The tax part is pretty inaccurate. If you use business IP and transfer it to Delaware you will not avoid California tax on income from that IP. The unitary business and formulary apportionment approach of California income tax (also the dominant approach of multistate income tax in other states) easily beats that strategy, by treating formally separate entities as one for taxation. The sort of income shifting described in the article works better in international taxation since there the dominant approach is a “separate accounting” aka separate entity approach.
Indeed, even the Geoffrey case the article notes is famous for Geoffrey losing in South Carolina, and having its income taxed in that state.
Nonbusiness income is taxed to commercial domicile, which does promote moving headquarters to a tax haven. But much less income is considered nonbusiness income than you’d expect, and further commercial domicile is a separate concept from place of incorporation.
By far the dominant reason for Delaware as a corporate place of incorporation is its well developed corporate law and courts. It is more favorable to corporations in part, but not excessively so—VCs would not be pressuring corporations to incorporate in Delaware if it purely screwed shareholders at the corporation’s benefit.
There are also estate planning and asset protection benefits of using Delaware (and certain other states) LLCs.
To put this into context, the average time in 2020 for a civil case to go from filing all the way to an appeal to the Delaware Supreme Court was 185.8 days; from submission to the Supreme Court, 32.8 days [1].
California’s courts don’t publish this information regularly, but the last time I checked, the comparable statistics were 3 years and one year.
Exactly right. I'm a Delawarean, and in my former career as a journalist I wrote about this phenomenon. It's all about the courts. It is a risk mitigation strategy for businesses. Having extensive, well-defined case law makes things more predictable.
One of the peculiarities of the US is how you guys managed to effectively bootstrap industrial districts at continental level for the weirdest meta-stuff, from newspapers to movies to corporate accounting.
When it comes to running a business in the US, it’s almost better to think about each state as if it were its own country because you’re subject to a substantial amount of state laws. You can’t incorporate at a federal level—only state level.
Federal law does it exist, but it feels like more a set of minimal standards. Most of the differences that people pay attention to are state laws because they usually go above the federal laws and regulations.
Funny enough, it's a rather common trope in fiction, which loves to stereotype people into stratums by any imaginable criteria. IIRC blog posts were pointing out the geographical specialization in Hunger Games and saying that it's pretty ridiculous because not fault-tolerant. Basically, if California were to break off and fall into the ocean, a huge chunk of US tech and entertainment sectors would disappear.
Ah, and the second objection is cost of transportation, I think. Which is probably the main real-life reason to have at least some finance and law firms in CA and not shuttle all documents to NY or Dover and back again.
You really don't think that the US exports a ton of media and entertainment? And that, for example, it happens to impose and protect copyright laws to make sure those profits continue?
I have trouble finding the export figures, but there's this:
> The global media and entertainment market was worth $1.9 trillion in 2016, with extrapolations ranging to $2.14 trillion by 2020. About one third of the total ($735 billion in 2017) is made up by the U.S. entertainment industry.
Newspapers? I would have said those were pretty distributed. Yes, a couple of the big national ones are in NYC, but that's where the population is. Finance is certainly another example. Obviously at least a certain subset of tech. Oil.
Is this really that unusual though? And, to the degree it is, how many other large countries have the same sort of distributed large population centers?
> And, to the degree it is, how many other large countries have the same sort of distributed large population centers?
Despite Australia seeming like the perfect candidate for this due to having approximately five cities of note, all spread out over an area larger than the contiguous US, there's basically no industrial specialisation on a per-city basis here.
Here's the closest examples I can think of:
The area surrounding Brisbane/Gold Coast is home to a large number of the nation's major theme parks and similar attractions (think any things named "<Noun> World"), but that makes a lot of sense for tourism purposes.
Melbourne is the sporting capital of the world, but every other city in Australia also has an extremely strong sporting culture, so even though Melbourne has most of the biggest events (Australian Open, AFL Grand Final, the F1 race that they stole from Adelaide, the Boxing Day Test, etc), everywhere else is usually still packing out 50,000+ seat stadiums for various football codes or cricket on a weekly basis anyway, so it's definitely not anywhere near the level of exclusivity that somewhere like Hollywood enjoys.
Then you've got theater in Sydney, but like theme parks that's fairly normal for the industry, and it's not a permanent exclusivity but more of a timed thing where shows start to travel after having been exclusively in Sydney for a certain period of time.
That said, my understanding is that China is a very close fit to this discussion. Unfortunately I only know enough to list one example - Shenzhen, the place where basically every cheap electronical component is made - but I've definitely seen dozens of articles about various different hyper-specialised cities in China. I suppose it helps when the government can just go "hrm, we want to be better at this industry, let's build a 1mil population city specifically focused around it".
>Despite Australia seeming like the perfect candidate for this due to having approximately five cities of note, all spread out over an area larger than the contiguous US, there's basically no industrial specialization on a per-city basis here.
Funny you should mention Melbourne. It is a good historical example of a city fueled by an industry. It grew out of the Victorian Gold Rush in 1850's and 60's.
Melbourne went from less than 75k population to 500k in a 10 year period which was massive growth.
At one point it was the richest city in the world. The legacy from all this still exists today. It is why a lot of Australian banks etc are Headquartered in Melbourne, because they have their roots in gold rush.
I couldn't reel off the details but China is probably a good example. As you say, it probably comes pretty naturally in a command and control style economy.
