1-3] The absence of aggressive enforcement doesn't obviate the illegality of the actions.
In your scenario, those humble multinational corporations who are so beholden to the truth have to tell the tax authorities that the dozens of subsidiaries all have actual and legitimate business purposes and that they weren't set up merely to avoid taxes. I mean, it really is obvious why Apple transferred most of their IP to an Irish subsidiary for non-tax reasons, isn't it?
[1] - https://www.gov.uk/government/publications/tax-avoidance-gen...
[2] - http://assets.cambridge.org/97805218/87779/excerpt/978052188...
[3] - http://www.insurancejournal.com/news/national/2012/05/15/247...
I don't believe that is true. There are ~200 countries in the world. The UK, a pretty advanced nation when it comes to tax, did not implement general anti-avoidance legislation until last year. (See your footnote [1] for the exact date.)
Moreover, this anti-avoidance legislation is specifically targeted at what HMRC calls 'abusive avoidance'. It is not targeted at all avoidance.
This is why the UK arms of these companies don't make any profit - they charge the parent companies more or less at cost. Meanwhile people who want to buy their services sign a deal with the Irish subsidiary. But legally these are different companies.
Additionally it's impossible to say how much profit is being made in a particular country. You can count income quite easily, but then what percentage of the cost of developing Facebook can be accounted to servicing the UK market? It wouldn't make sense to allocate ALL the cost of creating Facebook to the US market and treat every other country as pure profit, as obviously there are costs involved with being international.
I'm not convinces Osborne has any real clue about the morass he's wading in to here. It gets worse when you think about the possible future impact. Imagine Google and Facebook didn't have any UK presence at the moment but were looking to hire people there, because of an abundance of skilled people in, say, London. But entering the UK suddenly means a 25% tax on their UK sourced income. Why would they ever hire the first employee? If they stay out entirely, they aren't in UK jurisdiction so there'd be no reason for them to pay any tax there.
The horrid nature of current tax law is geared towards lawyers and accountants being creative. The system is geared to reward con-men and punish the honest.
A flat-rate tax system based on income might be more effective but the real danger is the tax-breaks that companies get. I see this all the time with Ford/Chrysler/GM. "We will build a factory in your city/state/county if you give us X-billion in tax breaks."
My thoughts: You want to sell your product don't you? In Canada we had a law called "The AutoPact" [1] which basically said that for every 3 cars that you sell in Canada, 1 must be built here.
Corporate welfare will always be a greater hindrance to tax-coffers then personal welfare will ever be.
Why are we paying companies so they have the privilege of taking our money?
[1]http://en.wikipedia.org/wiki/Canada%E2%80%93United_States_Au...
Also, taxable personal income and capital gains are taxes on profit -- I don't understand how that's easier. Any money spent on personal needs is taxable (see "The Situation" who tried to say tanning was a company expense) regardless of whether a person or company spends it. You're also able to write off business expenses whether you're a company or a person just the same too. Income tax is really a tax on profit, not total income. It just happens that people tend to have mostly profit (since they save their money or spend it on personal needs) and for most close to 100% of their income is taxable so they assume big bad corporations are getting some advantage they aren't entitled to which isn't really true at all.
If you run a business, that's largely true, as your sole-proprietor income tax is calculated very similarly to how business profits is calculated. But individuals who earn their income via employment (which is most of them) more often pay a tax on their income rather than profits. Some expenses are deductible, but many of the most common ones are not. For example, commute expenses are typically not deductible [1], even though they are probably the most frequent cost incurred solely as part of earning income. Work clothes are also often not deductible: they are only deductible if they are both formally required by the company, and of a kind that is dissimilar from non-work clothing. So e.g. buying a suit for interviews and/or meetings is not deductible, even if you only bought it for and only wear it for income-earning purposes (I have personally never worn my suit in a non-work context). It's also difficult to deduct the cost of a computer, even if your field is computing and you use it mainly for work and skills development (though it's possible in some cases, if the employer formally requires you to have one at home and doesn't provide it).
