It's good that multinationals are forced to pay taxes. Otherwise they get an unfair advantage over small companies (since only large ones can afford to pay lawyers and accountants to help them cheat on taxes).
A common scheme is that companies pretend to have 0 profit in a market (using various tricks) and then argue they shouldn't pay any tax on their profit in said country, because they don't have any profit there.
But it doesn't make any sense. If Apple actually made 0 profit in Europe for the past 10 years, it wouldn't stick around. But they have opened hundreds of new stores and hired scores of people. Everyone know they make boatloads of money in Europe (just as everywhere else). Of course they should pay taxes on this profit.
You are describing the failure of an idea of corporate income tax. I mean, it should be completely obvious that tax doesn't work by considering this example:
Two companies A and B work in the same market, produce the same thing of the same quality and have the same labor/material costs and revenue. Both companies make 100M in the market. The difference is that A is a local company and pay corporate tax on that 100M and B is buys "brand" or "marketing strategy" from a company located somewhere else (maybe on some island in the middle of Caribbean Sea or something). The rights to use the brand cost 100M/year. Company B pays 0 income tax in the country it operates.
This is an obvious failure of the tax system. The solution is quite simple: get rid of corporate income tax, focus on consumption taxes. Then you won't need to chase anyone around trying to prove they overpayed or "hid" income. You just don't care at all about those things. You also invite other corporations to come to your country and pay salaries and then you get consumption/real estate/land taxes on that salaries as well (and maybe personal income taxes as well if you are into that). I mean it seems so obvious for anyone who ever did any business on any scale where international sales are involved and who has seen how easy it is to avoid paying income taxes and how it really is a tax on honesty and on how ethical you want to be.
> This is an obvious failure of the tax system. The solution is quite simple
Yes, it is indeed: 1) if a company does local business, they should pay local tax, and, 2) by making sure the company has physical presence instead of being a P.O. box. Ie. by flagging those companies who claim they are in the middle of the Caribbean Sea while they're clearly not as tax evaders who ought to be prosecuted 3) use whitelists on companies who are honest, and for those who are not: immediately distract the corporate income tax from their transactions (it is 2016, after all). EDIT: 4) the construction with fake companies who the companies deal with should also be pretty easy to catch with some ML/AI :)
Your solution:
> get rid of corporate income tax, focus on consumption taxes.
Would give corporations a free ride at the expense of consumers. It'd stimulate consumers to start fake corporations just to avoid tax. Finally, it'd lower the value of the money the consumer has as it is. Hardly a fair solution.
> Would give corporations a free ride at the expense of consumers. It'd stimulate consumers to start fake corporations just to avoid tax.
This depends a lot on the other details of the tax system. Giving corporations a "free ride" can be unfair if it benefits one group of people at the expense of others, but it can also make a lot of sense when you think about all the different ways corporations can be organized.
Just for a simple example, imagine two different pencils. Pencil A is made by a big company that owns graphite mines, logging equipment, factories, ships, warehouses, and retail stores. Pencil B is made by lots of small companies, one of which is a graphite mine, which sells raw materials to a pencil factory, which sells finished pencils to a distributor, etc etc.
We really don't want a system that taxes pencil B more than pencil A. Because corporations aren't "real"; they can get bought and sold and merged and split. So of course if pencil A is taxed less, then overnight the market would organize itself into nothing but giant pencil companies just to pay less in taxes. We need some way to decide what "share" of taxes each small company gets, so that all else being equal they add up to the same tax the big company was paying. We could do that with profits vs losses, or with value-added taxes, but we have to do it some way or another. How should we do it?
I think the framing is a bit distorted in your representation of the situation. Pencil B provides more value to society as any of of these small companies can compete to do business with other entities while Pencil A can choose to avoid the overhead of establishing and maintaining these relationships, closing the market to small players that might seek to purchase graphite for other purposes, for example.
In an ideal situation Pencil B should be taxed less than Pencil A, as taxes would offset this overhead and incent this shift toward many small independent actors participating in an open marketplace.
In the real world, we have the opposite scenario. Companies are incentivized to become more like Pencil A, forming large vertical monopolies that minimize overhead and lock smaller players out. Even worse, once they're big enough to do business across national borders, taxation becomes mired in international law and cross-jurisdictional quagmires. In this laissez faire world, nations race to the bottom and compete for these businesses by offering places to incorporate at the lowest rates they can accommodate.
There are legitimate advantages to big integrated companies too. The graphite mine doesn't have to spend money hiring salespeople if it already knows who's buying all the graphite. Things like that depend on the nitty gritty details of the market you're in, so I think it doesn't make sense to try to legislate them if we can avoid it.
>>1) if a company does local business, they should pay local tax, and, 2) by making sure the company has physical presence instead of being a P.O. box. Ie. by flagging those companies who claim they are in the middle of the Caribbean Sea while they're clearly not as tax evaders who ought to be prosecuted 3) use whitelists on companies who are honest
This is delusional to be honest. There are many shades of gray when it comes to tax avoidance. Other than straight up fraud there are costs which really are needed but might be a bit overblown. Are you really going to use resources to prove this piece of software bought in Bermuda is worth 4M and not 5M? It's a fundamental problem with income tax which can't be fixed unless you have access to an oracle which just spits a real value for everything.
>>4) the construction with fake companies who the companies deal with should also be pretty easy to catch with some ML/AI :)
It doesn't need to be fake at all. You just overpay for software/advice/tours/coaching/brands here and there. It's fluid, there is no chance tax authorities catch all of those or prove they were in fact overpriced. It becomes tax on honesty/ethics again as people not willing to play the game will pay more.
>>Would give corporations a free ride at the expense of consumers.
No it wouldn't. Consumption taxes as well as corporate income taxes are 100% financed by what consumers pay.
>>It'd stimulate consumers to start fake corporations just to avoid tax.
It's way more difficult to avoid VAT than income tax. Avoiding VAT on any significant scale requires forgery while avoiding corporate income tax is as easy as overpaying a bit here and there and maybe getting "unlucky" with some risky purchases.
>>Finally, it'd lower the value of the money the consumer has as it is.