Yeah, my marvel at the US is how these districts emerged largely outside government intervention. Nobody in Washington “created” Delaware, Hollywood, or Las Vegas - although it’s true that tech in California was kickstarted by federal contracts, and oil is where oil is.
> how you guys managed to effectively bootstrap industrial districts at continental level for the weirdest meta-stuff, from newspapers to movies to corporate accounting
This is a common market flexing its economies of scale. India and China do similarly. If the EU could get its act together, it, too, would reap these benefits.
Wyoming has had a Court of Chancery for several years now too
They and any state could always lean on Delaware case law
And if you don't like Delaware established precedent then you can argue for the opposite in any other state (like Wyoming) where the judges are less bound to the established case law
Delaware is overrated
The race to the bottom never ended and is much larger than a collection of states, it is international with many permutations and many legislatures interested in attracting business, because they're a business too
> And if you don't like Delaware established precedent then you can argue for the opposite in any other state (like Wyoming) where the judges are less bound to the established case law
Not if you don't like the established case law and want to argue for a completely different outcome. Which is just me saying the exact same thing a second time. Let's see if we get to a third rehash of this optional preference.
You do not want, at the same time, a jurisdiction that leans on well-established case law, but also does whatever the heck it wants because you're arguing for it. Not unless you're in a privileged position to influence the court in a way that anyone coming up against you can't, anyway.
There are a lot of things I don't like about Delaware decisions
I could play this game for the next 300 years before people catch on or fundamentally change anything about the nation state/jurisdiction/case law concept
I have no legal background, so I could be wrong, but I would think that in both DE and WY the established precedent is overturnable, given the strength of your argument. If that's so, then it seems like the preference for WY is that you don't need as solid an argument.
But rarely do businesses know which precedents they'll want to challenge at incorporation time, so it's advantageous to go with the state that is the most predictable and whose court system is relatively efficient.
Yup, this article falls squarely in the "misinformation" category, and the author has no experience with tax law, nor does he cite any authorities to support the tax avoidance thesis. He's just winging it, improvising, about corporate tax law. It's crazy how low journalistic standards have fallen as the line between news article and "personal blog" has been blurred.
I am not ascribing ill motive to the author. Just incompetence in trying to write about a very complex topic that is far out of his depth, and doesn't allow for simple moralistic summaries like "Big biz not paying their fair share!".
It is actually simpler than this, and that is it is extremely difficult to pierce the corporate veil in Delaware. It is considered one of the strongest states for segregating the officers and shareholders except in cases of outright fraud.
For the number of corporations that register in Delaware, why aren't Delaware's streets lined in gold?
I dropped a few Google Street View pins randomly around Delaware and it looked pretty dated to me. Schools that look like jails, houses made of wood, potholed roods, narrow non-ADA-compliant sidewalks, and hardly any modern shiny train service. Aren't they scooping up trillions in taxes? Why aren't they building the next Shanghai/Silicon Valley/Singapore/whatever with that cash?
It's really hard to believe from Street View that this is the place where big corporations are registered.
There is a long line of countries that found black gold (oil) in the 70's, such as Venezuela , that are since economic basket cases.
Or take some African countries with Diamonds.
My point is that because you have a revenue source / competent niche, that does not guarantee a competent government. Usually the only thing you can guarantee is that unplanned riches or resources will lead to waste and corruption. Its not an accident that the norwegian sovereign fund is an rarity, not a rule.
I am curious if there is a genesis to the level of crime and abandonment so pervasive in DE.... from the success DE enjoyed early on, via corp registration riches.
We are a pretty normal delaware c corp . If optimizing for not paying taxes, we'd probably focus on states like Texas, and divest from anyone and anything in California, but we haven't.
Bigger than our taxbill is our accountant, lawyer, etc bills, and in turn, their jobs get easier with delaware: they know it & it doesn't change as much as say California. More than taxes is day to day like big multiparty contracts , equity management, and more existentially, potential m&a. delaware law isn't federal law, but everyone knows it and follows it, so close enough.
it might feel expensive to start and maintain, but probably isn't when you look back at your actual costs. in addition, legal counsel will pressure you to reincorporate if you don't, which would be a double cost. would be my default choice if doing it again: only want to innovate in so many things, and unlikely for this to be one of the most important areas of the business to be extra clever on.
Also, since the Wayfair decision, pretty much any interstate income is taxable where the customer is located if you do enough business in that state (usually an income threshold, but in many states its a number-of-transactions threshold).
Locating in Delaware literally saves you nothing in paying taxes; indeed, it actually costs a tiny bit more, tax-wise, than locating in your primary state of business.
But on the note of other compliance expenses: being incorporated in Delaware increases your compliance costs. You're now subject to suit in Delaware and whatever states you actually do business in (including especially whatever state your HQ is located in). So, for example, you don't avoid exposure to CA law if you have CA customers (and many state consumer protection rights can't be waived by a ToS or by a signed contract). And you don't need to be incorporated in Delaware to include a jurisdiction clause in your B2B contracts.
Delaware is useful in the limited situation that you are a corporation with a complicated capital structure that needs a management-friendly, shareholder-averse court system.
I honestly don't understand how these IP transfers are legal and continue to be legal. In the example from this article if the Delaware subsidiary bought the tennis balls from Vietnam for $10m and sold them to the California subsidiary for $80m, this is actually illegal. It's called transfer (mis)pricing. The general principle is that such pricing should be at arm's length. But for some reason it's totally fine for IP.
