The headline is inaccurate - the IRS did not sue Facebook today. This was the first day of the trial. The lawsuit was originally filed in 2016 and widely discussed at that time.
I doubt facebook committed a crime here. The right way to address tax avoidance is to change the law, not to punish companies that comply with the law through arbitrary levels of complexity.
Even if everyone in the room is aware that facebook is practicing avoidance, avoidance is still legal and categorically different than evasion.
Now- The right way to figure out whether this was a crime seems to be by examining the fair value of the intellectual property sold to Facebook's Irish subsidiary. I hope the discussion here can center around this.
I think there's room to argue that intentionally shipping all your IP to a lower tax country then charging the main company (that developed that IP in the first place) high fees to use that IP as a way to shift profits from higher tax areas to lower tax areas could constitute fraud. Either they sold/transferred the IP for way to little or they're charging themselves way too much because it's advantageous for taxes.
Here's the million/billion/trillion dollar question: how much is a brand worth? Clearly it is worth something. Facebook can do the most inane thing, but if they put their brand on it then it will have some value.
To me this is the flaw in corporate taxation. I don't think you can ever work around this as long as you allow free trade. It just makes sense to tax them in other ways instead and perhaps simply get rid of corporate taxation itself.
That is the tough bit for sure in trying to tell up front if an IP transfer is just a setup for tax avoidance. You can tell after the fact though just by seeing how much the company claims it's worth to use.
A VAT style tax probably solves that right? It doesn't care how much money you actually make so you can't slip profits out the back door as costs.
If facebook.fr sells adverts to (say) local realtors, and spends a lot of that on its own people, servers, etc, is VAT collected on the entire sales price? (I'm really asking, I don't know how this works.)
Completely agree that for physical goods, collecting tax where they are physically sold to end-users sounds like a great way of avoiding this game of deciding which branch of a company made the profit.
VAT is charged on the consumer of the product. It is as the name says: a value-added tax. Let's look at an example of a physical good. Let's say the VAT rate is 25% and you buy a graphics card for €500. 25% is added as VAT which makes the total cost €625. Now you resell that graphics card for €1000 and have to add €250 as VAT. However, you get the €125 you paid when buying the product back (realistically you simply pay the government 250 - 125 = €125). Essentially, you added €500 to the value of the product and that's what you pay this tax on.
I assume (don't know for sure) that in the case of FB ads FB just adds on the VAT rate to the cost of ads and that is then paid to the government. In the EU VAT has to be paid to the country where the purchase originates from. So if a French company buys ads then France should get the VAT.
Could the US simply impose a tax on all corporate profits, including international profits, for any company with any sort of nexus or business activity in the US? US citizens are basically already treated this way as individuals.
I imagine it would allow the rate to be drastically lower since the tax base would be so much larger. And while megacorps would obviously grumble, it would still be a profitable decision to pay the tax and remain in the US market given how lucrative it is. It would end all these country-to-country shell games once and for all, and would also provide some natural advantage to smaller homegrown companies that haven't gone international yet.
If I understand right, US citizens only owe income tax if what they already paid is less than the US rate. (Edit: "IRS Form 1116. If your income was taxed by a foreign country, you can subtract that tax from your US tax")
If something similar were applied to the tax on corporate profits, then it would not change much, as the US rate (21% I think) is pretty low by world standards. But there are exceptions, like Ireland (6-12%, IIRC).
But isn't the Irish company a different entity anyway? How far down the chain of ownership / authorized-importer-relationship would such a rule go?
"If I understand right, US citizens only owe income tax if what they already paid is less than the US rate."
I'm not an expert, but my understanding is that unless there's a tax treaty specifying otherwise (which we do have with many countries), all personal income over the "foreign earned income exclusion" (roughly 100k) is subject to income tax just like US-derived income would be. (Edit: just saw your edit about Form 1116... thanks, I didn't know about this. But I guess my point still applies in that, tax credit aside, you are still considered to be under the authority of the IRS even if your life and all your income are elsewhere.)
"If something similar were applied to the tax on corporate profits, then it would not change much, as the US rate (21% I think) is pretty low by world standards. But there are exceptions, like Ireland (6-12%, IIRC)."
Right, but if we taxed all international profits, it could probably be very low (maybe < 5%?) while still generating as much or more revenue, since there would be no way to avoid it. And it would be a naturally progressive tax since it would by definition hit multinationals the hardest.
"But isn't the Irish company a different entity anyway? How far down the chain of ownership / authorized-importer-relationship would such a rule go?"
My thinking is that perhaps we should end this silly game of international subsidiaries being treated like separate entities for tax purposes and just tax the aggregated profits of the parent entity, regardless of where in the world or under what subsidiary they are realized.
I'm not sure it's so easy. If you own 51% of a company, which owns a slice of a company, which does business in America, does this grant uncle same the right to collect 5% of your profits? Sounds pretty imperial.
Here's another idea though: Arrange things so that the taxes owed depend on the goods sold, not on any ownership structure. Don't sell goods in the US? No problem. Sell mostly in the US? Who cares about your office in the Bahamas. This probably means abolishing the tax on corporate profits, as where these occurred seems to be basically an accounting fiction. Which is fine, we also don't tax windows anymore.
>I'm not sure it's so easy. If you own 51% of a company, which owns a slice of a company, which does business in America, does this grant uncle same the right to collect 5% of your profits? Sounds pretty imperial.
Well, you run into that kind of issue when you allow spontaneous incorporation. If anything, incorporation should likely be handled a bit more like immigration in the sense you recognize an entity incorporated somewhere else instead of whipping up a brand new separate legal fiction, Company X,<Your Country edition>.
This would create a mechanism through which issues of taxation could be resolved through tracing the "heritage" of a corporation, then leaving the divvy up of tax extracted value to be sorted out by internation tax agreement.
It certainly sets up a pleasing symmetry in process between dealing with Corporations and people by my estimation, and cuts down on the attractiveness of creating corporate hierarchies with the direct intent to play shell games with your taxes.
I think you are saying that buying or selling shares should be as difficult as immigration? Or only if the buyer and seller are in different countries?
It's definitely imperial, but it's kind of fundamentally an imperial problem to have companies taking advantage of your world-leading economy, then moving all the profits elsewhere to avoid contributing to the society that made all their success possible.
Extradition is also imperial, but without it you effectively offer impunity to anyone who can get out of the country before they're caught. We don't offer this type of criminal impunity, so why are we offering tax impunity to the wealthiest and most powerful entities in the world?
The VAT idea is interesting and sounds a lot better than what we have now, but still seems like it could be subject to shell games in terms of what gets spent where. Wouldn't it also be extremely complex from a reporting perspective?
But not just your economy, I'm sure China feels the same way, as will the EU once they see what you raise...
I think the recent reductions in the US tax are moves in this direction, which is good. And what else to tax, lots of countries administer VAT, it's not so difficult, and seems quite hard to dodge. But there are lots of other taxes, too. Income tax + 401k starts to sound like a consumption tax, too, only paid on what you spend right now, like VAT. We can adjust that however we like. And before the profits in Ireland can be turned into a bigger yacht for any owner, they have to be paid as dividends (or by selling shares) by some real person who lives somewhere, and we can tax that.
The issue is Facebook Ireland or Apple Sales International are separate entities from Apple or Facebook US so on paper the profits are happening in completely different companies like Honda buying a car part from another company. So how do you effectively tax that just by saying we also tax overseas profits as well. To do that we'd have to define and pierce all sorts of corporate veils about true owners, decide what the threshold is for being legitimately a separate business and not just an international subsidiary.
> how much is a brand worth? Clearly it is worth something. Facebook can do the most inane thing, but if they put their brand on it then it will have some value.
Then, Toyota should only pay taxes in Japan? Or Volkswagen?
Is there any good reason to treat subsidiaries as separate from the main entity for tax purposes? All these "subsidiary X licenses from subsidiary Y" schemes seem basically fraudulent in terms of common sense--none of it generates any real profits or losses for the parent company.
Mostly that deciding when it's a legitimately different subsidiary and when it's just a shell for a corporate tax dodge seems difficult and with billions of dollars at stake for the largest companies there's a lot of incentive to make or find and exploit loopholes where FB Ireland technically qualifies as a legit division instead of a tax dodge shell.
While there's certainly a lot of incentive to exploit loopholes, I think we could make it sufficiently onerous and lawsuit-prone to skirt the line that these massive corporations might just pay their damn taxes instead.
With fairly commonsense questions like:
- Was the company formed at Megacorp's behest?
- Is there direct coordination between Megacorp and company leadership?
- Do Megacorp and the company share business infrastructure?
- Does the company share information that would normally be private with Megacorp?
- Does the company take actions that advantage Megacorp over the company itself?