No it wouldn't. It doesn't matter if you tax a consumer or corporation the money comes from consumers anyway. It seems you are not very familiar with how consumption taxes work and how they the tax burden under them looks comparing to corporate income taxes. I don't want to suggest sources but as this is widely discussed issue by economists on all sides it's easy to google for it. There are issues mainly concerned with consumption taxes not being progressive (or regressive if you take immediate look) but "giving corporations free ride" isn't one of them.
Thanks for the explanations, they've broadened my viewpoint on the matter.
FWIW, I never said it was easy. I also never said I didn't want additional punishment on the crime. I do; and in addition to jail time. That way you hurt the criminals where it hurts. If the BSA, RIAA, MPAA can claim missed income with ludicrous amounts, why can't the tax departments? Oh wait, reading the article, they did, and apparently that is just 100% + interest. For maximum efficiency, go after the big fish _first_. But there's so much fish slipping through with regards to BSA, MPAA, RIAA, and also (corporate) income tax. Tech can help us here, but the legal system is flooded as it is. In practice there's out of court settlements which is less ideal since it creates a shadow justice system.
Now, if we do what you suggest, abolish income tax, VAT will go up due to loss of income from income tax, and the state needs income from somewhere. However the effective income of the consumer would go up as well which I forgot. Since there's so much corporate income tax evasion, the consumer and honest businessmen end up with a net advantage of purchasing power compared to the current situation, and we save money/time/lawyers/experts. Although I suppose some lawyers/experts lawyers need to respecialize.
A caveat is that we must implement it on a global scale. Else the VAT is higher in certain countries, while lower in other, which increases the incentive for fraud (buy by proxy). Also, it is too bad it won't work with any of the progressive tax systems. Which is what we in Europe have (YMMV). We could however, while abolishing income tax, move the weight of the progressive income tax to VAT, but what's gonna happen then? With physical items people would end up buying items for others. But like you said it is difficult on a large scale, and for something like a car that wouldn't work very well, since its pretty much bound to a driver's license and its movement is tracked via GPS. With items bound via DRM or service w/o resale value, there's no problem either. In other words, progressive VAT on service would work.
There's also the side effect that people sit on their money. If they spend it, it is (more) heavily taxed. I think that is going to create a massive black market, but perhaps that could be tackled in the 21st century. My main beef with your point is that you believe people are gonna keep getting away with it. I disagree. I believe technology is going to force^H^H^H^H^H us, on the longer run, more honest. But if we were to swap to a progressive VAT-only system we'd also be able to use tech.
EDIT PS: A way to avoid progressive VAT problem would be to rescale incomes. Well... yeah... I just don't see that happening...
I agree, I think corporate taxation has many flaws (especially in a global context). But as long as it's in place it should be applied equally and fairly.
Most countries struggle only to make small changes to their tax-systems (just look at all the loopholes and flaws most countries have sprinkled throughout their tax code).
Or India, they've spent some ~25 years working on an update[1].
A global, synchronised overhaul of the tax-system would be very hard. Most likely, it'll have to be a gradual change.
I also think more emphasis on consumption tax (VAT) and real-estate taxes would be good. But any change will take time.
The problem as I see it is that it's actually impossible to enforce when we're talking Google, Facebook, etc scale....
Let's take BigCorp'inc or whoever which is selling stuff in the UK and not paying any corp tax; should the uk govt take them to court and try to reclaim money it feels its owed? The govt doesn't really have the teeth for that fight; it's in BigCorp's interest to fight incredibly hard and throw vast sums at that kind of problem.. I'm feeling like the endless pockets of these companies would force the govt to drop any case when the costs get high enough (with enough lawyers, how many years do you think even the frist phases of such a case could be drawn out, and at what taxpayer cost?) that would be a huge embarrassment and would mean publically admitting we can't actually enfore this and so we don't even try to do it...
So what's another option? We could attempt a sales ban, but that's a simple bit of math from BigCorp's side which makes it also pointless to attempt: If losing access said market forever costs less than paying taxes in all other countries where you are doing that kind of advoidance is, then goodbye to that market.. Right? If a sales ban on the UK worked, then the same thing would start happening everywhere -- it makes sense for them then to just walk away (certainly, it'll be cheaper).
So we can't force them to pay, and we can't threaten them with exclusion unless everyone else does too, so what else is possible? Drop corp tax and double vat?
Consumption taxes are typically seen as a bad solution because they are regressive.
If coupled with increased progressive taxation elsewhere this might be okay, but otherwise it's a big problem.
The truth is there isn't a 'simple' solution to this, which is part of the reason that status quo is unchanged (another part of the reason is obviously the lobbying power of large/multi-national corporates.
Consumption taxes aren't regressive unless you take a very narrow view of what happens in given year. Consumption taxes are linear as the money will be spent at some point and taxed there (and if it isn't spent it's fantastic as someone just provided free services to society and didn't want anything in return). Still if you are concerned about them being regressive in small time window then there are many ways to compensate for that:
-tax necessities at lower rate
-give every citizen some way to get some of the consumption tax back (up to X amount)
-introduce more social programs like some kind of unconditional payment; as this will be much bigger % of income for poorer people it will in effect make consumption tax progressive.
>>The truth is there isn't a 'simple' solution to this, which is part of the reason that status quo is unchanged (another part of the reason is obviously the lobbying power of large/multi-national corporates.
I think your "another part" is what is really going on here. I would add one more reason: people are not good at understanding economics and consequences of regulations. Even if you prove on paper that consumption tax is just more fair, will make companies pay in market they operate and therefore will lower tax burden on lower/middle class it's still easier for a politician to shout: "tax the rich CEO's!" and they will get people to follow them.
Robert H. Frank's Luxury Fever[1] advocates for a progressive consumption tax, and has some fairly compelling arguments. One of which is that it flips the "save money" incentive to consumers. This coupled with Piketty's wealth tax would be difficult, but probably effective in combatting wealth inequality, and making taxes a bit more "fair"
Until you start dealing with the fact that the largest taxpayers really don't consume that high a proportion of their annual income, and someone has to pick up the bill...
> The solution is quite simple: get rid of corporate income tax, focus on consumption taxes.