Not only does this avoid state taxes but it is the basis for big tech companies dodging federal taxes by transferring their IP to Irish subsidiaries and then paying "royalties".
So I'm a big fan of two reforms:
1. Profit apportionment. If 20% of your revenue comes from a particular state or country, that jurisdiction gets to tax 20% of your profit. This whole transfer pricing nonsense has to end and it's the real cause of the race to the bottom; and
2. Much higher property taxes for real estate owned by corporations rather than individuals. Corporate anonymity with real estate is a real scourge and drives speculative bubbles, money laundering and simply parking money in real estate, none of which does anyone any good.
1. It's clearly used for money laundering and hiding money from hostile governments. In Europe, this is a huge factor in the London real estate market.
2. Cities die when people can't afford to live in them. This is exacerbated by restricting supply to simply park money. Often the ultra-wealthy buy a place where they'll spend 3 days a year because they like that place (eg NYC). In doing so, they're contributing to making that place worse. This behaviour should have a cost;
3. There are cities around the world that have pockets that are essentially vacant because of (2). Condos in Manhattan have a notoriously low occupancy rate. I've heard Tel Aviv has this issue as well. There are many others;
4. In many places it's more profitable tp produce (unoccupied) ultra-luxury property. A lot of the building in NYC is north of $4000/square foot. That's... insane.
5. Property taxes in NYC, as one example, are highly regressive. a $1m condo may have property tax of $1200/month. A $100m apartment may only incur $16k/month in property tax. The counterargument is that the more expensive apartment uses just as many services. Personally I think subsidizing ultra-luxury property is just bad.
Some jurisdictions (eg Vancouver) have tried to punitively tax "non-working" real estate, which is to say real estate that sits vacant. I don't think this has had much impact and it's probably really easy to game (eg rent it out to a family member notionally).
My philosophy is that:
1. Ultra-luxury properties are generally speaking bad for a city. They take up a disproportionate amount of space and tend to add nothing to the city. It's fine that they exist but we shouldn't be subsidizing their construction and continued existence;
2. Providing rental units for people who live in the city is a better use of capital than parking foreign money. As such, both parking money and foreign investment should be taxed at a higher rate. Local landlords are better than remote landlords (since those local landlords are part of the city).
Personally I think that if you own property in NYC, for example, then the state and city of New York gets to tax your income as if you were a resident. LLCs to hold property are the obvious dodge so these need to be taxed punitively.
People are waking up to this slowly. Globalization of capital is destroying the ability of local populations to purchase real estate in the places they themselves live. Multiple cities in Europe, even outside of London, are suffering from extreme Airbnbnization, where buildings are pricing out locals just because it's 3x to 10x more profitable to build them for airbnbs.
I'm curious where in Europe has a 10x difference between short term and long term rent. This suggests an Airbnb unit renting for $100/night (and maintaining 100% occupancy all year) could only rent to a local long term renter for ~$300/month?
Just checked for Barcelona. A few years back, I remember checking a studio for 300 euros. But now, although the average price per night is 50 euros, I could still find a few places with 100+ euros. This is obviously a rough calculation and doesn't take into account the pandemic effects on prices either.
My philosophy is, whatever is bad, make people pay so much for it, that it will be (net-)positive. If they still do it, what's the problem?
> 1. Ultra-luxury properties are generally speaking bad for a city. They take up a disproportionate amount of space and tend to add nothing to the city. It's fine that they exist but we shouldn't be subsidizing their construction and continued existence;
I am not so sure about the first part, but I agree with the second. The proposal I made would in fact be a slightly progressive tax. I have no problem someone buys a $10million apartment in NYC and keeps it for a holiday in a year, if it say, costs $1 million in taxes per year and pays for a lot of other apartments, public transit, etc...
> 2. Providing rental units for people who live in the city is a better use of capital than parking foreign money. As such, both parking money and foreign investment should be taxed at a higher rate. Local landlords are better than remote landlords (since those local landlords are part of the city).
I have to disagree here. On two counts.
First, parking foreign money can be utilised to provide rental units who live in the city. We "only" have to frame the laws and tax code accordingly, and who cares then, what nationality the money has.
I also have to disagree on the assertion that local landlords are better than remote ones.
Local ones may care for the city, or they care more about earning more money, and know all the tricks in the book. Remote ones may not care much about the city, but they also may simply have no idea of the local market, and do not want any trouble.
You may guess, how my experiences were in that regard.
I think, we should not tax/punish people based on our prejudice we may have on them, but formulate a tax code, which punishes "bad behaviour" regardless of the nationality of the actor.
> I have no problem someone buys a $10million apartment in NYC and keeps it for a holiday in a year, if it say, costs $1 million in taxes per year and pays for a lot of other apartments, public transit
aka, you want a wealth tax that you yourself are not subject to, in order to pay for services that you yourself _do_ utilize. Implied here is that these services would be paid for by such a wealth tax, and thus, your own tax is either reduced, or used to pay for even more services which you can utilize.
This is just another way to frame a selfish desire, but making it sound good because it targets somebody rich. A populous opinion imho.
Tax should be levied fairly. Wealth tax is not a fair tax. The current tax system is pretty progressive, and there just needs to be patches to the loopholes, rather than institute wealth tax, which just causes inconveniences for the wealthy at best, and causes them to move their wealth at worst (leading to worse economic outcomes).