You could at least make it a serious pain in the ass with many potential pitfalls to avoid responsibility in this way.
I agree those are good questions for determining if a company should be treated like a single entity but any definition for those will be endlessly argued in court where, unless funding is increased for enforcement actions, the IRS is at a disadvantage for resources. Apple Ireland for example was able to skirt something around 13 billion dollars in already low Irish taxes, that's a hell of a war chest for defending against a lawsuit. In 2019 the IRS's whole budget was something around $11 billion dollars.
You -- or in this case, Facebook -- has one interpretation of what is legal, the enforcement agency has another. The court decides and everyone goes forward from there.
You and I can have opinion on whether these various international schemes are legal ways to avoid taxes, but ultimately the law going forward will be the precedent set by this case, and its appeals.
There is nothing in the case suggest the international schemes are illegal. Even the IRS is not trying to push for that.
"The IRS argues that Facebook understated the value of the intellectual property it sold to an Irish subsidiary in 2010 while building out global operations"
That is what IRS is trying to sue, on the ground that Facebook Ireland is now collecting substantially large revenue compare to what it was priced.
To me, trying to compare 2010 Facebook patents cost on revenue generated in 2020 is simply absurd. Patents are per user an per revenue based. Facebook 2020 is way bigger than Facebook 2010.
You latter point doesn't really make sense to me. Isn't it true that a sale of IP should model the value of the IP over its lifetime in some reasonable way? And that would include a growth model for FB, no?
If it could be shown that facebook intentionally undervalued it in order to make this scheme work better for them, wouldn't the IRS have a case?
>Isn't it true that a sale of IP should model the value of the IP over its lifetime in some reasonable way?
There aren't any "correct" way to measure it, but most of these IP are likely on percentage based. Sort of like 5G patents where they collect percentage of revenue. So the value I guess they did in 2010 were calculated based on ( projected ) 2012 ( its IPO ) figure. I think judging by majority of comment most people forgot how Facebook perform after its IPO, how its growth wasn't there, how Facebook Gaming Saved it, and how Mobile Internet ( aka Smartphone ) really took off, how they went to Mobile ( App ) First before the term was hyped by SV, and how it has grown possibly beyond most people would imagine. And that is not just Facebook itself, but also Instagram.
That is why I said comparing the value in absolute terms and not on relative terms doesn't make any sense.
At least that is judging from the limited amount of information given out by this FoxBusiness article. So again lots of assumption involved.
Agreed, of course there isn't a "right" way. But companies should be internally consistent in how they do these things.
So, I can imagine if you (as the IRS) can demonstrate that they used on method of doing this sort of thing for some stakeholders, but another for the sale to Irish subsidiary with no real justification ... you might just have an argument this was for tax avoidance purposes.
Also I didn't mean to suggest that absolute value comparison was the right way to do this. Just that it is entirely plausible the FB intentionally lowballed the sale. It's clearly the reason these companies are in Ireland at all. Cases like this I suppose are about defining the line between "fair play" and not.
It's also legal to claim your home office as a business expense, but most accountants will tell you to be really certain you don't use your home office for non-business use, because of the copious precedent for people getting in trouble when it turns out that their home office was really more of a guest bedroom / sometimes home office / sometimes gaming den.
Fill in a suitable analogy with "selling IP to a shell company for a song".
It gets even more complicated than that. Not even close to all FB IP was developed in US. There is a great deal of custom integrations built across the world, in smaller offices dedicated to a particular market. Then you have things built in UK (say, Workplace). Then you have the even more complex case when a piece of tech is first developed in US, makes or not some money, then is taken over by an UK team, which tweaks, extends, rebuilds, whatever and makes some more money, then returns to an US team and so on.
I can't even phantom how hairy a report detailing the above would look like, how long it will take to make and how long it will take to check said report.
You could also argue that is almost impossible to fully check the situation. The people with the skills to check such a report are either working for Facebook, or for a Facebook competitor. Bias either way.
It should be noted the unpaid taxes are from the period of 2010-2016.
>“Facebook Ireland and Facebook’s other foreign affiliates - not Facebook US - led the high-risk, and ultimately successful, international effort to sell Facebook ads,” the company said in a pre-trial memorandum.
Well it should be. There are public services not being provided/underfunded because of those unpaid taxes. Considering main revenue stream of FB, there is hardly anybody here being sad about this.
In a similar vein when a rogue multinational bank is fined up to a yearly profit for some dirty shit, and people celebrate.
Facebook might have decided to simply do less business, because the risk wasn't acceptable with the taxes added. When the cost of doing business is higher then less business is done.
I am willing to bet Facebook did not pay Irish taxes on US income, but failed to pay US tax on non-us income, which is a different thing, as the US have signed treaties with the EU preventing them from taxing revenues that an company have already paid taxes on in Europe, so the IRS suing Facebook from headquartering in Ireland would be an severe treaty violation and is likely not what is happening in the real world despite it being an obvious angle for fox to try and push to their audience.
The problem with Facebook/Google taxation(the EU is even less happy about it) is that is that by moving the money through Ireland(who dont tax corporate transaction, only Irish revenue) the profits end up in limbo somewhere in the Atlantic where nobody gets to claim taxes on them.
It is essentially the reverse of what the EU is suing apple over as apple insists that their profits is taxable in the US despite not paying tax on their IP related profits in California.
Most major media sites have some good articles and many bad articles, in HN's sense of good/bad, so nearly all of those get mildly penalized on HN: https://hn.algolia.com/?dateRange=all&page=0&prefix=true&que.... But there are plenty of ways for that penalty to get overridden by software or users or moderators.
Regardless of any particular politics, they seem like a politically expedient target. Everybody hates them (while using their products, which is funny), and they aren't a big government contractor.
On the other hand, if this is done for political purposes with demands, then Facebook's problem will go away when they capitulate. That will mean that they can continue doing what they were doing. If they're actually guilty then they should be punished.
Indeed. I think politicians understand better than anybody that optics now are a better expedient than results later.
And, to get explicitly political for a second, you don't have to look any further than the events of the last few days to see how little interest this administration has in the rule of law.
Disclaimer: I have no idea why this particular thing is happening, what the motives behind it are, etc. Everything above this paragraph in this comment is meant in the general sense. This IRS action seems to fit a pattern, that's all.
Yeah the IRS budget has been intentionally slashed over the years to make their job enforcing the tax code harder. It's part of why they go after low return audits on low or middle income people so much more than against corporations and the rich, rich people and corporations have the money to hire lawyers to draw out cases where poorer people don't so auditing 10 Etna's is 100x easier than going after a company with a complicated tax evasion scheme.
I recall reading that because of how much the IRS budget has gotten smaller, they have a harder time pursuing many of the larger violations (such as this) which can be very complex to investigate. A consequence of that is when they can pursue something like this, they need to create some big headlines to show the public their value (and hopefully get a budget increase) while keeping other bad actors in check.
People looking at their personal income tax return: Woah, this is more complicated than I expected - should probably pay a professional accountant to sort this out for me
People reading news articles like this: Look at these stupid professionals arguing about how international tax law in the $XB range when one side is so obviously wrong, and the correct outcome is really straight forward.
If a professional accountant told my buddy to do one weird trick to completely eliminate the lion's share of his tax liability, and he did it, and then the IRS went after him, I'd feel entirely comfortable judging both my buddy and his accountant, even if I didn't know the precise details.
Then you'd be judging a lot of people wrongly, because that sort of thing happens all the time for entirely legitimate reasons.
For example, at various points there have been federal tax credits for installing solar panels on your house or buying certain types of green cars. For a lot of people the credit would exceed their federal tax liability for the year. You're prepared to send them all to jail for that without looking at the details?
Those are not "weird tricks". Those are tax incentives whose intent is obvious (make the environment better) and where your friend's using the tax incentive directly aligns with why that tax rule is there. Your friend and the tax law are clearly doing what they are clearly designed to do, which benefits not just him but us all.
However, if your friend's "weird trick" is something like a double Irish [1], then it's not at all clear that the applicable tax laws are intended to be used that way or that your friend's choice to use that loophole is good for anyone but your friend.
> Your friend and the tax law are clearly doing what they are clearly designed to do, which benefits not just him but us all.
As we know the mortgage interest tax deduction was intended to promote home ownership. A lot of people who would have bought a home anyway then go out and take a bigger home loan in order to use the money they would have put down as principal to e.g. buy a car. The tax provision clearly wasn't intended to promote car ownership, so all of those people should be in jail, right?
> However, if your friend's "weird trick" is something like a double Irish [1], then it's not at all clear that the applicable tax laws are intended to be used that way or that your friend's choice to use that loophole is good for anyone but your friend.