I feel the better solution is a global tax treaty. Where WTO nations or appropriate group all agree to have a minimum corporate tax rate if they want to trade. This will stop any race to the bottom by countries trying to attract companies via a double Irish type method and remove the incentive of corporations for this. All while allowing taxes to be collected at the corporate level in a global economy.
The problem of removing corporate tax is corporate vehicles will become a holding vessel for profit hoarding. E.g for someone like me that likes to save rather than pay my tax bill each year on investment earnings I'll set up a company and put all my savings into this. Each year these invest profits will be retained tax free as I continue to save. This will pull massive tax revenue from the economy as people do this at scale. For this reason shifting to consumption tax only will just open another tax avoidance option.
I don't like it. There are too may countries, local governments with various degree of corruption. Legislation with various kind of rebates and laws which allow you to deduct all kind of different things. Global treaties like that can't work in a world with so many realities and cultures.
>>The problem of removing corporate tax is corporate vehicles will become a holding vessel for profit hoarding.
I don't mind it. Sooner or later they spent the money. If we have inflation at some decent level that will serve as a tax on hoarding.
>>E.g for someone like me that likes to save rather than pay my tax bill each year on investment earnings I'll set up a company and put all my savings into this. Each year these invest profits will be retained tax free as I continue to save.
I don't see the problem. It's a basic arithmetic property of multiplication that it doesn't matter if you save more first and then are taxed at 23% (or w/e the rate) or are taxed first and save later. If you are buying assets then some other people get the money to spend.
>>This will pull massive tax revenue from the economy as people do this at scale
I think encouraging savings is good, it stops over the top consumption and allows building capital to finance new ventures and therefore allow for faster progress of our civilization. If you never spend the money it's great for everyone (you provided free services and didn't want anything in return), if you spend it: you are taxed. If you buy some assets you will be taxed on that and some other people will have your money to spend and be taxed there. I just don't see it as a problem as long as there is at least minimal inflation (aka tax on keeping cash).
I read an article that said we should move away from all taxes except for one tax on moving money around. Something like 0.01% on all transactions(bank to bank, c2b, b2c, etc.). The taxes would be taken at the point of use and wouldn't need to be progressive because for most people it wouldn't cost much for typical use. Large businesses or very rich people would have to pay that tax to move money off shore etc. Not sure how feasible it would be, but it's an idea to ponder at least.
Ideally we should tax things that take us away from our collective values and reward or leave alone things that contribute to it.
IMO, we should tax things that don't contribute to actual growth. Basically companies that merely extract wealth from the system without contributing anything of value like high frequency trading and predatory patent trolls.
Taxing income makes no sense to me. Isn't that a disincentive to work? Work is one of the primary drivers of creating prosperity.
Wouldn't such a policy disincentivize transactions, at least to a degree? I thought the whole reason for the federal reserve bank's monkeying with interest rates was to keep money in motion and being used, instead of just sitting piled idle in various accounts, because the former is better. In my mind money in motion necessarily implies lots and lots of transactions. Taxing transactions seems like it would make people want to keep money in their accounts instead of using it.
It would, yes, I'd imagine. I looked up what it's called and it's the Financial transaction tax[1]. What some propose is to make it 0.3% on all transfers of money. Right now it costs $21.80 to send $1,000,000. The same payment under the new scheme would be $3,000. I have no idea what can of worms it would open up but it's an interesting thought experiment.
This is rather wishful thinking, because a high proportion of the "moving money around" transactions that take place either won't take place if you charge 0.01% to do it (market making/HFT, day trading, shifting money between theoretical business units that can be consolidated) or are directly or indirectly taxed at a much higher rate at present.
Nah it's not really good. We need to just tax rich people if that's what we're going to do. Taxing a corporation takes operating money away from that corporation to spend on other things. Normally this is where people say "they'll just enrich their shareholders", to which I reply, then tax rich people.
Rich people were taxed, the industries that depended on them suffered (I'm from Florida, and yacht manufacturing industry alone laid off tens of thousands in the state).
---
Your distinction is arbitrary (especially considering point #1).
(1) It's not legal to run your personal expenses through a corporation to evade taxes. People do it, but it's not allowed and they could get fined or worse if audited.
Trickle up economics (is that what you call a luxury tax?) doesn't work.
> August 1993, the Congress decided to eliminate the “luxury tax” since it did not achieve its main objective...According to the tax's critics, these revenues were disappointing and unsatisfactory and also negatively impacted the incomes of the sellers of the luxury items.
In response to (2) pretend that we weren't talking about wealthy people exclusively. If we were arguing about putting money in the hands of individuals to grow demand would you still disagree?
> Taxing a corporation takes operating money away from that corporation
You nailed it. We need a system where "corporate taxes" should be entirely at the shareholder level, and corporations should be allowed to propagate tax liabilities all the way to individual shareholders (so that holding entities aren't taxed). Then we should apply a progressive income tax on any capital gains made by shareholders. That would make our the system fair and economically efficient.
We should apply a progressive income tax on any capital gains, period. They're income. There's no reason why they should be taxed at the rate lower than sweat-of-the-brow income, except to economically advantage the rentier class at the expense of the worker class (since the overall tax bill is the same, you're just shifting money paying for it between these two groups by applying different rates).
I agree that capital gains should be taxed like income except for the fact of inflation. If you hold, say a house for 10 years, and inflation averages 8% a year (remember the 1970's), and then you sell it at the same inflation adjusted value, you will pay a bunch of tax on no real gain. Maybe we could adjust capital gain tax to inflation. This would have added benefit of having a constituency that wants a higher CPI against those who would like to keep it low (for example to keep Social Security payments or other retirement payments from increasing).
Problem is inflation statistics can (and often are) manipulated. Just look at how the government swaps things out of the "inflation basket" when the levels start getting too high. Food, rent, healthcare, college education, etc some of the fastest growing (also unavoidable costs) that are not taken into account for CPI.
Thanks. I would rather have money in the hands of people and companies so that they can do stuff with it. I'm not anti-government, but I believe that people and corporations spend money more effectively for themselves than the government can. We obviously need taxes to fund programs that the free market cannot handle efficiently (healthcare, national parks, national defense, and these are just general categories for rhetorical purposes only).