> aka, you want a wealth tax that you yourself are not subject to, in order to pay for services that you yourself _do_ utilize.
Ah, classical ad hominem. And on top of that based on assumptions about an pseudonymous person, which is often a difficult thing on the internet. I do have property in an area, where I am probably considered _relatively_ rich. Not in the range of the example, mind you, but I think the same should, in fact, apply to me.
If people buy property like that, they want (or should want) to buy it _because_ it is where it is. So, they (or should I say, we) do profit from those services even when not there, because they do contribute to the community, where we took a stake in.
What is the point in having an apartment in Paris/NYC/London if all that is left are tourists?
> This is just another way to frame a selfish desire, but making it sound good because it targets somebody rich. A populous opinion imho.
Popular, probably. That would be great in a democracy. "Targeting", "because they are...". Nice way of framing trying to invoke the feeling of persecution and the classical "democracy is wolves and a lamb deciding who to have for lunch".
Being rich (and I fall in more in that category than poor) does not require protection. The ones with more luck on their side can contribute more than those with less. I certainly can. It shouldn't be by charity, but the necessary obligation of doing your part in society.
> Tax should be levied fairly. Wealth tax is not a fair tax.
I wouldn't say it is a wealth tax, it is a luxury tax. And yes, that affects more the wealthy. You can have all your wealth invested in fonds, companies, etc... and it wouldn't affect you.
On a semi-related note: Why is a wealth tax not fair? Is it fairer to tax the way to become rich over being rich? I would argue the other way around.
> The current tax system is pretty progressive, and there just needs to be patches to the loopholes, rather than institute wealth tax, which just causes inconveniences for the wealthy at best, and causes them to move their wealth at worst (leading to worse economic outcomes).
If it is a inconvenience at best, then I fail to see how it is unfair. It would be ideal, if it is just that.
And regarding moving their wealth, that is the beauty of it: You can't move your $10 million apartment in NYC.
1) How does this get enforced? What stops Ireland, Camans, Monaco, or Luxembourg (note: I am not familiar with the most popular tax havens) from continuing to have low corporate tax rates?
2) How to prevent corporations from paying individuals/employees to manage property? Or giving them a cut?
Let's say that BigCo wants to buy a $50M office building on the outskirts of the capital city of Taxis, where corporate owners of real estate are taxed at 8% of the market value of the property each year but individual owners are taxed at 1% per year.
BigCo writes a contract with Jane Schmidt, a citizen of Taxis. BigCo will loan Jane $50M to buy an office building, and Jane will lease the building only to BigCo. At the end of thirty years, Jane will have paid back the loan via the payments that BigCo has made, including necessary maintenance (handled by a BigCo subsidiary) and insurance (handled by BigCo's main insurance company). BigCo will also pay all reasonable and actual legal fees arising from Jane's ownership of the building. The contract provides that at any three year boundary or in the event of Jane's death, BigCo can direct Jane or her estate to sell the building to an entity of BigCo's choosing; Jane will get a fee but owe the remainder of the sale price to BigCo.
Jane is happy because she makes some money for the next three to thirty years. BigCo gets to avoid 7/8ths of the tax burden in exchange for a much smaller sum going to Jane. BigCo doesn't show the building as an asset but as a rent expense plus an income-generating loan.
At the end of the contract, BigCo directs Jane to sell the office building to Steve Jones for the current market price of the building, Steve having a similar deal in place with another company.
First off, I agree with you on principle. I do think it is too prone for circumvention. Whatever criticism is thrown at you in detail, it can likely be adjusted in the contract accordingly.
So, keeping that in mind, (and that IANAL) lets develop it further.
I have trouble seeing that as being a legal contract, as all the rules are in favour/at will of the BigCo. I believe that renders such passages void in some jurisdictions.
E.g. It is hard to claim that you can sell at market-rate, if there is no free market, since the buyer is at BigCo's choosing.
Assuming it is legal, it leaves Jane completely at the risk of deprecation and the will of BigCo to make use of it, and leave Jane with the debt of the difference.
Selling a property is usually accompanied by a property sale tax (at least in Europe). One of the reasons a lot of private people found companies to actually own their property.
Worst problem though I see is, that BigCo is here at risk that there could be a regulatory change, which renders parts of the contract invalid, making Jane not only owner in name, but also in fact.
These contracts are private, as long as neither party seeks to break the deal - then no regulatory agency will intervene. Jane would be fighting a long battle with BigCo.
In terms of economic bindings in the contract. It's possible to require Jane to have a nominal loan equal to the market value of the property due to BigCo. Jane would need to both claim ownership (hard), break out of the loan (harder), or go bankrupt.
> These contracts are private, as long as neither party seeks to break the deal - then no regulatory agency will intervene.
Not sure about the US, but in many parts of Europe, contracts are subject to law, and cannot override it. But new laws can override existing contracts.
I assume it is the same in the US, because all US contracts I saw contained an "Invalid Clauses"-clause: https://www.lawinsider.com/clause/invalid-clauses
Aren't there any rules on loans in the US too? To my knowledge, there are strict limitations as to bundling of services.
> Jane would be fighting a long battle with BigCo.
contracts are subject to law but minimal regulation. Bank loans are regulated - B2B load arrangements minimally so. My point was that Jane and BigCo have aligned incentives - as long as they aren't actually breaking a law then the contract will hold.
Variable Interest Entities and similar loan arrangements are legal. Hedge funds regularly "lend" assets through hypothecation etc.