Being not at all clear is the circumstance where you most have to look at the details, not where you get to ignore them based on whether you like the accused.
Money is fungible. International profit doesn't have a clearly defined jurisdiction. This isn't trivial. "Do what I meant not what I said" is a cop out. If you want better tax laws, change them instead of pretending the existing ones aren't what they are.
But governments don't actually want to do that, because if you had clear tax laws that caused international corporations to pay more tax for operating in your jurisdiction, that would give them a major financial incentive to move somewhere else. Everybody wants to eat their cake and have it too. Pass laws that let corporations avoid your high nominal tax rates which makes them stay in your country, then get offended when they use them.
> The tax provision clearly wasn't intended to promote car ownership, so all of those people should be in jail, right?
That's a red herring. Once he receives the money from the tax break (the reward) in exchange for buying a house (the incentivized activity), what he does with that money is completely irrelevant, unless it somehow involves reducing home ownership.
But it wasn't in exchange for buying a house. He was buying the house anyway, what he did was to take out a larger home loan and use the extra money to buy a car.
This is the same general problem as assigning a jurisdiction to profits. Money is fungible. If you take out a $30,000 "home loan" and buy a $30,000 car, did you borrow $30,000 to buy a house or to buy a car? If you pay a million dollars to develop software in the US and then license it for ten million dollars in Europe, do you have a nine million dollar profit in the US or in Europe? Notice how the US is going to want to claim it's in the US and Europe is going to want to claim it's in Europe, and the company is going to want to claim it's wherever the tax rate is lower, but none of that is an answer to the question.
I think by implying that the IRS went after them, the "weird trick" was not as legal as previously anticipated, despite being guidance from a professional.
Appealing to popularity wouldn't make it anymore legal than appealing to professionalism.
> I think by implying that the IRS went after them, the "weird trick" was not as legal as previously anticipated, despite being guidance from a professional.
That's about as legitimate as "the police investigated them, so they must have done something wrong". That kind of argument has huge problems.
Sure, but it wasn't that kind of argument. It's not about trusting the police/IRS, it's about distrusting loopholes.
I'm about as sympathetic to Facebook here as I am to the people who claim that under the maritime act of 1776 their car is a ship and therefore the police can't arrest them for speeding.
I'm sure Facebook just got confused and didn't look at the details to realize that it didn't make sense for the lion's share of their profits worldwide to come from Ireland.
I mean, it's well known that there are leprechauns with massive pots of gold in Ireland, so it's easy to assume they might be an extremely lucrative market for targeted ads for rainbow-dissipaters. If not for the complicated tax code, I'm sure they'd have happily paid more tax.
The problem with that evaluation is that credibility can only rightly be evaluated by author, not by publication, and unless we're talking about scientific journals (and sometimes not even then), editors can't be expected to be subject matter experts in everything a paper ever writes about.
Example: Bloomberg is still a legitimate business paper of record despite running that unfounded story about backdoored motherboards. I'd take anything those authors put out with a shaker-full of salt in the future, but Bloomberg is still legitimate.
But really is not, since FB exists in US, UK, Ireland, Israel, France and many other places (see [0]). And not all the value was created in the same place. You could have (and I know examples) a piece of tech being developed in US and not make any money until a team in London picks it up, tweaks the crap out of it and makes some millions. And you need to note that engineers in London are employees of Facebook UK, a different legal entity than Facebook US. Then there are sales and solutions (custom tech built for various customers). The point is, attributing wealth to a particular area is not that clear cut. And I guess this is what this lawsuit is all about, figure out how to do that.
While this is clearly true in general, it's exceedingly unlikely that attributing wealth mostly in the places where it is taxed less is really supported by the types of interactions you are talking about.
International development is complex, sure, but let's not pretend particularly with respect to Ireland that corporate structuring for tax avoidance isn't actually most (by $, not effort/people) of what is going on in practice.
Well, I guess it depends on the interpretation of the rules. The point of contention seems to be the valuing of assets, which of course FB has incentive to not value highly:
> The IRS argues that Facebook understated the value of the intellectual property it sold to an Irish subsidiary in 2010 while building out global operations, a move common among U.S. multinationals. Ireland has lower corporate tax rates than the United States, so the move reduced the company’s tax bill.
The value of intellectual property is kind of a murky thing, especially before it is fully monetized. So I guess the question comes down to: Did FB executives knowingly undervalue the assets to save money on taxes? Is there a paper trail to that effect?
Part of the problem is, it’s not a legit, best price, arm’s-length, market price. Facebook:Ireland is just a sock puppet for Facebook:USA, and the latter has no intention of selling it to a true outsider.
OTOH, if FB:USA sold the rights to FB:I for $1, knowing it would pay billions to license those rights the next year, I don’t get how that can be a proper valuation, even without a clear price discovery mechanism.
The real issue is that "market price" legitimately has an amount of slop in it that can eat the company's entire profit.
Suppose it costs $50M in salaries to create intellectual property which is then licensed to customers for $500M. Which one is the "market price"? It was sold for both prices, once by the employees to the company and then by the company to the customers. But the difference is a factor of ten.
More than that, the difference can be justified. When the $50M is paid, you don't know whether anybody will buy it. Maybe you'll make a billion dollars, or maybe you'll make nothing and just flushed $50M down the toilet. Or maybe you'll make a profit but the profits are spread over future years whereas the work was paid for immediately, so in an arms length market transaction you would expect the price paid to be discounted for the time value of money.
So they pay $50M for something they go on to sell for $500M. Which one is the market price? Both of them.
This obviously leaves more than enough slack for chicanery.
What measure? It's two different transactions that occur under different terms at different times.
Suppose some code is written by an independent contractor instead of your employees. The contractor is in San Francisco. The San Francisco office pays the contractor, then does nothing more than immediately sell the rights to the code to the Ireland office for approximately the same amount. You just demonstrated that that was the market price -- the contractor was willing to accept it in an arms length transaction with an independent third party. The Ireland office could have just as well paid the contractor directly. What value is the San Francisco office supposed to be adding that justifies being awarded a significant fraction of the total revenue?
To be valid for tax and legal purposes, valuations must adhere to generally accepted valuation methodologies. In some cases, like IP, there are enumerated methods of valuation.
Cost of creation is not a valid measure of the value of IP or intangible products generally, though it can provide a lower bound for physical products.
e San Francisco office pays the contractor, then does nothing more than immediately sell the rights to the code to the Ireland office for approximately the same amount.
The market price is what an independent third party would pay for the IP, not what your other office would pay. And what a third party would pay is based on how much they would be able to monetize the IP for in their own uses or the value they would derive from it (for example, like a process-based IP that increases efficiency).
The Ireland office could have just as well paid the contractor directly.
Maybe they could have. If the idea actually would have originated in Ireland, then they should have contracted the programmer directly, and then they would own the IP instead of the US office. But they didn't. It was the US office's idea to engage the contractor, to tell him what to program, and to evaluate the fruits of his labor. You would need to establish that the idea would just as easily have originated in the Irish office, and generally that's a very difficult to prove.
What value is the San Francisco office supposed to be adding that justifies being awarded a significant fraction of the total revenue?
Because territory matters when you're talking about sourcing income for tax purposes, especially where you're dealing with two related but legally distinct entities in different countries. There are literally millions of pages written about this (see "transfer pricing") because it has been the primary means of tax avoidance and tax evasion by multinationals for the past 3 decades. It is the primary focus of the OECD and (pre-trump) of the IRS and the EU.
Note: if both entities were in the same country, these concerns usually go away because related companies usually file consolidated tax returns (i.e., as if they were a single company), so all of this valuation crap would be rendered meaningless for tax and reporting purposes.
"Sell" is a four-letter word. Was that an actual market transaction where the seller got the highest price they could, and said price was evaluated by the buyer against alternatives? No, of course not. It was a dictated sale, precisely to present a fiction to the tax authorities.
You can only use a sale price to justify a valuation when it's under those circumstances, or a good-faith approximation of such circumstances.
In normal circumstances t would make no sense for FB to take on the risk of hiring a contractor and justify the RoR to shareholders knowing they could only immediately sell for exactly what they paid. That's not how sane businesses operate.
> Was that an actual market transaction where the seller got the highest price they could, and said price was evaluated by the buyer against alternatives? No, of course not.
Why not? The San Francisco office doesn't have any monopoly over the contractor. It doesn't have anything the Ireland office wants that nobody else could provide. So what is it doing that justifies it receiving a significant premium?
> You can only use a sale price to justify a valuation when it's under those circumstances, or a good-faith approximation of such circumstances.
How isn't the transaction between employee and employer any different? If there were two otherwise identical jobs doing the same work and one paid more, the employee would choose the higher paying one, so it's not unreasonable in general to assume that what the company paid the employee was the market rate to have that sort of work done.