I mostly agree with that answer, although think that there are virtually no politicians pushing it: those that want to cut one tax want to cut the other two, rather than a revenue neutral adjustment.
Doesn't it create some kind of weird cross-border investing incentives though? I.e. we drop the corporate tax in the US, we could raise the income tax to recoup some of that, but not all of it, due to foreign investors who get taxed in their home countries.
Every "tax rich people" discussion turns into politicians appealing to the non-rich masses by taxing higher and higher levels of income. When the politicians themselves and the other rich people, simply don't categorize the bulk of their annual earnings as income.
Though somehow a lot of these really big corporations seem to have massive amounts of cash sitting around and are not spending it, at the same time as many governments are imposing austerity on their populations.
Taxes on profits don't hurt companies that actually reinvest. The problem here is companies that act like they reinvest the money and have no profit, while they actually have tons of profits.
It depends what you reinvest in; I know that the (hardware) business which I work for gets taxed on the revenue it spends on capital goods (machinery and tooling) as if it were profit (then we sometimes get to write off some taxes in the future).
One of the reasons 'hardware is hard' is because the government makes it hard.
An expense must be ordinary and necessary and you have to be able to make the argument that the expense had a reasonable intent to make profit down the road.
Companies that reinvest most of their revenue make small profits. Companies that don't make larger profits, and thus pay more corporation tax where corporate taxes exists.
(By extension, those wanting to abolish corporation tax should come up with an argument why companies that reinvest profits to research or expand should pay more tax - on the goods and services they buy to improve - than companies that do nothing with their large piles of cash except hope it's enough of a war chest to deter others from investing in competing with it)
> Everyone know they make boatloads of money in Europe (just as everywhere else). Of course they should pay taxes on this profit.
The difference between revenue and profit is really important here. You can have a lot of revenue without any profits if you're reinvesting the money, I think? So even if there are a lot of games you can play in terms of which profits you reinvested, I don't think it's as simple as "doing lots of business = owing lots of taxes".
Yes, totally, this is the trick. They come up with bogus costs, usually something vague.
"We have to pay our headquarters Y billion to use 'their' very valuable logo". And this amount Y just so happened to match our gross profit X in market A. So X - Y = 0 profit in market A.
My point is that this doesn't make any sense. If the company actually didn't make any profit year after year they wouldn't stay. Everyone knows this is true. Any other argument is just PR-bullshit to justify the tax dodging.
–––
Another common trick is to buy something with intangible assets, for example software, in a market where you have untaxed profits (as described above).
Then you wait a few months and suddenly realize that this was a stupid mistake and that all this software is now worth zero.
You make a huge write-down (which is a cost) that can help you reduce your (bookkeeping) profit to 0.
You still actually made money though + your 'worthless' asset [the software] is still around, and will keep generating money in the future.
I've also seen this happen in real estate. You can make a ton of profit, but if your on-paper amortizations outweigh your in-real-life profit then you on-paper lose money even though in the real world you're richer than you were before.
There's something called an Arms Length Test. Basically the criterion is that a business can not set up an arrangement purely for tax benefits if they wouldn't be willing to make the same arrangement with another company they didn't own.
It is designed to prevent abusive income shifting practices.
They might be able to make this case for Apple but it's really a subjective call.
Apple can argue that any other company would agree to the same Ireland IP licensing because they can make a profit.
It really comes down to a subjective argument of how much profit is needed to make it attractive to 3rd parties at arms length.
They also make boatloads of profits. Somehow they argue that those profits are largely happening in the Bermuda's, not in the EU and also not in the US. How convenient for them, that there's no corporate tax in the Bermuda's, and also no transparency.
Everyone can see that these are all tax avoidance tricks that may or may not be legal, but they certainly are not based on economic reality, they are not in line with the intentions of law and can't be defended to public opinion. These companies get access to markets, use public infrastructure and get support of the US and EU governments. They should simply pay the taxes where they are due, mostly in the US and also in the EU.
Insurance companies keep re-domiciling to Bermuda and Ireland.
Hedge funds have preserved material gains via Bermudan tax laws for years. They park money in Bermudan insurance companies whose investment arms manage the funds, while deferring tax payment on trading profits. Eye-opening to learn about...
I worked for an employer who used the Bermuda shell corporation trick. To keep the IRS happy they had to actually do some real work in Bermuda -- it wasn't just a PO box. And let me tell you, it probably cost as much as it saved in terms of yahoos doing things suboptimally based on misunderstandings. It might have been something that could be cleared up with frequent trips to Bermuda for business stakeholders, but that would have cost some money too.
Then introduce a tax they will pay. Otherwise you will always be in the business of "how much that investment strategy/brand/trips" to Bermuda were really worth. It's the game that can't be won. It's frustrating to me that this point is missed. I suspect it's because people who write tax law rarely has any meaningful business experience and little understanding of economic reality.
Only as long as countries and politicians don't really try you are right. Giving up on trying to make corporations pay taxes they should pay because "you can't win" seems like a very weak way to handle this.
Corporations will immediately start discussing income tax or VAT and invent avoidance schemes on that, playing countries against each other, and that game also can't be won. There's no end.
The big economic regions like EU and US should completely stop accepting all these transfer pricing and IP deals, and tax these multinational companies on something that is based on the profit that they report to their shareholders, divided by the approximate regional share of the company's total market.
Only Ivory Tower mad scientist can come up with idea like that. I mean, it's not at all realistic to assess "real value" of those transactions. Investment strategy from Bermuda for 5M, are you going to argue it should really be 3.5M? How are you going to go around proving it? Is this really something public resources should be dedicated to? I mean it just can't work and is ridiculous idea.
Just because everyone is doing it doesn't mean it's a sensible idea. It's a huge failure which makes honest ethical people to pay more in a world where everyone else "optimizes" to bigger or lesser degree. It's a system where the only question is how much you go into shady area. This is a problem at every scale from micro companies to big corps.
>>Like many laws, there are subjective components and that is what precedents and courts are for.