> BigCo will loan Jane $50M to buy an office building, and Jane will lease the building only to BigCo.
Jane is a corporate owner of [this particluar piece of] real estate, and is taxed at 8%.
> The contract provides that at any three year boundary or in the event of Jane's death, BigCo can direct Jane or her estate to sell the building to an entity of BigCo's choosing
Also (seperately from the previous bit), Jane doesn't actually own the building.
> What stops [tax havens] from continuing to have low corporate tax rates?
Nothing. But if Apple has $100B (out of $300B), as an example, in revenue in the US then the US gets to tax 1/3 of their income. If other countries decline to do likewise, well that's their choice. But tax havens are a scourge.
We've gone full Ayn Rand here where the people whose wealth was made possible by the stability and infrastructure in the countries they made that wealth in want to avoid at all costs paying for that stability and infrastructure. It's ludicrous and unsustainable.
Eliminating transfer pricing (both IP and non-IP) is a way of avoiding this race to the bottom as globally mobile capital perpetually moves chasing the lowest tax rates and short-term incentives.
How is that relevant here? The notional problem consists of Apple Inc. selling an iPhone and then paying a royalty on the trade dress to Delawapple Inc. There is no supply chain involved, so it doesn't matter if the supply chain is unaffected.
The proposal above is that California should get to assess taxes against Apple based on Apple's revenue from California. And they do. That's what a sales tax is.
As discussed in other comments, the notional problem doesn't actually exist. The article was simply wrong on the Delaware Loophole in general; it still works in a handful of small states but it hasn't worked in any respectably sized state for longer than most people on HN have been alive.
Apple wouldn't get a California deduction for its "payment" of a "royalty" to Delawapple for an iPhone sold in California. It would get assessed a tax on the income it makes selling the iPhone to a buyer.
Note also: sales tax is a tax owed by the buyer of a good, not the seller. It is simply collected by the seller because it is more efficient for the seller to handle sales tax remittances than for each of their customers to do so. It's less overall work, it's easier to audit, and the seller can simply send the collected amounts in with their other periodic tax payments.
Sales tax is not a tax on revenue, its a tax on purchases (paid by the purchaser). Perhaps you are saying business taxes should be non-existent, but in most places they do exist.
Also, dont confuse revenue and profit. While some locales do have a gross receipts tax, taxing profits is much more common. This, in theory, incentivizes companies to pay out their revenues in the form of wages, R&D, building things, etc.
The tax strategy in the article (aka the "Delaware Loophole") doesn't actually work to avoid state taxes. In fact, the "Delaware Loophole" as it was called has not worked in most states for decades. (As another commenter noted: the sole example given of this loophole was a miserable failure. The Toys R US group ultimately ended up owing more money to South Carolina after its maneuver than it did before. https://casetext.com/case/geoffrey-inc-v-south-carolina-tax-.... )
Two reasons the "Delaware Loophole" doesn't work:
1) In most states, related companies are treated as a unitary group for tax purposes. (See for example, California.) This means that generally, intercompany transactions between the related companies are treated as not existing for tax purposes.
2) In states which don't have unitary group methods, they simply tax the IP lease itself on nexus grounds, as South Carolina did in the Toys R Us/Geoffrey case (Geoffrey LLC was a subsidiary of TRU that existed solely to lease the TRU IP). TRU's IP-expense deduction in South Carolina ended up being fairly small, after taking into account their low profits, so SC simply granted the deduction to TRU...and decided to tax Geoffrey on the IP lease on nexus grounds. Unfortunately for the subsidiary, they had no expenses apportionable to South Carolina (which is usually the case for IP holding companies), and so all of the lease was taxable in South Carolina. The TRU group ended up paying significantly more in taxes to South Carolina after attempting the Delaware loophole than it did doing things the honest way. (And this result was predictable from the very beginning based on the nexus laws even as they were back then, which is why companies don't do this within the U.S.)
Edit:
On your proposal #1: this is how income taxation generally works in the U.S. States already get to tax a company's income earned in the state, so long as (a) the company has a physical presence in the state or (b) isn't physically located in the state but does enough volume or revenue in the state to justify imposing tax. (See "nexus").
At least in the U.S., the real game is about how to apportion expenses to a state. Every state uses a different formula, and some, like CA, let taxpayers choose the formula most beneficial to them. (Note: apportionment is nothing like transfer pricing.)
Outside of the U.S.: If a business earns 20% of its revenue from directly Country A, then taxability is not a transfer pricing issue, it's a tax treaty issue. But you presumably mean the following: a big (foreign) business sets up a smaller business locally, and "leases" that IP to the local subsidiary, reducing the profits (and thus tax) the smaller company pays to the local tax authority. In that case, there isn't really anything the local country can do, because the situation is no different than the case of Unrelated Local Company A licensing an IP from Big Company in Other Country B. Many countries wouldn't allow that sort of tax discrimination based on company ownership, and in the countries where it would be allowed, foreign investment would drop precipitously because it would be riskier and less profitable to do business in that country.
The Delaware Court of Chancery is among the best in the world, if not the very best, and Delaware’s corporation law is extremely well developed, far ahead of most other states.
When they teach corporation law in law school, they usually teach Delaware law. It’s the most advanced in the country.
It's neither the best, nor the most advanced. It has two centuries of law pretty much focused on upholding management at the expense of all other parties' interests (including non-management shareholders).