[1] "You cannot deduct commuting expenses (the cost of transportation between your home and your main or regular place of work)." http://www.irs.gov/publications/p17/ch28.html
Yes it does create problems like "is driving to work a work expense?" but those problems are generally solved.
In our world of online services, how do you that? For every three subscriptions I sell to somebody in Canada, what should I do exactly?
The bridge between Windsor, Ontario and Detroit, Michigan is likely the most-travelled on the continent, carrying 25% of US-Canadian trade, and $13Bn of assets, mainly due to the large auto industries of both countries.
(The US domestic brands are predictably huge, and there's also Magna, the 3rd largest part supplier in the world http://en.wikipedia.org/wiki/Automotive_industry_in_Canada)
Taxing revenue instead of profits could be a solution for example by shifting all the tax to the VAT (and then having a single VAT rate in the EU). Then Apple and Google would start paying back on the property rights, patent rights, copyrights, trademark rights, infrastructure, rule of law and well educated consumers they enjoy in Europe.
If anything about VAT is going to cause grief for small B2C tech businesses in Europe, it seems more likely to be the changes affecting them from 1 January 2015 precisely because the VAT rates in different European countries are different.
Inasmuch as the tax gets passed on to companies, it can push teetering companies out of business. A company with no profits 9for real) pay no corporate tax. Second, corporate taxes are more or less like capital gains tax, in many cases a capital gains tax on foreign citizens that own shares in that company. Taxing the rich is hard. Taxing the poor is relatively fruitless and morally questionable. This is why a lot of the burden (as a percentage of income) falls on the middle class, who are easiest to tax. A VAT is a "flat" or moderately regressive tax. To replace corporate tax revenues with more VAT, poor and middle class people would have to pick up the share currently paid by rich people and foreigners.
The current tax systems with the various types of taxes are evolved to maximize tax revenue, and to a certain extent GDP. A fairer system that "costs" the tax office 5-10% of their revenue is off the table. Most kinds of taxes are maxed to the point where raising them would either (1) not actual produce more taxes^ (2) produce immediate political reactions (3) harm the overall economy too much.
When you are super-optimzed for one thing, its' hard to optimize for something else, like fairness.
^EG, if the high marginal income tax is 50%, increasing to 70% will not realist in a 40% increase in revenues from that tax bracket because the incentive to earn (declared) income goes down.
It's a hard problem that doesn't lend itself to simple solutions.
See: http://www.bloombergview.com/articles/2014-07-16/we-don-t-ne...
A reasonably fair personal income tax or VAT can be implemented reliably (and has, in virtually all of the industrialized world). A fairly distributed corporate tax is nearly impossible (again, the existence proof being its absence basically everywhere). No matter how well the statutes are written, a big enough entity will be able to lobby the government into changing the law to its benefit.
Yes, we're talking about a UK law, but the principle remains valid. "Lobbying" is just the advocacy for the government to do something. Most of the time it's a good thing, because governments on their own tend not to have many good ideas. Making that illegal in general is (quite literally) isomorphic to living in a totalitarian regime.
I suspect what you really mean is that lobbying by "bad people" should be illegal. Well... good luck defining that in statute. You say banana and I say banana.
Let's say you have a horse-and-buggy paratransit company (call it "Unter" for short) that you think is a great idea. But it turns out that existing cities have dumb, ancient laws that disallow horse-drawn carriages. But your users love your service and everyone agrees that it's a great idea. So you call up a legislator to pitch them on the idea of updating the law.
...and end up in jail, because you're a "corporation"?
You aren't going to drive much social justice if you paint your enemies as cartoon characters.
I'm not sure how you could get from here to there though.
A VAT or sales tax has the advantage of efficiency and ease of implementation. A personal income tax can be made more progressive and socially fair more easily. Most western governments have settled on some mix of these for the bulk of their revenue.
The real proper tax is a transaction tax. Not a flat sales tax or anything, just whenever money changes hands between entities (personal or institutional) in exchange for goods or services (including you paychecks, which are an exchange of your time for money) you get flat taxed on that.