But this is not similar to subjective laws where you need to come-up with interpretation for some case. Here you would need to assess "real value" of every transaction out there which is just not possible.
>>Tax agencies understand that businesses exist to make a profit and try to come up with systems that are compatible with that.
This is not an argument. There exist taxes which are simple in structure and which are not possible to evade without committing forgery. VAT is one such tax, taxing revenue (but not income) is another idea. Income tax isn't like that.
Your conclusion does not follow from your the issue you outline. The unfair advantage could easily be removed by simply not taxing corporations at all. Taxing someone (or in this case, a whole bunch of people) just to keep them down seems like quite a bad motivation.
That's a separate argument. Laissez-faire vs. government (or the optimal level of taxation).
My argument is that a set of tax laws exist today and as long as they do all companies should be treated the same.
> just to keep them down
As an aside, Ireland's corporate tax is 12.5%, roughly 1/3 of the US corporate tax rate (35%). So it's not like Apple is being horribly 'kept down' here.
Unless Apple's going to start paying to keep the roads, energy infrastructure and primary education that keeps their business and staff going they better start paying up.
Well, legally it is if the tax code says it is (or multinational agreements say the tax code should say it is). And ethically, I don't see why an artificial entity which exists purely because governments are benevolent enough to bestow special privileges like limited liability upon its shareholders should carry less responsibility for the maintenance of the civil society required for its continued existence than the average person living in that country.
> Though Apple will have to pay its tax bill within weeks, the money will be held in escrow, and the issue will probably take years to be resolved.
Am I the only one outraged by this ? There is no guarntee your money is safe. You hire tax advisors. You go as far as to get confirmation from Finance Minister. Its apparently not enough. This level of legal uncertainity is just insane.
It's important to keep in mind that Apple, being a business, is doing exactly what the primary function of a business is - making money. Reducing tax burden is effectively making money they otherwise wouldn't have.
So while as a consumer and citizen I'm happy that Apple is being held to account, I agree with your concern that not even Apple, having gone to such lengths to ensure that such an approach is ostensibly a legal and legitimate method of doing business, can effectively have the authority turn around and say "We change our mind, you owe us fourteen billion dollars." It creates much uncertainty in the legal and administrative processes.
I would prefer to see them simply close the hole for future endeavours.
> I can’t see why the tax liability is in Ireland.
Because it's cheaper. Duh.
If a company charges too much people don't buy their products and go to a competitor. Likewise if a government charges too much tax businesses change their tax nexus to somewhere else.
It's unreasonable to expect a business to operate against its own self-interest. Any system that requires it is bound to fail.
Governments must design their tax systems to be competitive if they want revenue.
Arguing that companies should opt to pay more in taxes is like arguing that consumers should buy a product that costs more. It makes no sense. It's the reason why Walmart exists and why people don't buy local. It's a matter of practicality.
You can make all the moral arguments you want but the facts are that people and companies are going to act in their own self-interest. Until we can be frank and accept this as fact, we can't design moral, legal, and tax systems that work effectively.
Yes, companies will act in their own self-interest. No-one is denying that.
The issue here is that a small hardware startup competing with Apple cannot use shady tax-dodging techniques. Thus they are at a disadvantage.
> Likewise if a government charges too much tax businesses change their tax nexus to somewhere else.
Apple still want access to European customers. So it's fair that they follow the European law. It would be fair if Apple ceased selling in Europe and also didn't pay taxes there. But they don't want to leave the worlds second largest economy.
> The issue here is that a small hardware startup competing with Apple cannot use shady tax-dodging techniques. Thus they are at a disadvantage.
This is true of 'personal' taxes in the US as well. Warren Buffet pays a lower tax rate than his secretary because when you're rich, you can afford a lot more tricks to bring your effective tax rate down, and you can afford a lot more things that can make you money.
Another similar effect: the mayor in my town bought a house in an expensive part of town, which he could afford to do because he had hundreds of thousands of dollars for the down payment. Real estate prices in this city are out of control, growing by leaps and bounds, so after a year, he sold the house he'd bought at a profit of hundreds of thousands of dollars.
I don't have hundreds of thousands of dollars, so I can't afford to buy that place. If I could, I could have made that same profit. If I came across a million dollars tomorrow and had to give it back in two years I could make a lot of money - maybe even double it, if I made the right real estate investments. Two years from now I could give back the new million and keep my own million.
But as it is, without that million dollars I can't make the down payment to afford a place, which means I can't ride the wave, which means instead of getting less profits I get zero profits.
This isn't a dig at the mayor, btw; he and city council are making a lot of moves to help affordability in this city, but being a successful businessman before becoming mayor he has those opportunities that most people don't and can't.
Yes and European law is bound to the same expectations of due process that American law is, except due process isn't being followed here EXCEPT in Ireland.
You approached this discussion with the assumption that the new federal government of Europe has a legitimate authority over their taxation argument, when it simply does not have a clear case, it doesn't have supportive case law, and the administrative procedure is being made up on the fly.
The public servants in the European Commission honestly believe in the concept of fairness, but are interacting in a revenue collection system where that was never a prerequisite.
Another interesting wrinkle is that they were obeying the law in the country / nation they were doing business in, but it was the trade/economic/currency group (euro zone) that told them that what they were doing wasn't allowed.
One problem here is that in the race to the bottom it will always be difficult to hold companies accountable.
wgt regulations in general, the same happens in every state in the US (see delaware)
There's a whole article above about what laws were not followed and a solution that works for both parties: Apple pays the taxes it owes. If it is unhappy with that burden, it can leave Ireland and the EU, but I suspect that will not happen.
I don't think it's fair for Apple to evade taxes even if it's legal. I don't think it's fair for the EU to claim those taxes from an American company. But I also don't want the taxes to go to a Trump administration, just to be blown on a wall.
I think you're supposed to feel like our current setup of democracy is failing us:
1. Governments fail to prevent evasion of taxes.
2. Governments make unfair claims on taxes when public outrage allows.
3. Trump got elected.
4. Most money spent by governments is blown.
I think many people seek a "one good guy, one bad guy" storyline. I'm not sure whether that's cultural, a part of our mythology, or biological. But it's probably something to avoid.