> In normal circumstances t would make no sense for FB to take on the risk of hiring a contractor and justify the RoR to shareholders knowing they could only immediately sell for exactly what they paid. That's not how sane businesses operate.
But they do know that. The Ireland office is willing to immediately pay them the full amount they're paying the employees, so the US office is taking no risk. No risk, no reward; thin margins are the norm in that sort of transaction.
You keep trying to make logical arguments about a very small portion of the entire transaction without looking how that transaction relates to much larger business concerns.
The law, tax, business, and reality doesn't work that way. They make policy based on a view of the entire forest, not on the gnarls in a single tree branch.
Territory matters when you're talking about taxing value creation. It always has. If you're arguing against that you're literally arguing against thousands of years against human history. The short answer: it's this way because humankind fought a lot of wars to make it this way, and trying to change it could result in more violence.
How isn't the transaction between employee and employer any different? If there were two otherwise identical jobs doing the same work and one paid more, the employee would choose the higher paying one, so it's not unreasonable in general to assume that what the company paid the employee was the market rate to have that sort of work done.
No, it's not reasonable to make that assumption based on the facts. The employee/business relationship is not related to the value of product created by the employee. This is literally not how any business works. If it was, then most tech startup employees would get paid below minimum wage. FAANG programmer salaries would start in the low millions after a year or two on the job. Mid-level attorneys at most law firms would be making a cool million each year. Backoffice employees at any company wouldn't get paid at all, because they don't contribute to the creation of products.
But they do know that. The Ireland office is willing to immediately pay them the full amount they're paying the employees, so the US office is taking no risk. No risk, no reward; thin margins are the norm in that sort of transaction.
Valuation isn't about what the Irish company would do. Valuation is about how much the IP would be worth on the open market, to unrelated third parties who might not have insider knowledge of the actual cost of creating the IP, and thus who base their offer prices on the value of the IP to their own interests.
More importantly, if the Irish office was always going to reimburse the US office for hiring the US contractor to create the IP, that trail of paperwork says the Irish office was the actual creator of the IP, because the US office was just acting as its agent in hiring the contractor. And that's a very different scenario than what you were originally talking about. (And side note: backdating legal documents to suggest this was the contemplated transaction all along is a crime in both the US and Ireland likely to result in prison time if the IP has any significant value.)
IANAL, Retroactively going after the valuation of assets based on success years on is awkward at the least, and dangerous at the worst.
FB is right, they were still pretty unproven in 2010. It took nearly 1.5 years after their IPO before they convinced people they could make money.
I agree, it seems like they would be looking for evidence of undervaluing. But like, let's say you are discount potential cash flows. I don't even know if FB was profitable in 2010, what kind of projected cash flows are you going to have?
I just think that if the governments cared about this so much, they would actually fix this. The double irish is going away, but while the US had a chance to fix stuff in 2018, there's still incentive to offshore IP, and in fact, reinforces the advantage of offshoring production.
You don't need to be a lawyer to understand what this is all about and it certainly isn't hindsight, as you have suggested.
The reason why the IRS are challenging FB is that Apple's Irish tax arrangements became public and were very embarrassing to the US authorities, which were revealed not to be applying US law.
Now, to the matter of hindsight.
The essential point is that the transactions have to be a sham to work.
There is precisely no point in selling IP from a US subsidiary to one in Ireland at a fair price.
That would just trigger an immediate taxable event in the US for no benefit whatsoever.
The transaction is by design intended to sell IP at a large undervalue and the game was to satisfy the US and Irish authorities, both of which were happy to play along.
>There is precisely no point in selling IP from a US subsidiary to one in Ireland at a fair price. That would just trigger an immediate taxable event in the US for no benefit whatsoever.
Apparently there is if you want to book your international operations in Ireland without the IRS dragging you to court saying you lowballed them a decade ago.
Facebook had a funding round in mid 2009, and mid 2010. The 2009 valuation was $9.8B, and $13.8B in 2010. And this case is solely about their ex-US operations, which they're saying basically didn't exist at the time.
I mean it's like if you join a startup, how much are your equity options worth? Does the IRS go back and say your options were worth way more because it turns out you were working at the next Netflix or something?
There's no way to know for sure. If it was clearly illegal and Facebook's lawyers thought they were going to lose they'd settle with the IRS. If it clearly wasn't illegal the IRS wouldn't pursue the case. The courts are needed in the fuzzy area to interpret the law and answer the question - was it actually illegal?
Other alternatives: If, for example, the IRS has been pressed into the case by public or political pressure they may pursue an unwinnable legal case to win in the court of public opinion or to give other corporations with fewer legal resources than Facebook pause before they engage in similar.
It sounds like a standard “double Irish” tax scheme. It’s possible FB did the same thing as everyone else and the IRS is just going after one of the big fish to get case law in their favor. If that were to happen, they’d potentially get to go after everyone else who has done it, like Microsoft, Apple, etc.
> Is this actually illegal though? Or is it just clever exploitation of the rules? Tax avoidance is not the same as evasion.
IMO illegality has a human and personal component too. I understand your question is about whether what they did was legal or illegal.
But let me give you an example of something that is "clearly wrong" but sometimes legal. Let us assume that you buy something (or are paid cash) and the amount is $100. If you pay $20 tax, then we say you are taxed at 20% and the amount becomes $80. So far so good. Now let's suppose that you claim back that $20 and you put it in your pocket. You still have the $80 (or the item you bought). So you net is at $100 whether in cash fully or $20 cash and something worth $80.
Now, let us suppose that in this scenario the cash was paid to you (I am specialising away from the case where you are buying something). You thus have $100, and effectively there was no tax. Now assume you go back to the tax office and you tell them that you are reclaiming another 20% on top of the 20% you paid and then reclaimed. Now, suddenly you have $120. You got $40 in tax reclaims but only ever paid $20. This is essentially the cum-ex scandal. [1] Once with and once without. The with part is the tax you reclaimed; the without is the tax you reclaimed with no base for it at all. Note that these are not tax credits, it's hard cash!
The cum-ex tactic is not always illegal, and this is why I say that legality is sometimes dubious (but not always). The reason why they could steal 50 BILLION EUROS from the German tax office is exactly because 1) the banks were and are in on it and 2) they lobbied for and blurred the lines of legality.
Apparently the German tax office still thinks, even today, that claiming $40 after only ever paying $20 somehow makes sense.
Mmmm. There must be some epic level shenanigans going on somewhere to make that kind of tax liability recording even possible.
A stock can only have a single holder of record, and only one dividend payment should ever be made to whoever the holder of the stock was at the time of the payment.
If that article is to be believed, I'd suspect there was a bank who needs some serious auditing; because there is simply no way there should be any ambiguity as to who the stockholder of record is at that time; and the issuance of a multitude of "tax certificates" to multiple individuals implies they fundamentally mishandled that particular taxation event.
Transactions are atomic, and serial in nature as far as finances go. Automated or manual. They must resolve down to chronological order.
This is also part of the reason the Feds hate structuring, and will stamp it out in any form they can get enough information about in order to recognize it. Don't be like these people ever.
There is no moral or fiscal imperative to commit or concoct structures/mechanisms capable of becoming or facilitating tax fraud. Hell, this exact kind of chicanery is why AML/KYC/tax law ends up making normal financial service providing such a slog; because every link in the chain is yet another gear in the machine. If it seems like you're having to go through lot of hoops to do a relatively straightforward transfer of value, odds are, you may be taking part in some form of either structuring or other financial engineering. If you think that's a tenable of affairs, have fun, but when it comes back around, don't be surprised if there isn't much sympathy to be found.
> A stock can only have a single holder of record, and only one dividend payment should ever be made to whoever the holder of the stock was at the time of the payment.
Yes you are right with this. I have suggested a way to handle this to my colleagues informally, but I don't work with the tax offices themselves. What I would do is to have each share at the atomic level as you mention to have a serial number. If you reclaim for 100 shares then you need to supply 100 serial numbers.
With regards to the banks, absolutely, they are the critical step in this kind of fraud.
The serial number solution does have one weak point: You can use "unused" serial numbers for your reclaim or you can use serial numbers from someone who lives in a country that does not participate in the bilateral treaty that allows the reclaim. This latter example is also essentially using "unused" serial numbers. Typically there are many billions of dollars of withholding tax that remains unclaimed for whatever reason, sometimes even just ignorance. But at the very least this allows you to be better off than today. The tax offices, if they are competent, can even try to attach each serial number to a person, but there are privacy laws that can prevent this. Another subtle point is that a dividend payment event is not the same thing as receipt of the dividend in your account. Typically, the receipt of the dividend is the critical point that tax offices want, not proving ownership of the dividend. This is why the banks have so much power here. They essentially prove payment receipt, not dividend ownership. The logic is that you can't have had the payment into your account if you didn't have ownership of the dividend. There are also other examples of fraud such as forging the country of residence of the shareholder.