The exception to this is capital gains, since those are not really transactions, just money you are making for owning some form of the means of production. You would definitely want a strict yet simple progressive tax on that, to curtail wealth concentration of the pandemic nature we see happening today. Rather than tax brackets, they should just use a linear function with no capital gains below the happiness threshold up to, say, (now these numbers are fudged and should be researched) 100% tax on capital gains over 1000 times that threshold.
Those are in fact transactions, at least when they're realized, and are supported by a huge class of apparatus of the State, from property laws to courts to communications infrastructure, and more.
Companies don't pay taxes. Ever. Their money comes from customers buying their products and services. If they are not taxed, they can offer a lower price to the customers. If they are taxed, that simply means higher prices for customers.
Ultimately, individuals always pay the taxes.
Starbucks does not avoid tax to give me a good deal. Starbucks avoids tax so that Starbucks can make more money.
Even if they are applied to specific companies (to favor domestic companies, for instance), then they still have largely the same effect, since they allow the domestic competitors to compete in the market inefficiently, raising prices on the consumer.
Companies don't set prices for products to achieve some specific return, they set prices at the highest point the market can bear. Cutting their tax rate doesn't have any impact on the greater market, so it's unlikely that prices would move at all. The more likely outcome is that owners and shareholders would see higher profits -- which definitely isn't a bad thing, but it's a very different proposition than a general price decrease for consumers.
This assumes the owners are targeting some set return rather than pricing their products at whichever point the market can bear, which is a giant, unsubstantiated assumption.
If GM was paying an effective 5% tax rate, which was then cut to 0%, do you honestly think they would lower prices? Yes, I know the theory that Ford would get the same benefit, then lower their prices in competition, but history has repeatedly shown that this is unlikely to result in a price war. Informal collusion is fairly easy to maintain and it's unlikely that the marginal loss in sales from a 5% price premium would be enough to offset an additional 5% booked straight to profits.
Conversely, if employees were not taxed, they could work for lower salaries. Individual taxation simply means higher labor costs for businesses.
Corporate taxation is part of a complicated system. It's easy to isolate it and say that companies don't pay taxes because they simply pass the costs onto consumers but the same argument can be made the other way, because they're both part of an integral whole.
Falsehood. Prices are set by market supply and demand, not tax rates.
A tax may change the quantity of goods or services provided. The price, however, is set by the intersection of the supply and demand functions.
Basic market economics.
There've been many articles and posts cited on HN that go into the tortured, and very profitable, machinations of entertainment industry financing and accounting.
Some argue towards making such finance, e.g. taxes, simple to the point where it can't be gamed. The tradeoff is that finance is used as much if not more so than overt legislation, to steer policy, investment, and ultimately -- imperfect as they are -- outcomes.
I'm not saying simplification is wrong. But keeping your system intact while you do it, is... well, not as simple as it might seem.
But there is a lot of potential benefit. How much further would clean(er) energy be, if we weren't propping up carbon fuels to the tune of billions in subsidies every year (including a substantial part of e.g. the U.S. military budget)? Would the Mid-East be quite such a mess, if no one was continually pouring money into its weapons systems and dictatorships?
Anyhoo, I typed way more than I intended.
When an outfit is doing fantastically well, to all appearances, yet the profit is missing, then start looking at / going after the gross. They have to pay their way, just like everyone else. Perhaps all the more so, the more they insist upon being a "corporate person" with "personal" rights (e.g. speech, et al.).
----
P.S. As an actual person, with a few policy-minded exemptions aside, I am taxed on my gross income. Not my net. (E.g. I don't get to deduct my groceries, nor my auto insurance, nor...) (Although, state sales tax in the U.S. does vary by state and is often, when lowered, meant to lessen the regressive nature of said tax for low income earners with respect to essential goods -- you gotta eat.)
Home owners get to deduct mortgage interest, while renters get no such break even though a significant chunk of their rent may effectively be paying the interest on the landlord's mortgage for the property. Pushing home ownership in the U.S. as a policy that apparently veered into the extreme, providing lots of marginal loans as raw inputs into the financial machinations that propelled the 2008 Great Recession.