But the law was changed in their favour by Luxembourg in a deal to deprive other EU countries of tax by creating sweetheart deals.
Jean-Claude Juncker, the current president of the European Commission, who was prime minister of Luxembourg admitted after the “Lux Leaks” publications that the system was “not always in line with fiscal fairness” and may have breached “ethical and moral standards.”
Define fair. Fair for who? The problem with using fairness as any sort of qualification is that it does not work. That's how the US ended up in the current situation with a high top rate and mountains of loopholes attempting to make it fair.
The financial system does not recognize fairness as a factor. Apple is playing the game to make money for its shareholders. It would be noble of them to behave otherwise, but I certainly don't expect it.
You shouldn't feel sympathetic to the crocodile tears of legal jurisdictions like the EU who are fully capable of simply changing the rules, but instead choose to complain about individual companies following their own rules.
Evading taxes is illegal. Tax avoidance is legal and it's a fiduciary duty of corporate officers. They would actually be violation their fiduciary duties if they paid more tax than was required.
No it isn't. There is no fiduciary duty for corporate directors anywhere in the world, and certainly not anywhere in the USA or Europe, to avoid taxes.
Nor is there, I wager, any duty to maximise revenue or profit or anything similar in any jurisdiction on the planet.
Here's a relevant assessment by a UChicago tax professor on this very topic (i.e. the "duty" of APPL execs to avoid taxes) [0].
tl;dr: "Tax avoidance" isn't a "fiduciary duty" per Delaware corporation law. That said, APPL execs may be subject to such standards through its corporate bylaws or through a variation in state law (CA v. DE).
'Tax evasion' is illegal - it implies you're doing something like hiding money offshore, and not declaring it.
Apple is doing nothing more than not paying the taxes they are not supposed to.
If you claim your 'moving expenses' on your tax form, are you 'evading taxes'? No - you're just playing by the rules.
Apple basically played by the rules. Nothing they did was illegal until the EU change their laws 25 years retroactively.
2)
Europe definitely has a right to tax business activity in Europe.
3)
The US does have a right to also tax business overseas, but it needs to be reasonable. Today, the laws are whack and US companies are double-taxed. If they weren't all that money would be coming back.
Your comment about Trump are unfortunate, I don't like him either, but he was elected. Also, the bureaucracy has not changed.
But consider this: Trump is actually going to change the repatriation laws, and you'll likely see a Trillion dollars parked overseas come back to the US. A good chunk of it will go to investors as dividends, but still, even that money will circulate back into the economy, and that's not all of it.
It's surprising Obama did not do this - if he made repatriation laws consistent with the rest of the world ... it could have been a big bump to the economy when the US needed it the most.
Edit: to be clear (thanks to Marzan, below) 'double-taxation' is not quite the appropriate term, as US companies are given credit for taxes overseas.
I think OP is referring to places that have tax % lower than the US. Say Country A had a rate of 10%, you get the deduction of the 10% but you still owe 25% more due to the US 35% tax rate when you repatriate the $.
> Apple is doing nothing more than not paying the taxes they are not supposed to.
Well they did take part in secret sweetheart deals with Luxembourg that were designed to specifically route tax from EU countries into Luxembourg tax shelters. I would define that as "more than following the law"
Jean-Claude Juncker, the current president of the European Commission, who was prime minister of Luxembourg admitted after the “Lux Leaks” publications that the system was “not always in line with fiscal fairness” and may have breached “ethical and moral standards.”
> Nothing they did was illegal until the EU change their laws 25 years retroactively.
That's oversimplifying what happened. What happened is that Apple was working with the Irish government for a deal with very low tax %. The EU now told the Irish government that this was illegal, and that they need to ask Apple to pay the full price. Retroactively.
If you play dirty around the rules don't complain when it does not work out. If Apple had simply played according to the rules none of this would've happened.
The excuse that 'everyone does it' is a bad one. It doesn't work out for all the criminals in jail in US for dealing drugs, now does it?
>> "The excuse that 'everyone does it' is a bad one. It doesn't work out for all the criminals in jail in US for dealing drugs, now does it?"
> Governments give incentives including subsidies and tax breaks all the time to companies.
How on earth is that a reply to what you are quoting? Learn to quote.
Your original statement was a deceiving lie, and I corrected it. The EU did, in fact, not retroactively change a law since that is impossible. At interpretation of a law however, can be changed. The EU has told Ireland that their deal was invalid, and asked the Irish government to still ask Apple for all the money they owe the EU. It is money we -as civilians of the EU government- never received from Apple.
As I said in my previous post (you did not address any of what I wrote except went on a completely different tangent): If you play dirty around the rules don't complain when it does not work out. If Apple had simply played according to the rules none of this would've happened.
My example of how terrible the US government is was actually one where the US government profits because the US government profits from drugs felons via free labour.
I'm not going to get into this holier than thou debate on subsidies since I find it a complex topic to judge on by a case by case scenario. Other than that I'm casually gonna mention the US does this as well (in multiple kinds of ways including for example corn), as well as waging all kind of illegal wars and installing democracies as well as dictatorships to wage illegal wars, as well as economic espionage on their allies (Belgacom hacks come to mind). All of which the EU barely does, if it even does that. Some specific EU countries do, and I'm not happy about that. One of the worst culprits on that, for better or worse, is soon leaving us and in that delight I won't shed a tear.
How can you assume that this money would circulate back into the US economy? You imply that it will be used to buy goods and services within the US and thereby serve the "greater good" of increased economic activity of the sort that produces jobs and greater financial well-being for the bulk of the citizenry.
Assuming that it did "circulate back into the economy", it seems most likely this money would be funneled into the already bloated financial sector where it can most readily participate in the variety of internal US tax avoidance schemes.
"How can you assume that this money would circulate back into the US economy?"
I'm saying that corporate profits returned from overseas are effectively coming back into the economy.
Actually - this is statement of fact. It's 'in the US system' as opposed to overseas.
Second - your position basically implies that 'corporate profits' are not beneficial to the US economy, which is a stretch.
Almost all of the money coming back will be put to use.