Oh yes, and then lastly: Apparently around 2009 some countries turned a blind eye to cum-ex because they saw it as a way to "boost the recovering economy" by pushing up bank revenues... ¯\_(ツ)_/¯
I think that if there’s no legitimate business purpose to a particular business activity other than avoiding taxes, it qualifies as tax evasion. If that’s not illegal in your particular jurisdiction, that just means you have legalized tax evasion.
And there’s an argument to be made in the other direction too: everyone should be doing everything they legally can, and where it makes financial sense to exert the effort, to avoid paying any more tax than they have to...
because giving money and power to politicians is like giving whisky and car keys to teenage boys.
> And there’s an argument to be made in the other direction too: everyone should be doing everything they legally can, and where it makes financial sense to exert the effort, to avoid paying any more tax than they have to...
I hear this a lot and I kind of disagree with the sentiment. I think it's rooted in petty selfishness.
If you have enough money, as these companies surely do, good for you, ok. The attitude that sees any additional proceeds as wasted if they "needlessly" go to governments where it gasp might give other people useful public services ... Seems to have priorities in the wrong place. One must have proper perspective when you see financial success. Petty greed over small percentages of huge incomes is not the way to go. There is value in seeing how lucky you are and being happy with what you have, then subsequently seeing your role in our social system as paying some of that back.
Apparently some firms used to be like that. Benevolent societies rather than money making machines. Then globalisation happened and those companies were competed out of the market by aggressive multinationals or low wage countries.
Some countries have GAAR a General Anti-Avoidance Rule. Exactly how these rules work varies but e.g. the English law version uses a trick called the Double Reasonableness test. This says avoidance is legal IF a reasonable person (such as a juror) thinks that any reasonable person (here a different hypothetical person that the juror may well not agree with) might think that there was some other reason to do what was done besides to avoid tax.
For example, tax free savings accounts are often mentioned as "avoidance" in this context, to suggest that it's somehow nonsense to criminalise avoidance. But saving money is a reasonable thing lots of people might want to do anyway even if there was no tax advantage.
On the other hand, a scheme in which rich people pay somebody else to pointlessly buy and sell cars at a loss makes no sense - except that they then claimed a large tax discount as second hand car dealers...
One of the cleverest parts of the English scheme is that tax advisers, who sell such schemes to the rich for lots of money, are insulated from any penalty for doing so... As long as they tell the tax authorities how their scheme is supposed to work.
It should be illegal. The company has a strong incentive to undervalue the asset, and 98% of the time IP assets are transferred to a related overseas party it is to minimize tax.
Countries would be better off if they simply did not allow IP assets to be transferred to a subsidiary in a different country. The IP stays in the country where it was created, or else sold on the open market.
tax avoidance is tax evasion for the rich. the only difference is barrier of entry which starts at around 1MM for avoidance (very low). if you're below that and still insist on playing this game, the tools at your disposal will almost always fall under evasion (and be considered a crime).
Does anyone else feel weird to be rooting for the IRS?
We tend to get smashed if they suspect our deductions was only 85% kosher. Facebrick, goog, apple, amazon, yeah. Focus there and everywhere there are overseas tax-dodges with high priced lawyers and accountants.
Is there a reason why Mike Schroepfer is being called to testify? Boz makes sense given that he ran ads for years, Naomi Gleit and Javier Olivan led parts of the growth team for years, but Schroepfer is the CTO. Not entirely sure why he'd be called while Sheryl Sandberg isn't (or any number of people who actually worked directly on revenue)?
Probably because the tax avoidance scheme involves shifting intellectual property and technology to overseas subsidiaries and then charging the parent company a large royalty.
Schroepfer would be asked to testify about the actual source and work product that led to the intellectual property transferred to the Irish subsidiary.
Surely this is more about political coercion than tax? Amongst all US companies that offshore profits, including the likes of Halliburton, Facebook has been singled out because the US administration wants the company to do it's bidding regarding policy and algorithms for political advertising? Especially considering all the other political reprisals and pardons that are in the news, following the impeachment acquittal. I expect this story to quietly disappear, or some mild fine to result, followed by a not-so-mysterious tweak to how political advertising is handled on the platform. I don't expect it reduce large corporation tax evasion as much as people are crowing here.
A lot of unfounded speculation in your comment. It seems more politically-motivated than rooted in facts.
Secondly, have you done your research? Surely Facebook is not the only company being targeted by the government right now. I can assure you that, surely there are more.
Thirdly, as much as I might dislike an administration, I won't take the giant, speculative leap as to assume that I know exactly what they're thinking.
Fourthly, if this "quietly disappears", why would you automatically assume the administration's involvement? Again, there are presidents I strongly dislike, but part of remaining objective requires grounding your position in fact. Facebook has world class lawyers. Having worked in the legal field for numerous years, I am more than positive that Facebook has made many things "quietly disappear" on their own.
It's not unfounded in the days of pardons to political donors, political donations to jury members, and firing of whistleblowers and witnesses.
You are allowed to assume bad faith when the entity has time and time again showed bad faith. This is suppose to be one of the detriments to acting in bad faith time and time again.
If you think that's new, you're obviously not aware of the history. How would you compare and contrast the corruption and lack of consequences of say, the Iran Contra conspiracy, to Trumps scandals?
Just to throw you a bone, you'll notice that AG Barr was involved in the pardons resulting from the Iran Contra affair as well.
Only you are smart enough to know everything. Not the dude who beat 16 establishment Republicans including Jeb!, and Hillary "it's my turn" Clinton who steamrolled Sanders with her establishment clout.
These things you're mentioning are minor issues which have been blown out of proper proportion and context by a hostile media spoon-feeding political propaganda to a willing segment of the public.
That said, none of the things you mentioned are related to investigating tax evasion.
"Oh, you sneezed on Sally when you were in first grade without apologizing? You must be guilty of armed robbery."
I hate to say this but a lot of unfounded speculation in your comment as well.
"Secondly, have you done your research? Surely Facebook is not the only company being targeted by the government right now. I can assure you that, surely there are more."
Can you back this up with some factual information? Would love to know more about other companies. Thanks.
Just this month, the Department of Justice announced the largest-in-history FCPA case against Airbus, totaling 3.9 billion in fines[1]. The government's agenda is much larger than you're aware of, apparently.
Unfortunately, the media loves to scandalize things, throw out big names, and hype-up news. The problem is when people just take it, run with it, and parrot it back in the public square.
Anytime a company rises to the stature of Facebook, the probability that they will come into the government's cross hairs is much higher.
Oh what “fact-based” source do you get news from and how do they verify the “fact”? Do they use floating signifiers like “democracy”, “freedom”, “liberal”, “middle class”, “big government”? Do they have opinion columns and private ownership? It is impossible to act as if you’re both fact based and as if you’re serving your readership at the same time—the very act of choosing which stories to cover is deeply political itself, and that’s before you hit framing, what parts of the story you choose to emphasize, the goddamn headline (often written by a different person).
The National Review for instance is excellent at fact-checking, but I would not call the NR a factual paper or a paper of record.
There are no rocks on which to build these days (probably ever), just a series of private rides you can choose to be taken on.
I understand that lawyers are taught to think logically and to support their arguments, so I would appreciate your analysis on our exchange, which looks to me like this:
The main complaint to my comment was about unsupported speculation, which I don't see, instead I do see it in the reply. I genuinely want to do better if I should.
Funny that you broke it down like that. I think since forums like this aren't for formal arguments, it's fair for the questions to be seen as more than suggestive, especially with your phrasing.
"I genuinely want to do better if I should." I would have to respectfully call you out on that. You're main interest appears more to show how right you, or at least more right.
Also, your breakdown of the encounter is dishonest. You literally said "Surely" it was about political coercion. And you didn't even attempt to mildly address the allegations brought by the government against Facebook. Next time, you might want to use the world "might" or "potentially".
"Amongst all US companies that offshore profits, including the likes of Halliburton, Facebook has been singled out because the US administration wants the company to do it's bidding regarding policy and algorithms for political advertising"
So because other companies do it, it's okay for Facebook to do it -- that's your rationale? Not good, and all I see is a lazy attempt at utilizing "circumstantial evidence" that can't withstand the test of scrutiny. When cracking down on something, the government will almost always start with the big names in the industry to send a message. Why did you overlook that possibility, or why is that possibility less feasible? These are important questions that should've been asked and addressed.