Today, most new companies form as LLCs, which are regarded as the "most advanced" form of business entity for legal and tax purposes. In that regard, Wyoming is generally considered to have the "most advanced" law because many governing LLC concepts and regulations originate there first.
> Wyoming is generally considered to have the "most advanced" law
This is a novel opinion. In my experience, non-Wyoming residents self identify as being unable to afford Delaware’s franchise tax. That, combined with its shallow bench, means one can blast an adversary out of the water by retaining the majority of Cheyenne, Casper and Laramie’s legal talent before pressing your cost advantage.
I didn't comment on the court system, but having practiced in the area of business and tax law for over a decade, WY is without a doubt, the forerunner in developing LLC law: it not only originated the concept, but has also originates essentially all of the LLC practices and treatments adopted by other states today, including the permissive management structures and other beneficial properties of the LLC form.
> In Delaware, there are 2 huge registered agent firms:
> CT Corporation (1209 Orange Street) is home to 285k+ businesses, including Walmart, Apple, and Coca-Cola
Apple may be using that firm for something, but Apple is not incorporated in Delaware. Their state of incorporation is California according to their SEC filings, and has been since at least as far back as 1994.
It seems the only mentions of Apple being incorporated in Delaware are from news articles and infopieces like TFA, no actual documents showing they are.
I did YC startup school (twice, actually), and one of the first courses was about the legal aspects of setting up your company. The talk basically said "just register in Delaware", without explaining why.
For me as a European (and many other non-US founders in my SuS group) the course material was basically useless. But we did have a good discussion afterwards on loopholes, and why they exist in such way in the US.
As I understand it, Delaware is what Dublin is to Europe.
I'm from the Netherlands. I don't know much about tax loopholes though.
I do remember reading about some loophole possible through the Netherlands, called the 'Dutch Sandwhich' [0] hence why there are supposedly a lot of companies with just a postbox address in Amsterdam (we call these 'postvakbedrijven' in dutch). Not sure what the extend of this loophole is, or if it is still possible to exploit.
I wouldn't bet my company on it though, I prefer just to pay tax in my own country. I see it as my contribution to society.
It seems like there are many situations where a company is definitely following all laws and is extracting value or relative value by making certain decisions that have tax or other advantages.
It also seems like the general public directs outrage or anger at these companies in response to these decisions.
Why the anger at the companies and not the lawmakers who made the system in which the companies are legally operating?
Is it difficult to look up who moved the laws forward? Is it just because it's easier to point fingers at a company?
Here's how I think the average joe sees things. Most people here may not fall into this category, but certainly know people who do:
A) Politicians only listen to money; even ones that are on your side; laws therefore are skewed towards those who have money.
B) Companies donate large sums of money to politicians; therefore they listen to companies.
C) Very rich individuals also donate large sums of money, but the average joe can't figure those names out on their own and will rely on rumor mills from social media, and media propaganda from his/her political tribe.
So people will get mad at companies first because they are more visible and the fact that it's more possible for a non-rich person to get people to stop spending money at a corporation than making a lawmaker do what you want.
There are many levels to this but generally there is an idea that politics and especially laws like these are shaped by those who benefit from them the most - big businesses who can afford lobbying.
In terms of theory there is a Marxist notion of 'ruling class'. In regards to capitalism Marxists think that ruling class of capitalism is big business, not the State itself. Politicians are in a weaker position and just implement the will of the captains of the industry. That is rather extreme notion but still one can see traces of it in society.
And it generally goes both ways - companies have poor (but legal) working conditions and oppose any legislation or action that would change it by being anti-union, by funding thinktanks that do studies that prove raising minimal wage would lead to overall decrease of jobs etc.
They're all sell-outs. When election time comes you vote your side, hope the other side doesn't win and then spend the next for year ignoring what your guy is doing or criticising what the other side's guy is doing.
Sure, you could vote the libertarian party, good luck going higher than 3%. Even if they were successful, what are the chances they won't become as corrupted as other politicians once they have the power?
In the last 200 years the USA government just got bigger and inequity has just increased.
Forget about politics, accept the leeches as part of life, joke that "Two things are unavoidable: death and taxes".
You can at least boycott large companies and stop purchasing their goods.
I find efforts to skirt rules and regulations very fascinating.
This reminds me of a discussion awhile back. When interest rates threatened to go negative due to European markets circa 2014-2015, I remember discussing with fellow economists just how negative rates could go. Ultimately, at some negative rate, we figured wealthy individuals would remove their capital from the market and put it in warehouses with armed guards. The maintenance cost would eventually be lower in that approach than to leave in banks (charging higher fees as rates increased) or similar.
Ultimately it was speculative only, thankfully, since capital inflows from Europe to the US kept the rates higher than zero.
Incorporating in Delaware is the exact opposite of trying "to skirt rules and regulations". It is based on the desire for well defined, stable rules and relatively efficient enforcement.
Not really. In e.g. the Netherlands you've to pay a 0.5% interest rate over the balance above €100k, €250k or €500k at most banks.
Of course most people that hit the cap just spread out their money over multiple banks, use a savings deposit that still gives zero or positive interest, or invest it.
Not too different than the concept of precious metals depositories I guess. I don't know what the yearly tithe is in places like Singapore for this service, but one problem would be the physical size of the cash.
Maybe they should reissue the $100k federal reserve note for public consumption.
There's something that's been bothering me for a long time about interest rate policy.