Do you want to know just one of the many ways:
STARTUPS
The massive number of startups being funded, at amazing valuations, is a function of 'extra cash' in the financial system. All of those failed startups employees are being paid with those dollars. And in many ways 'it's good' - they learn, they move on to better companies etc..
Massive amounts of money coming back into the US economy is a 'good thing' - the onus I think would be on you to demonstrate how this could really be a negative thing, and I suggest it would be impossible to demonstrate.
I wouldn't exactly call Apple's cash war chest "money circulating within the US economy" but I will take your point as given.. by definition money that returns to the US will technically be (once again) "in the US economy".
A significant portion of those profits were shifted overseas to avoid taxation within the US. Providing a "tax holiday" in order to repatriate those monies essentialy validates the tactic of shifting profits overseas to avoid taxation until a critical mass of dollars has accumulated so that it is politically attractive to institute another "holiday" just to bring the money home sans the tax.
This tactic is starving the US Treasury of funds needed for the People's Government to perform its functions.
This isn't the first go around with this, it is in fact becoming cyclical.
In the meantime, these entities are parking dollars out of reach (actively removing them from circulation) instead of investing or spending them within the US.. where they would have been circulated anyway if not for the tax avoidance. They are being rewarded for removing the money and then politicians are being hailed as heroes for "convincing" them to return it by helping them avoid paying taxes to put it back in the economy it was removed from.
I fail to see how you think any of this is beneficial to the US economy.
"In the meantime, these entities are parking dollars out of reach (actively removing them from circulation) instead of investing or spending them within the US.. where they would have been circulated anyway if not for the tax avoidance. They are being rewarded for removing the money "
No - they are not removing anything.
Listen - if you lived in Dubai and earned $300K/year and paid minimal taxes, and moved back to the US with $100K in your Dubai account ...
If you left it there, and used it for travelling overseas, making investments, there would be no tax.
If you brought it to the USA - and it would be taxed at say 25% ...
Would you leave it there, or bring it back?
Would you be a tax evader/avoider for leaving it there.
No.
It's perfectly reasonable for you to want to leave your money overseas.
(I should point out that this is merely an analogy, personal taxes don't work this way for Americans.)
Apple has done nothing wrong.
If the US adjusts it's tax system to be more commensurate with how the entire rest of the world works ... it would be very beneficial to America overall.
I really don't like Trump, but I think he's going to fix this one issue, and that's going to be quite a big deal and a 'good thing'.
This is a BS example. I am going to assume that you don't realize this because I otherwise have to assume you are being crass and disingenuous.
People are not fictional entities that can be created and destroyed at will; corporations are.
Shell corporations are being created within tax haven countries for the sole and explicit purpose of parking revenue within the boundaries of tax friendly regimes. The companies are not actually moving anything to these countries in terms of physical assets or corporate function.. only revenue. This is nothing like a person moving overseas and working and getting payed within that country.
They may have found a legal framework that makes them within the bounds of US & International law in order to do so. The problem with doing this is the inability to repartiate those funds without paying tax in the country you wish to move the money to.
There is nothing broken about taxing profits. You may not agree with the rate of taxation for corporations, but you would be at odds with the vast majority of the electorate. Companies choose to park revenue overseas in protest of the US tax rate.
Trump? I don't think he will fix anything. His stated intent is to cut taxes and increase spending. Maybe lower corporate taxation is in there, but that doesn't "fix" anything. There will always be some country, somewhere willing to go lower. This shell game will continue.
> A significant portion of those profits were shifted overseas to avoid taxation within the US.
In Apple's case this is not true at all. The money they are holding in Ireland comes from profits generated overseas, not from profits made in the US. (This is all well documented from the Senate investigation into Apple's finances a few years back.)
This is 100% the fault of EU and American legislators.
Apple was mostly only doing what's reasonable (aside from, I think a 'special tax deal' - which is unfair).
The EU makes the rules. They created the gaping loophole.
Then they decide they want to 'change the law retroactively 25 years back' [1] - this is gong-show Chavista banana republic type property theft. Apple should sue them aggressively.
What should have happened:
A) The EU should have closed the loophole, long ago, and set some harmonization rules. When the closed the loophole, it should not have been retroactive.
B) American leegislators are at fault as well. Why? Because insane US tax laws prevents US companies from just bringing the money home.
Two problems:
i) Corp tax rates are too high in the US 35%
Because of this, there's a lot of loopholes in the US tax code, instead, they should close them and just reduce the tax rate to be consistent with the international averages
ii) US 'double taxes' foreign profits. A US company that pays 25% corp tax in France, brings the money back - is hit with another 35% tax. US is the only country that does that. Everywhere else, they pay a repatriation fee. The US system is basically designed as though the rest of the world does not exist. US should have a repatriation fee - it can even be commensurate with level of taxes paid in country of origin to be smart about it.
Large US companies are not really 'American' - they often have the majority of their staff, majority of sales, possibly majority shareholders overseas. So we need to grasp this new world order.
The only thing really sneaky that Apple did was pressure the Irish to give them a special deal, but it's still legal, and rational.
The EU is a terrible organization, they're incompetent, ideological, and they work against us as often as they work for us.
If there 'was a problem' with Apple's taxes, it was 100% their own fault - Apple was just following the law.
You can't change laws and have them apply retroactively for 1/4 century, it's totalitarian.
To be clear: I don't think that Apple should have been given a special deal, but it's not their fault for trying, or for having been given it.
It's quite common: Ontario just gave a huge subsidy to Cisco to open an office in Toronto. It could have very well been in the form of tax subsidy. EU massively subsidizes Airbus. Auto manufacturing incentives etc. etc. it's all common. Agree or not with them, but they're not nefarious.
"Following an in-depth state aid investigation launched in June 2014, the European Commission has concluded that two tax rulings issued by Ireland to Apple have substantially and artificially lowered the tax paid by Apple in Ireland since 1991"
The only thing really sneaky that Apple did was pressure the Irish to give them a special deal, but it's still legal, and rational.