Furthermore, the President has granted somewhere around 25 pardons; about two of those were actually controversial. The rest barely made headlines, and most haven't. You referenced this as part of your circumstantial evidence. Once again, this absolutely doesn't pass the test of scrutiny.
I didn't write your comment -- you did. Which is why I called you out on throwing claims out there, without even the slightest reference to any reasonable evidence. Throwing out overly-confident words and sloppily referencing acquittals, political reprisals, and talking about what you expect to happen is a good representation of an unfounded comment. Airbus just received the largest-in-history FCPA fine by the DoJ, totaling 3.9 billion. Is the President trying to bring them down as well? Maybe to help out Boeing? If I were to say, "Surely this is about helping Boeing", I would need much more than a couple of references to current events.
>"Especially considering all the other political reprisals and pardons that are in the news"
What news are you talking about? Whatever news you're watching is only giving you one perspective on events, so this "observation" is not helpful on its own.
The rest of your comment is similarly rooted in assumptions and speculation borne out of a hostile media's interpretation of recent events, so the conclusions you're reaching are built on a far less sturdy foundation of "evidence" than you may think.
The media is supposed to be hostile. They are always hostile to the administration. It is their job as one of the checks on power enshrined in the constitution. Why do you think freedom of the press is in Amendment one?
That's not always the case. The mainstream media - both the news media and entertainment media more broadly - was extremely accommodative and deferential to the Obama administration largely because he was on the mainstream media's political "side".
Given this, many actions taken by the Obama administration that would have dominated the news cycle as impeachment-worthy if taken by the Trump administration were simply ignored or brushed aside by the Obama administration's media allies.
> The mainstream media - both the news media and entertainment media more broadly - was extremely accommodative and deferential to the Obama administration
However, currently it's not possible to obtain a lot of facts about the inner workings of this administration, since it is effectively above the law in terms of things like subpoenas.
Some were, and based on the timeline provided by the District Court it was clear that it would be nearly impossible for the matter to be resolved expediently. i.e.: before the next election, which the President was alleged to have abused his power to interfere in. It would rely on Congress trusting that the Supreme Court would deviate extraordinarily from its normal process and decide a matter in a very short time.
And on top of this, Congress has the power to grant subpoenas. The Supreme Court has affirmed this right since the 19th Century and it's absurd that defenders of the President keep insisting that every subpoena must be fought in court, all the way up to final appeal, in order to be valid. That is expressly not what Courts have said in the past. See: https://www.scotusblog.com/2019/07/cases-and-controversies-c...
The Supreme Court will deviate extraordinarily from its normal process and decide a matter in a very short time when national politics are at stake. For example see Bush v. Gore, 531 U.S. 98 (2000). The whole case took only a few weeks, and the court delivered its decision just one day after oral arguments.
Dahlia Lithwick described how the courts are intentionally making the political choice to slow-walk various Trump matters in order to enable his behavior:
I guess if Congress isn't happy with the outcome, they can just impeach the president... Woops!
Sucks when the other party uses the rules against you.
If you believe you're being attacked by politically motivated partisans, it's your duty to obstruct them by whatever lawful or procedural means available.
It's all just a dog and pony show anyway. The news just want to drum up advertising because they're a dying media. The best way they have found to do that is click-bait political fighting.
Congress' unprecedented barrage of subpoenas force the administration's hand here. You may find it "absurd", but unprecedented animus requires unprecedented defensive measures.
> Congress' unprecedented barrage of subpoenas force the administration's hand here. You may find it "absurd", but unprecedented animus requires unprecedented defensive measures.
Not sure where in the Constitution this appears...
Claiming that congress doesn't have subpoena powers and everything needs to be taken to Supreme court is not "legal defensive measures". That is the only thing that matters to this sub-thread here. Remember, it is only a while ago that the tables were turned and republicans were happy to claim then President Clinton did not have any powers to defend.
It may be speculation, but I honestly can't categorically state it is unfounded. I have no love for FB, and, as parent memtioned, they are hardly the only beneficiary of this particular loophole.
Then, if you recall FB recent stance on e2e, Barr's and Lindsay's comments, the question of political influence over IRS becomes much less an unlikely proposition.
It does not make it automatically true, but let us not pretend that IRS moves in mysterious ways.
To claim otherwise is to ignore context in which IRS goes after them. It may be completely unrelated, but it does raise questions.
My guess: Facebook makes an enormous percentage[^1] of its revenue in the US compared to Amazon/Apple. This might make it legally more tricky to argue that its Irish profits are not actually US profits.
Also the IRS would definitely go after Amazon instead if it were politically motivated.
Amazon is suing the government right now because of the abrupt cancellation of a 10 BILLION dollar government cloud contract that the likely were on the way to winning, that the Trump administration intervened with likely because they don't like the Washington Post (owned by Bezos) reporting of Trump's corruption.
Also if FB is being picked out of all large companies by the Trump administration for something like this which most all large companies have been doing for decades it's easy to believe it may be to get FB back in line with the fake narrative of "stop silencing conservatives on FB" which is a narrative that doesn't exist, but has been pushed by Trump admin folks online for a while now.
According to Complianceowl, they may also be in the crosshairs (I have no idea myself):
> Secondly, have you done your research? Surely Facebook is not the only company being targeted by the government right now. I can assure you that, surely there are more.
But, if this administration does have something to do with targeting Facebook, why would they not go after Amazon if this is politically charged? Trump has been vocal about his hatred of Bezos and Amazon, and his base would love to see it. It would be a fairly safe thing to go after, and honestly even I would have trouble being outraged by it as a non-Trump person.
Also, does the IRS need staff to sue an entity? If they wanted to audit Facebook, sure, they would need staff. But in this case, it's a lawsuit. All you need is lawyers. And since lawyers aren't busy doing IRS audits, they probably have a lot more free time to handle billion dollar lawsuits.
Halliburton uses a different scheme. Its assets are physically offshore, though there are R&D and depreciation shenanigans (buy out of American profits, depreciate against onshore expenses, and tax the production where it happens).
Facebook, on the other hand, claims most of its assets, which are principally intangible, live in Ireland. Its American sub is charged massive licensing fees by the Irish sub, thereby shifting away profits.
This literally sounds like apples and apples to me, unless you really think "cloud computing" occurs in space or something. If the servers are in Ireland, then their physical assets are offshore.
Except, the vast majority of Facebook's servers aren't in Ireland. They couldn't be for the platform to work. There is a datacenter in Ireland, but there are 11 datacenters in the US. I guarantee the majority of data and compute power is in those US datacenters.
Yes. The commissioner of the IRS is appointed by the President (current one appointed by Trump) and can be dismissed at any time without cause. So if you want to continue in that role, you will do what the President wishes. You can always resign if you find the instructions not to your liking, of course.
Richard Nixon demanded that the IRS investigate his enemies, but the IRS commissioner at the time refused to do so and eventually testified against Nixon on this issue.
No. That won't stop accusations of influence however. Each side believes that when the other side is in the White House they use the IRS to go after political enemies. Republicans particularly were very loud in accusing Clinton and Obama of using the IRS to go after people and groups. For example:
Not sure about your accusation, it might be true, I can't rule it out. After all, agencies can pick and choose who to target, and we are all seeing the political climate today.
BUT, on the other hand, IRS has to win this one case and all others will start negotiating. Once this is declared illegal, it's over for all. So they had to pick one case.
Twitter has already banned political advertising, and Reddit simply doesn't have the audience that Facebook does (and being a pseudonymous platform is a different paradigm).
I think they banned paying for political ads but not political ads that I or anyone might share (like sharing a Sanders clip)? The latter would of course be a serious infringement on expression.
Are you saying Facebook isn't doing its bidding on political advertising? From what I've seen, FB has been the most welcoming of the social media platforms.
i disagree on pretty much every underlying supposition here: the tax evasion whataboutism, “why facebook when everybody evades taxes?” US allowing these other companies to offshore profits, as if the IRS has the ability to, at any point, ask for that money back; The government having any use for the facebook; facebook being capable of coercion/ memes and advertising having any effect on the way people vote.
We know people read what they want into political media. the content may affect your experience on facebook but Facebook has not been proven to have any effect on the ballots.
Facebook was probably caught in the act. IRS probably found some legal loophole to actually sue facebook and has not yet found one for google, etc. whats more important to the irs? Getting facebook to change its content policies which would have zero effect on this upcoming election given everyone already knows how theyre going to vote, or 9 billion dollars?
Guys, everything at that level, regardless of reasons, are political...it has nothing to do with right and wrong, just interests. Of course it has to be packaged with good reasons otherwise people won't buy it, but again very often they don't bother to give good reasons and push through anyway.
That said, I do believe that tackling offshore revenue is a good move.
> US administration wants the company to do it's bidding regarding policy and algorithms for political advertising?