Anyway... I'm taxed against my gross income. There's no magic rule that says businesses can only be taxed against their net. It's all policy -- not natural law. And when they game the system beyond all measure, they should expect that, sooner or later, policy will be changed.
The problem is in good part that, if they can make it later enough, they become another "too big". They've captured their regulation.
At one point, I personally rolled up the annual corporate net profit for over a billion U.S. dollars of gross revenue. It came out to (for various reasons I won't go into, here) circa 4 million. That's a much larger percentage of expense than I get to deduct in my personal life.
I realize this is a simplistic example. But when things start to get this extreme, we need to take a look at who is paying the taxes that benefit whom? Is this anywhere close to in balance and each "entity" paying their own way?
Paying their own way not just on principle, but because if they aren't, they may have a distorted and "inefficient" (I might chose the word "destructive") business model.
Should we in the U.S. really have to e.g. provide food stamps and other benefits out of tax revenue -- which has increasingly shifted to come primarily from individuals rather than businesses -- to Wal-Mart employees?
And many of the investment entities and their management that benefit in outsized measure from such... subsidization, are ostensibly paying a 15% rate -- before they whittle this down even further.
It's harder to compete with the "big boys", when you are facing an entirely different cost structure. Not just economies of scale, but finance and policy of scale.
The incentives to give back don't exist unless you take a chunk of the money before it can be put back into their own pockets. Not that I think this should be done this way, but it's silly to think they are going to be able to recover significant profits from these banks.
Let's walk through an example. I call a plumber to replace a water heater, which they provide. They charge me retail for that water heater. Plus sales tax. Now of course, they have to charge me corporate income tax for that whole amount. Including the sales tax, by the way, because that's income.
The hilarity doesn't end there. The plumber bought the water heater from the manufacturer. Let's assume that was at some discounted rate, maybe a 20% discount off of retail. Ok, so 80% of the retail value of that water heater is income to the manufacturer. They have to pay corporate income tax on that whole amount now. But wait, corporate income tax was already paid for 100% of it by the pluming company.
We're still not done. It turns out that water heaters are a commodity and there isn't much margin in the business. They already can't afford to pay the corporate income tax, but it still gets better. All the manufacturer does is assemble the parts. They buy the parts from other companies, and some components go through multiple companies. At each step, each of those components was income for the manufacturer or assembler of the part.
Basically you end up triple taxing or more, the various parts of the system.
Believe it or not, it gets worse!!!
An astute observer would notice that the easiest way to avoid as much corporate tax as possible is vertical integration. In other words, if the plumber, water heater manufacturer, and all of the subcontractors and sub-manufacturers involved all worked for a single giant corporation, they'd only have to pay corporate income tax once on the water heater and all of the components within it.
In short, companies would be forced to move to countries that did not implement corporate taxes. Companies that are unable to do that would be forced to combine into as few companies as possible to avoid corporate taxes.
Remember, taxes discourage the behavior that is being taxed. Corporate income tax discourages the transfer of money between corporations. That just means there would be fewer, larger corporations. And of course, more expensive goods and services. Assuming the entire world implemented corporate income tax simultaneously. Without that, there would just be massive shifts of businesses away from countries with corporate income tax.
VAT is absolutely not that.
I was illustrating how impossible it is to just look at top line revenue of a corporation.
Also, if by solved you mean prevents double taxing through a production pipeline then sure. But it boils down to a sales tax which in general is regressive compared to typically progressive income tax.
I recommend that everyone read up on the basic mechanics of the U.S. income tax: http://www.amazon.com/Chirelstein-Zelenaks-Taxation-Concepts... (this book is very approachable, and quite short). Things that seem like "creativity" if you're not actually thinking, actually fall out from the mathematics of what you're trying to tax: gains in wealth over time. Things that seem like unnecessary complexity arise naturally in response to the challenge of sampling a continuous function (the value of assets) at discrete points (yearly, or at the time of sale).