If Apple did get a sweetheart deal, that is illegal under EU rules. That is what the whole dispute is about. But I don't think that they got such a deal. I think that Apple may have forum shopped for the best tax regime in the EU. Ireland has extremely low corporate tax rates period; no sweetheart deal required.
So the Irish strategy is to be nice to multi-nationals, in return for that 80%. The understanding is that if we taxed more, they'd move somewhere else and we'd actually receive less. e.g., biting the hand that feeds you.
(This is also why the Irish govt are going to defend Apple in this - this isn't just about Apple for them, it's about scaring off 80% of corporate revenues)
Consider the pressure / race to the bottom this puts on the rest of the EU though. The EU has an incentive to try to keep things fair between the states (disallowing sweetheart deals to lure companies away from other members), because this sort of competition is harmful to the EU as a whole. It's not like Apple is going to stop selling to Europe; they'll be somewhere if not Ireland, and the EU benefits as a whole if Apple is not allowed to skip out on paying its share.
The problem is, no-one's offered a sane alternative.
The top employment sectors in Ireland are Food&Drink, Pharma, and Tech. The latter two of those are massively dominated by multinationals. Combine that with multinationals contributing the bulk of corporate taxes, and we simply can't afford to scare them away. Without these MNCs, Ireland's economy would be basically beef, beer, and American tourists. There simply isn't enough native industry to make up the short-fall (which is the part I think should actually be addressed, rather than the symptoms).
(And away they will - Ireland is not the lowest corporate tax rate in the EU. Liechtenstein and Cyprus have the same rate, and 3 more states have a lower rate.)
I do understand the desire for a level playing field. It's a noble goal. But we're basically being told "We'd like you to drive your economy back to the 1950s, because France feels it'd be more fair". It's not a particularly enticing proposal - all stick and no carrot.
Ironically, they're championing our post-bailout growth as a success, while they retroactively make the mechanisms behind it illegal.
Since when was the EU supposed to be about making things "fair" between countries? The EU does not advertise itself as a club that requires you to become less competitive in order to avoid upsetting the French.
Tax competition doesn't harm the EU, it makes it stronger. Because you realise, that there are countries outside the EU too, who can also lower their tax rates ...
IMHO, Taxes (or market access/safety-of-life etc) are absurdely overpriced. We are seeing market-competition. And I for one welcome it, like any other competition.
I dont know whats "fair" and I dont care. I want things as cheap as possible.
Props to Ireland for doing that. They collect taxes on salaries those big corps pay as well and then consumption taxes on what the workers buy. I wish my country was similarly clever (we have corporate tax at 19% and a lot of companies are coming here but if our politicians had a bit of foresight it would be 0% long time ago and everyone here would be way better off).
It's not one company. It's one example. Pretending this is only about Apple, while completely ignoring the implications to other MNCs, is precisely what Ireland can't afford to do
> It's not one company. It's one example. Pretending this is only about Apple, while completely ignoring the implications to other MNCs, is precisely what Ireland can't afford to do
Can you point another company that has a sweetheart deal with the Irish government like the one Apple had?
The EU's argument is that they can do this but only if they apply the same tax rate to all companies in the country. Apple and O'Donald's Vintage Bicycle Repairs should be subject to the same tax, in other words.
This particular ruling was only permitted to go back 10 years. Where are you getting the 25 year number from?
Also, I'm unaware of how profits are calculated internationally, but it seems to me that by sending the money to the US it should no longer be on the international sheets for taxation. That is, US company "charges" the foreign company $x, usually as a "licensing fee". That $x would be a "cost of business" and should offset foreign profits by the same amount. Grand total is that the $x is only taxed in the US on the US company.
Now, if they earn that $x in 2015 and send it the US in 2016, sure that particular $x is technically double-taxed. However, the offset is that $x in 2016 is not taxed at all. So again, a wash -- money is fungible and it doesn't really matter when it came from.
This is called Transfer Pricing[0]. It's not illegal, but only if you can prove that you are charging your subsidiary the same price that you would otherwise charge an independent third party.
That can be difficult depending on what kind of arrangement you are trying to make.
Laws are not capable of withstanding the kind of gamesmanship and time-geo-varying-interpretative arbitrage that multinational companies spin against all the countries in which they operate or generate business. The idea that tax rules are absolute entities defined within geographical lines in the instantaneous moment has always struck me as pretty flawed.
The lie that regulations define an absolute set of rules with no room for subjectivity is used as a weapon by the biggest rule breakers -- who argue that subjectivity both exists and does not exist as needed to suit their position.
Intent really does need to be part of the definition of law -- the idea that law can exist without a model of intent is flawed beyond hope. It's high time we acknowledge that there exists acts which explicitly violate the intent of law -- and that there exist criteria for deciding when this is indistinguishable from violating the letter of the law.
> Then they decide they want to 'change the law retroactively 25 years back' [1] - this is gong-show Chavista banana republic type property theft. Apple should sue them aggressively.
Taking into account that there was no change of laws and there was not loophole I don't know if you really know what the case is about
> The only thing really sneaky that Apple did was pressure the Irish to give them a special deal, but it's still legal, and rational.
No, those special and not public deals are ilegal
> The EU is a terrible organization, they're incompetent, ideological, and they work against us as often as they work for us.
Citation needed
> You can't change laws and have them apply retroactively for 1/4 century, it's totalitarian.
This. I believed the WTO agreements prevented the governments from changing their laws retroactively. If it's not WTO, it must be IMF, but it is probably forbidden somewhere in international trade agreements.
Or, the IRS could butt out, and stop shaking down businesses that manage to turn a profit without one bit of government assistance.
Would that be so bad? I mean, obviously we'd have to find some other way to fund our wars, state surveillance, and other "think of the children" endeavors - but at least "tax lawyers" would finally be out of a job; the final solution.
A common scheme is that companies pretend to have 0 profit in a market (using various tricks) and then argue they shouldn't pay any tax on their profit in said country, because they don't have any profit there.
But it doesn't make any sense. If Apple actually made 0 profit in Europe for the past 10 years, it wouldn't stick around. But they have opened hundreds of new stores and hired scores of people. Everyone know they make boatloads of money in Europe (just as everywhere else). Of course they should pay taxes on this profit.