In general, I have the impression that people take for granted that lower rates are "easier" even when they go negative.
However, it vaguely seemed to me that either side of zero should be considered "tightening". The sign determines which way money is going, but the absolute magnitude constitutes the friction.
So I've wondered if negative rate policy was counterproductive.
Loopholes like this are why I balk when any politician talks about raising corporate taxes. I agree that businesses should pay more, but until loopholes like this get plugged I don't believe it will do any good. At best it's a way to placate voters without accomplishing anything of value. At worst, it can make our horrifically complex tax code even more complex, making it even easier to hide loopholes.
Its the same thing with the upper tax brackets. People point to the 50's and say "look we taxed the rich at a much higher rate!!1" but what they miss is that there were so many loopholes that the rich didnt pay anywhere near that rate.
Loopholes are the lifeblood of corps / billionaires. No one will fix them though because thats where their campaign contributions come from.
The rich paid more in the ‘50s, because the alternative (the USSR) was worse. Moving money was slow and risky; if you parked your cash in a friendly Caribbean island, there were no guarantees that tomorrow that island would not see a Moscow-backed revolution and your stash would go up in smoke.
Nowadays the world is largely stable. Running conflicts are largely ethnic in nature, hence limited to specific areas. Capital is welcome everywhere, and you can move money in and out of a country with a click. So it makes sense for the rich to shop around, like we do when buying insurance through a comparison website.
A lot of people getting hooked on the tax part, some on the anonymity part, but don’t underestimate the friendliness of Delaware courts to boards of directors. Things like staggered boards, share classes with extraordinary rights, poison pills and so on have all easily passed muster in Delaware and might well not have in a different state.
The 175-180k figure for franchise tax is misleading. Our franchise tax as an early pre-revenue company was $450 dollars this year because of one of the methods of franchise tax calculation available.
Ah yup the minimum is 400 plus 50 fee for the method we use. But 175 for the other method. Well that clears that up.
I’ve always been advised to open a company for the few times I’ve done it with an initial 10m shares for ease of investors and to more easily manage an employee options pool so I’ve never had a co that would qualify for the 175 method. The more you know
Is there some advantage of choosing the entity mentioned in the article over its ~100 competitors? I found a list of registered agents here: https://corp.delaware.gov/agents/
I am sure that the quality and breadth of services provided by the agents chosen by fortune 500s well exceed the services provided by an agent that is one guy in a garage.
Neither, just found it interesting that the _one_ address always comes up, but you don't hear of the runner-ups (although it seems I have also missed the mention of the other big player that someone quoted from the article).
I'm always blown away by how high taxes are in the USA.
A federal corporate tax of 21% - and states can tax you even more?
Meanwhile you can incorporate in Europe paying 10% (or 5% in Malta, if you setup a holding company, or 4% in Canary Islands if you invest 50k-100k and hire 3-5 people).
The UK is taxing companies at 19% (even if it's due to increase to 25% to cover COVID's expenses).
There's no no need to use a formation service. Incorporating a company in the US is very easy and can be done online, even by foreigners. All you need is a Registered Agent and they start at $25/year (in Wyoming).
I'd also like to point out that forming a LLC as a foreigner is a bad idea, as that might make you personally liable for US taxes. Either form a C Corp outright or have your LLC taxed as a C Corp. Then just zero out the profits. Some extra forms to fill out, but still better than paying taxes.
Exactly. If you're outside the US, you can only be a contractor, even if you work full-time for your company. There are no caps on how high a contractor's fee can be - that's not the case with employee salaries.
There are more fancy options, such as having a second, foreign company owned by you be the contractor - if you want to avoid personal income taxes in whatever country you live in. Beware of CFC regulations though.
Members nor Managers are not listed with the state
My main issue with out-of-state LLCs though is you typically have to file in whatever state you're operating/living in as a foreign LLC, so you end up with double the paperwork and filing requirements.
IMHO its better, especially for sole-proprietor / pass-through LLCs to just register in whatever state you're living in.
> 100% not worth the headache so better to file in the state you "do business in" = home state!
This is only true until someone attempts to sue for a triviality. Most companies get sued at some point in time. This is why such a service is of value.
From our experience, most customers go for Wyoming LLCs because of the cost-effective option of a $50 Annual filing charge as compared to Delaware which has a $300 Annual franchise tax. The option is totally up to you.
We wrote a guide around how to choose the best state for new LLCs [1]
My understanding is that if you create your LLC out-of-state, you still need to register your llc as a foreign entity, which often, puts forth the same requirements as an in-state LLC.
Take specifically California. If you live and operate in CA, but register your LLC in Delaware (or Wyoming), you still need to pay the $800/yr franchise tax and complete all of the same tax paperworks that you would if the LLC was registered in CA.
Isn't it just simpler (and cheaper in time and money) to register in the state you operate in?
If you live in the US, correct! It's best to form an LLC in the state you live in.
If you live internationally, you can actually choose any state to form an LLC in (and Wyoming + Delaware tend to be the two most popular options, Wyoming for online digital businesses due to the lower ongoing annual costs = $50 per year to the state vs $300 per year in Delaware!)
The focus is more on international, rather than inter-state, arbitrage of legal systems by persons/corporations but is there really that much difference between the rationale for putting an HQ in Dublin and incorporating in Delaware if the goal is selectively operating under favorable legal frameworks?
Bonus, I’d never put together that offshore is just a socially acceptable alternative for the word pirate a la pirate radio.