The bones of the tax code are pretty elegant. It's complex, but it's complex because accounting is itself very complex. But nobody argues that the complexity of GAAP is a form of corporate welfare. Yes, there's nonsensical cruft layered on top in the form of tax breaks, but those are actually pretty simple in comparison.
If a tax code becomes simpler and some businesses are no longer viable, why should I care? So Wal-Mart doesn't make sense anymore? So iPhones should be more profitable than they are now? I'm not sure why I should care about that.
It's the classic programmer's dilemma: do you implement the complex algorithm that gets the right answer, or the simple one that gets the wrong answer?
I'm all for simpler algorithms, but assuming that's our goal, I'm not sure all this discussion about income taxes isn't starting from the wrong point. We should be looking for taxes that are relatively easier to enforce, like property taxes.
EDIT: Yeah, I looked it up: http://en.wikipedia.org/wiki/Gross_receipts_tax
There's drawbacks to that sort of scheme, but it's certainly feasible. After all, individuals pay taxes on their adjusted gross revenue (income).
Yes, one way to avoid the complexity of implementing a proper income tax is to tax something other than income. But there are reasons we tax income rather than consumption or property. Consumption taxes are regressive--poor people carry more of the overall tax burden. Property taxes have the undesirable characteristic that they often require you to pay money you don't have in cash. Just because your house doubles in value doesn't mean you have the cash to pay double the property taxes on it. Except in certain cases involving inheritance or gifts, income taxes don't force you to sell property that increases in value just to pay the tax on it. Also, with property taxes you run into complexity in defining "property." You'll either draw arbitrary lines (land is property, but stock isn't), and distort the economy as people invest more in untaxable property, or run into trouble valuating intangible property like stock ownership and IPR.
There's a reason why every developed nation has settled on income taxes. The basic principle is something people can get behind. The existence of society and government helps you gain wealth, so it seems reasonable to people to tax a percentage of that gain in wealth. Moreover, people keep track of changes to wealth even without the tax regime (modern accounting predates the modern income tax by centuries), which makes income taxes relatively easier to administer.
Will some low-profit and no-profit businesses have problems? Sure, but I'm not sure why they shouldn't have to contribute to the general fund just like all the other businesses. If their business models aren't sustainable while paying taxes, I'm not sure why I should be upset. What we have now is overly complex (deducting losses from previous years) and amounts to a subsidy for losing money.
I think you'd be pretty upset if all of those businesses closed their doors due to a massive tax increase.
The gross receipt tax distorts the economy: it rewards firms that integrate every step of their production rather than focusing on their comparative advantage. The railroad that owns its own steel mill is tax-advantaged over the one that buys steel. That policy is inefficient: the economy should reward the most competitive steel mill, rather than insuring that the largest consumers of steel are more or less required to operate their own crappy mills.
Here's a more immediate example: imagine a tax policy that essentially fined Dropbox for not owning its own chip fab, and forced it to compete with huge companies like Apple that did.
Wal-Mart versus Apple is a bad example, because the two companies are in radically different lines of business. Instead, imagine a tax policy that fined Whole Foods, which sources the goods it sells from a variety of different vendors, while rewarding Safeway. And, of course, the point Rayiner was making was that turnover taxes penalize all of direct-to-consumer-retail; it doesn't just pick Target instead of Wal-Mart, but rather penalizes companies that rely on logistics and distribution at all.
> What we have now is overly complex (deducting losses from previous years) and amounts to a subsidy for losing money.
Say company A makes $10m in year 1, loses $10m in year 2, and makes $20m in year 3. Net gain in wealth = $20m. Say company 2 makes $10m in years 1 and 2, and breaks even in year 3. Also has a net gain of $20m.
Say the tax rate is 20%. In any sane tax system, both companies will pay $4m in taxes over three years. So how do you handle the loss for company 1? Does the IRS write them a check in year 2 for $2m? If not, company A pays $6m in taxes over three years, versus $4m for company B.