Unfounded conspiracy theory?
Just because they haven't gone after other companies, doesn't mean they shouldn't go after Facebook. They might believe the other companies are guilty but don't have enough evidence to win the trial.
Facebook is clearly a US company. Founded and HQ'd in the US, so they should be paying US taxes.
Facebook does pay US taxes. That is not in dispute. But facebook does business all over the world. The question is about the proper handling of overseas income. How much of that should face local tax rates vs US tax rates?
It's a complex area of tax accounting and there are a lot of judgement calls to be made. This lawsuit is about one of those judgement calls.
> Facebook is clearly a US company. Founded and HQ'd in the US, so they should be paying US taxes.
If most of the advertisers are outside the US, most of the users are outside the US, and most of the servers are outside the US, I think you will agree that it's not reasonable to say ALL of the profit should be taxed in the US.
Which part of the profit should go where is an endless debate among pundits, politicians and academics.
1) The entire issue here is about international revenue not US revenue.
2) Your second point is true but this IP was then sold to a subsidiary. The dispute is about the price paid in this sale, not about the origin of the IP.
> Except Facebook makes most of its money from US users not from international users.
Source? 96.75% of the world population is outside the US, of Facebook users it will be a smaller percentage, but it seems highly unlikely that most of the revenue will come from such a narrow base.
What a weird way to approach that claim. The population inside or outside the USA plays a tiny role. a) China and Russia aren't involved, so strike 2bn from that b) it's not about people "existing", it's about people being a customer (or product, whatever view you prefer), facebook is obviously more widespread in a first world, high tech society where practically everyone has a smartphone than in some thirld world country where electricity is rare and unstable and c) revenue per user. statista [1] claims it's much, much higher than in the rest of the world. With that coming in at a 3:1 or 4:1 or even 5:1, that alone would make the US a heavy weight in revenue.
The more I learn about what goes on in the world the more I ask myself "who does this benefit?" and many conspiracy theories seem to make a lot more sense. Governments and other large organizations have such a long and common history of doing shady things that it's really hard to give them the benefit of the doubt.
Comes down to what was the value of Facebook’s intellectual property when it was sold to its Irish affiliate. The IRS is saying they valued it much too low to their benefit.
The main issue I see with all these tax avoidance measures is they are all based on not realizing profits in the tax year they were earned (and realistically it'll become tax evasion in spirit if not by legal definition when a future govt lowers taxes or offers amnesty).
Obviously a short comment isn't going to have the rigor needed to solve such a complex problem or figure out appropriate exceptions. Having said that I honestly believe appropriate governance laws that recursively apply to subsidiary and owned companies would be a very effective (even if not perfect way) for a single country to start realizing tax on their multi-nationals before the much slower wheels of international agreements can grind the problem away.
My poorly thought out solution is along the lines of:
Any company owning shares in another must attempt to vote every year that that the subsidary (or just invested in company) company pays out a dividend proportional to net profit and 3rd party investment since the last such passing vote.
Any subsidiary incorporated by this company must apply these rules and any investment in the company is taxed when the subsidiary incorporates or buys stock in another company.
They must also attempt to vote that any company they have shares in follow these same rules.
No temporary transfer of shares or proxy appointment should effect the outcome of these mandated votes.
I'm sure there are issues with my implementation of this idea such as longer planning of a warchest for growth or perhaps intuitive structures such as a subsidiary that manages all international subsidiaries but it was more to highlight a particular structure than to be exhaustively tuned.
Reality is companies know that even if they have to settle in court they still save BILLIONS. Companies can't loose until laws drastically change here.
What would be the alternative to the current taxation scheme of digital goods?
Could we imagine the tax rate being weighted by the revenue made in a specific fiscal area? Lets say that if FB makes 40% of its revenue in the US where the corporate tax rate is 27%, the IRS could tax FB profits at a 11% rate (27% x 40%).
Okay, but if I'm producing widgets, every widget I produce is transported over roads and uses public resources. So you can make the argument that because each transaction uses those, a sales tax is justifiable. On the other hand, if I'm serving web pages, the marginal cost in public resources of each new page is zero. Is there any reason for taxing those other than "wanting a piece" of that?
Taxation also pays for educating your workers, providing the electricity you need to run servers, the roads carrying your broadband infrastructure, or the salaries and general welfare of large numbers of your customers.
If you sell to / produce in a country, no matter how light your presence is, you still have a duty to pay something towards the general upkeep of such country.
I guess it was somewhat socratic. Monetary value is being extracted from UK users. Presumably that value would have not existed without physical,legal, political etc. infrastructure maintained by the state.
I truly wish that the corporate tax rate was 0. Not 25, not 15, but 0%. Then all of this ridiculous nonsense around crony capitalists lobbying for special tax breaks, “double Dutch Irish sandwiches”, and the insane discrepancies between big business and small business in regards to tax games would all go away. Just increase capital gains to match income tax and be done with all of this bullshit. Amazon pays an effective rate of 0% anyways.
How would you avoid companies-as-expense accounts? If I form "Coral-Snake & Co.", wouldn't I be able to pay 0% taxes by just directing all income/expenses into that shell?
(Granted, I don't understand basically anything about tax law, so maybe this is already a well-defined problem with a well-defined solution.)
By making it illegal. People already do that and when they get caught they sometimes go to jail or otherwise pay severe penalties. Also a company with no profits already pays no taxes so to the extent you wanted to roll the dice this way you could do it just as well under current law.
This is already doable with a multitude of ways. If I have profits, and I direct them to a business, then argue plausibly that my life expenses (lunches, travel, cars, computers) are for my business, I can write off all those expenses against my profits. Business owners do this all the time.
Business owners that do that had better be very careful and keep plenty of documentation. There are legal "tests" (read requirements) that must be met for those lunches, travel, cars, computers, etc. to be considered an expense. In many cases, any "non-business" use/benefit/enjoyment renders the entire expense not a business expense. Yes, it is not so rare for small business owners to play loose with the rules. And then they get audited and end up paying a lot in back taxes.
Wouldn't a 0% corporate tax make it even more incentivized than it is today?
As a novice, this feels like an approach that punishes the well-off, who may not expend the resources to structure all assets/liabilities this way, at the expense of the super-well-off who will simply pay multiple other people to re-organize their own financials.
You can already show a $0 profit today and pay no income tax, but a business that generates income will always pay sales, payroll and other taxes anyway.
No, you'd have to show $0 income (ignoring for a moment the low 0% tax bracket). So, very much negative profit, unless you're not paying rent, fuel for your car, food, not to mention taxes like property taxes, sales taxes, etc.
by my reading the parent was comparing personal income tax policy with corporate income tax policy, and as a person you can take a loss and still be taxed.
Corporations have similar legal rights to corporeal persons. Freedom of speech, access to the legal system, etc. As a result of having similar rights, they should be taxed as corporeal persons. It is not rocket science to conclude that corporations in the U.S. should be taxed at the same effective tax rate as real persons.
Corporations are just bundles of stuff that people own. They have legal personhood as a convenient legal fiction because it would be obnoxious if all of the owners had to get together to sign things, and they have rights because people don't lose any of their individual rights just because they happened to form a corporation together. But at the end of the day, bundles of stuff. Economists seem to be broadly in agreement that tax systems would work better if corporations didn't pay income tax.
Yeah, this "corporate personhood" issue is so dumb.
All it is is that the legal system decided it would make sense to apply the same laws in some areas to both companies and humans, rather than design completely separate frameworks for each case.
Maybe I am wrong on this, but I doubt that you have studied economics or have any idea what economists think.
The people that you are talking about are effectively lobbyists - policy entrepreneurs is the phrase, who appear in the media advocating for policies that benefit their clients.
Feels like an aggressive response to what I said. Feel free to look it up, the statement is noncontroversial. There are regularly conducted surveys of the field that include questions on this topic.
What about the inverse. What if individuals didn't pay an income tax but corporations did, kind of as a "user fee" for the privilege of having limited liability.
Mostly because corporations are pretty different from people. They can own each other, buy and sell each other, split in two or be combined, etc. And they they can deduct business expenses in ways that people can’t deduct living expenses, because we rationally recognize that corporations mostly have lower profit margins than the tax bill would be on total revenue (and some always will at any tax level).
Because different industries have wildly different profit margins so if you taxed revenue instead of profit, companies in some industries would be wildly undertaxed while others would instantly go out of business.
Humans, on the other hand, all work mostly the same.
And just like the real person cannot get a write off for things required to live or things that make them more attractive on the market, neither should businesses. If I have to pay taxes on the income I spent to repaint my house, why shouldn't a business have to pay taxes on the revenue they spent to repaint their building?