Loss carry-forwards are not a "subsidy for losing money." They're a mechanism for getting the right answer integrating a continuous function at discrete intervals, without allowing for negative tax due. Your solution to the complexity is to just punt and give the wrong answer.
At the basic level, corporations should be able to operate and turn a profit, regardless of whether they're low or high margin. That shouldn't even matter in a discussion, since both high and low margin businesses create jobs, and are a good thing for the economy. Some businesses just need bigger scale, but that doesn't make them worse businesses.
Yes, they're avoiding taxes, but a lot of these companies are still highly profitable without the tax avoidance aspect of it. That's just the 'icing on the cake', and I'm pretty sure if they didn't, some (activist) shareholder could probably force them to do so. This is the world we live in. In the end, tax is just another corporate expense.
This tax problem can't be solved without significant international cooperation, and I'm a big fan of simplifying the tax code of countries globally.
Nobody has a right to the profits they are accustomed to. Buggy whip manufacturers have no right to make a living. And businesses that require exotic tax exemptions to exist might fall in the same category. Again, I think it's more fair to gradually phase out current tax schemes and phase in new ones so the economy isn't shocked by a massive rule change, but I don't see why any business has the right to broadly fix the current tax rules in place forever.
And, at the end of the day, any tax increases will be (and are) passed on to end consumers. It's not as if gas stations go out of business because their expenses go up (oil prices, credit card fees, etc.). They raise and lower their prices to accommodate price changes. And longer term, they adjust their business models as well.
All that being said, I don't even really care about gross vs. net taxation. I just believe this line of thinking doesn't add up.
Take Starbucks for example, they're not even turning over a profit in the UK... yet they created thousands and thousands of jobs.
We'll keep ramping up taxes, they'll close down stores, move abroad and then wonder why youth unemployment keeps rising.
This also coincides with a lot of pub closures due to certain government regulations and increased taxes on alcohol.
Got to say I agree with this http://www.thetimes.co.uk/tto/news/politics/article4285739.e... (paywall).
Summary: Hodge wants to make it a criminal offence to sell or promote illegal tax avoidance schemes in the first place. So if HMRC challenge a scheme and it's found illegal, the lawyers/accountants who developed it can be criminally prosecuted as well as those who used it.
Isn't promoting something illegal already illegal by definition?
"HMRC can prosecute tax advisers if they try to hide schemes, but has no sanction against those that create and sell artificial trading arrangements designed solely to dodge taxes."
That's what she wants to change.
llegal tax avoidance = tax evasion. You might as well talk about legal tax evasion.
If my company was having these taxes imposed on me, I would move all of my offices and companies out of the U.K. within the next couple of years. I will be interested to see what happens to the economy after these changed.
According to the FT:
"the new tax would be a “deemed profits” tax rather than a corporation tax, so as to sidestep issues about double tax treaties.
[...] the Treasury would identify profits that escaped tax in the UK because of royalty arrangements or the absence of a taxable presence.
[...] It seems to be something completely novel . . . It is a huge stick that will stop this artificial avoidance. The difficulty will be how it is defined in practice.” [2]
[0] Similar way to the way the UK flat rate VAT scheme works
[1]http://www.internationallawoffice.com/newsletters/Detail.asp...
[2] http://www.ft.com/cms/s/0/127010ea-7af9-11e4-b630-00144feabd...
[0] http://www.endole.co.uk/company/09054162/google-ninjas-limit... [1] http://www.endole.co.uk/company/08533581/google-pizza-ltd [3] http://www.endole.co.uk/company/08770094/google-it-ltd [4] http://www.endole.co.uk/company/09263100/google-internationa... [5] http://www.endole.co.uk/company/08537202/google-ads-ltd [6] http://www.endole.co.uk/company/08497535/google-analytics-li... [7] http://www.endole.co.uk/company/08615290/google-logistics-lt... [8] http://www.endole.co.uk/company/09042316/google-property-lim... [9] http://www.endole.co.uk/company/08573677/google-recruitment-...
http://www.bbc.co.uk/news/uk-northern-ireland-30131556