Wouldn't the costs be updated to reflect the difference in profit margins. If the tax is 10%, then in cases where the profit margin is razor thin prices would rise by about 10%, but life would otherwise keep on going. If an entire industry would die from such, then doesn't that mean that currently tax payers are subsidizing that industry to keep it alive by having uneven taxes, if the standard of equal taxes is the purposed change?
Are you trying to say that tax payers are subsidizing the entire retail industry? No, that is definitely not the case.
Different amounts of value are added at different stages of the product pipeline. These different amounts of value are reflected in different profit margins. Forcing uniformity here via the tax code would be massively distortionary.
As a business owner, I fully support this. There are plenty of other taxable outflows like payroll and sales. Having 0% corp income tax would also encourage spending and growth without trying to write down everything as COGS.
Also LLCs operate this way already with pass-through taxes which is why they're used so often in real-estate. It allows for limiting liability and splitting ownership and management without adding a whole new tax basis.
I'm wary of incentivizing corporations as a personal wealth vehicle, but I still agree with you. Payroll, sales, capital gains, and value added taxes are a great place to shift or grow tax revenues should we ever reduce the corporate tax rate.
The point of capital gains taxes having a separate rate lower than income tax is mostly to account for the fact that corporations pay income tax, so income received from corporations has already been taxed once. One of the perks of abolishing corporate income tax is that it naturally should be paired with abolishing the distinction between capital gains and earned income, a double-whammy of tax code simplification.
There will always be loopholes. Any corporate tax rate above 0% will have carve outs for any number of industries that are favored for any number of reasons. If it was 0, huge swaths of busy-work jobs in law and tax industries would go away. They provide no value to society.
But in a capitalist system, that which could be good is a problem. Now you have swathes of people who become unemployed. You now probably have to support them with welfare (and without corporate tax revenue to boot :)).
Wouldn’t business still lobby for tax reductions in other areas? I feel like your argument that setting the corporate tax rate to zero would eliminate the incentive to influence the government ignores the many other reasons to do so.
They would lobby for regulations but this would eliminate a huge amount of economy-warping tax carve outs and prevent a lot of crony capitalist donations to politicians.
I think most people advocating for 0 income tax (corporate or personal) advocate replacing that tax with an increased sales tax instead.
That way you don't have to mess with income reporting, deductions, loopholes, etc. Just pay a % of each transaction directly to the government. Credit card companies and banks could even automate this so it's completely transparent.
Most people (that I know of at least) advocating for 0 corporate income tax would like to see it paired with eliminating the special tax rate for capital gains and rolling capital gains income into earned income.
How do you then deal with "Business A pays no corporation tax in country X, moves the money back to country Y, where there are low capital gains taxes, and gives it to the shareholders there." - which means that country X gets no taxes at all, despite that being where the business happens.
Just capture it all as sales tax when the money is coming and and income tax when it being distributed to employees. get rid of corporate tax for ANY business, small or large.
This is a 100% reasonable policy, but it's a really hard sell for people who don't understand how business income actually works, and how the money would be captured by far more functional taxes as dividend income or cap gains. I don't think your comment is going to do well on HN.
Maybe leave INCREASE CAPITAL GAINS in all caps. Or, CAPTURE THE SAME MONEY AS DIVIDEND INCOME OR CAPITAL GAINS.
Perhaps: IT IS THE SAME MONEY CAPTURED LESS CONFUSINGLY AND LESS PRONE TO CHEATING
Many of my comments do poorly on HN, but I’ll keep writing them because alternative opinions to the hive mind are valuable. I may even convince a few people!
You might want to try leaving better comments? The one at the top doesn't really make any sense. If you left one that did convince people, it would probably get upvoted.
There should also be no speed limits, since some people drive too fast anyway. And murder should also be legal, since some people murder anyway. Let’s just remove all laws, since they’ve all been broken at some time.
That's nonsensical and not even close to what was being said.
Taxes are not a moral issue nor do they have a victim. The proposal isn't to eliminate them entirely, only to remove corporate income tax and make it up in other changes for a net win for the economy, and it's perfectly reasonable to discuss.
The key difference is there is no large industry of lobbyists working for reckless driving and murder. If there was, I daresay some rethinking would be in order, even in these cases.
> "Facebook Ireland and Facebook’s other foreign affiliates - not Facebook US - led the high-risk, and ultimately successful, international effort to sell Facebook ads,” the company said in a pre-trial memorandum.
This is hilarious! Does anyone really believe the pretense that these are multiple different companies?
I have hard time believing that selling Facebook ads is a high risk (at least from a financial standpoint, maybe from a democratic standpoint yes) effort. In 2010, Facebook had 500 million monthly users and there wasn't even any kind of a serious privacy legislation like GDPR to curtail Facebook's plan on monetizing user data. I can't imagine there were many executives at Facebook losing sleep over this.
I'm curious to know how this gels with the Trump administration's recent criticism of European countries trying to claw back tax based on revenue generated in their countries... .
The chance of an ordinary middle class person being audited by the IRS is extremely low. The enforcement division is severely understaffed, and pretty much only works on computers pattern matching clearly egregious returns.
A large proportion of the US population commits some sort of low level tax evasion- unreported income, deductions that never happened, personal expenses as business deductions, claiming dependents, etc. The vast majority will never see any enforcement whatsoever. By contrast the returns of a major corporation like Facebook are held up to an extreme degree of scrutiny.
> He who has the guns and the men to use them makes the rules.
The good old monopoly of violence. Too bad Max Weber is not in the public discussion as much as he should be, he “guessed” a lot of things too damned right in his “Economy and Society”, imho it is the defining book of our modern society, with Marx’s “Capital” a close second.
> On the one hand, the IRS said, auditing poor taxpayers is a lot easier: The agency uses relatively low-level employees to audit returns for low-income taxpayers who claim the earned income tax credit. The audits — of which there were about 380,000 last year, accounting for 39% of the total the IRS conducted — are done by mail and don’t take too much staff time, either. They are “the most efficient use of available IRS examination resources,” Rettig’s report says.
> Since Smick, who is taking classes toward a bachelor’s degree, and her husband, a chef, together earned around $33,000 in 2017, about $2,000 of that refund would come from the earned income tax credit. [...] But no refund came. Instead, she got a letter from the IRS saying it was “conducting a thorough review” of her return.
> the same year that Facebook started moving profits to Ireland, the IRS launched a team to crack down on deals like that. The effort started aggressively. [...] But shortly after the IRS showed this new ambition, Republicans in Congress, after taking the House in 2010, began forcing cuts to the IRS’ budget. Over the years, as Facebook grew into one of the world’s largest companies, with 2 billion users, the IRS was shrinking. By the time the IRS finally took on Facebook over its Irish deal a few years later, the agency was in over its head.
Been in both situations and did a lot of research on what was possible negotiating. There is public information out there which they try to suppress (imagine if the public knew that the guy who owed 10 mill, got away paying 5 mill after years of not paying anything even after the IRS marked them).
I suspect this particular action is the IRS actually doing its job for once, although I'm more suspicious of the recent DoJ and FTC moves to look more intensely at tech companies.
But the reason to go after FB now would be to keep them in line. Facebook, which has an effective monopoly, understands the number one threat to their income and wealth is regulation. That's why they've just started telling people how they should be regulated. Doing things that are menacing but not immediately consequential is a great way for authoritarians to tilt things in their favor.
Why do you think it's the "current regime" that's going after FB? Before Barr, the "current regime" couldn't even launch investigations into fake "dossiers" and things of that nature, and this stuff with FB started back in 2016. Could be the deep state. Could, in fact, be both, competing with each other. Not being able to control public opinion is a pretty terrible thing for all of them. In the good old days you could resolve all this shit quietly by having a few conversations with the owners of the "free" press. Nowadays Zuck is less compliant.
Is Steele's dossier what we're talking about? What I'm finding squares with my understanding that almost all of it's 1) pretty solidly corroborated, or 2) isn't confirmed but is plausible as supported by surrounding events, often with a lot of smoke-but-no-as-yet-discovered-fire sorts of public info surrounding it. Where's the info so thoroughly discrediting its claims that it makes sense to call the whole thing "fake"? Again, what I'm seeing (normal-ass sites and Wikipedia, not like The Nation or something, if that's a concern) strongly supports pretty much the polar opposite of that, and even a fairly strong refutation of much of that would still leave so much that labelling the whole thing "fake" would be unfair. What's up?
Time they do something about those offshore profits...Of course this is probably just a political move, but again everything on that level is political...
I wouldn't call 12% of the annual revenue "not a big deal". I'm pretty sure if I told my boss that my tax plan just cost us 12% of the annual revenue I'd be out on the street in a jiffy!
https://www.wsj.com/articles/irs-wants-facebooks-records-on-...