It's not (just / only) taxes - Delaware has for a century or more not imposed changing rules and regulations on businesses registered in its state. It has basically left things well alone.
If this was outside the USA then Delaware would just be some tiny island tax haven. But it's a full fledged State in the most powerful country in the world. Businesses in Delaware still have to abide by every Federal law and regulation, and every Federal tax. It's not (quite) a no laws, no rules hideaway.
What they don't have to do is guess which State's local problems are going to hamstring them in five years.
Delaware incorporation gets you in the USA market at the national level. National America laws affect you but local State politics you can safely ignore. And be confident that the changes coming nationally will be clearly signalled in California or Texas first.
Yes there is tax arbitrage opportunities - but we are seeing similar things in Netherlands or Ireland in the EU. And when things got too out of hand then the other states would all "have a quiet word" with Delaware. Similar to how the Dutch Irish sandwich is it seems coming to an end.
So yeah, businesses like stability and only having to look in one direction, much more than low taxes but more complex environments.
Edit: It's worth reading up on the Dutch / Irish sandwich. In some ways yes it is egregious (and yeah a lot of the time it is - franchises that claim all the profit resides in a logo or a policy book - we all know that's crap). But that's a question of degrees - if I sell McDonalds burgers I will make more than selling some unbranded stuff. So IP does have value. Now let's say I am licensing wind turbine generators for a wind farm - designed in UK, built in Germany, installed in France by a Dutch company with Spanish investors. Whose laws apply to the licensing agreement ?
This gets really hard really quickly - which takes us back to Janet Yellen and minimum OECD tax rates. By stopping the race to the bottom, it does not matter so much - tax is paid, and gets shuffled in somewhere.
I know I am banging on but, getting outraged by tax dodges like this will prevent us taking the big wins - if there is a global minimum tax rate a huge amount of wasted effort on tax avoidance goes away, and it opens up real possibilities for clamping down on tax evasion.
Companies in Delaware mostly pay tax in the right range - and those that don't, trust me, the way to deal with it is to hire more IRS agents - probably the only branch of Government that has a 4-10x ROI year on year :-)
tl;dr tl;dr
There is an order to fixing taxes either globally or between states. First set a global minimum corporate tax rate (see OECD/Yellan). Then clamp down on tax evasion by forcing beneficial ownership to be made public globally. Only after all that is it worth fighting over who get what cut of the pie. There is no global tax pie right now - we need to bake it before we discuss cutting it.
> how shall I put this ... straw chewing hick-town councillors (sorry, State Senators) who think cows made America great.
Considering America wouldn’t exist without food and the hick towns that supply it, and speaking as a straw-chewing hick from one of those towns who I guess manages to smash enough keys together to occasionally write software in your eyes, please do not so condescendingly dismiss the half of the country you clearly don’t understand. We can just as easily dismiss you and your arrogantly narrow view of your fellow citizens. It’s those exact globalist policies you’re trumpeting, and their ideological underpinnings, that forced the very people who feed you into a position where you can comfortably shit on them as you are here.
You didn’t need this classist, obnoxious swipe to make your point, and you absolutely knew that given how you hedged it linguistically (twice alone in my quoted portion). It says far more about you and your beliefs than you think it does that you said it and apologized for it in the same breath.
On the other hand, as a European, the very few State Senators I have met / known have been decent honest people - but very focused on local (to the State) issues - or on what I would call global always on politics like decent labour laws etc.
But then again, their very job is to focus on the local.
Hmm, re-reading this bit:
>>> It’s those exact globalist policies you’re trumpeting, and their ideological underpinnings, that forced the very people who feed you into a position where you can comfortably shit on them as you are here.
And do you have a plan to connect that (otherwise correct) sentiment to the point I’m making? Or are you implying that because America has an obesity epidemic the point is invalid?
So, when a state operates in California but pays its Delaware subsidiary to hold its IP and other intangible assets as a tax dodge, does it not have to pay Californian sales taxes on this purchase?
A) Yes, it still collects sales tax on the purchase. (Sales tax is owed by the buyer, not the seller).
B) The company would still owe CA tax on the revenue from selling the phone.
C1) California would disregard the IP royalty, so no deduction for the Delaware shenanigans.
C2) Other states will grant the deduction...but tax the royalty on nexus grounds, and the subsidiary won't have apportionable expenses to offset the royalty income, resulting in a higher net tax burden for the corporate group .
I haven't worked on the money side of a business - businesses are allowed to claim an expense for purposes of reducing their income tax burden, but they don't have to pay sales taxes on that same expense if it's internal to an associated business? That seems perverse.
"I spent money on X"
"Okay where's the sales tax payments for X?"
"The money went to myself, so there's no sales tax"
They do, it's called a use tax. So if you buy paper for your business and don't pay sales tax, you'll generally have to pay the same amount in use tax.
As often happens, Planey Money has an episode on exactly this [0] (from 2016, so could be out of date). There's also some followup episodes at the bottom of that link.
They even name their company 'Delawhoo', which I think is quite charming
Most of the stuff in this article is misleading or straight-up wrong. Delaware isn't a tax haven, and most companies will see zero tax benefit from incorporating there.
The reason they do so is that Delaware corporate law is now the de facto US corporate law. Lawyers, auditors, tax professionals etc. all study Delaware's codes in school, no matter which state they come from. The entire ecosystem is extremely mature and up to date. Most other states on the other hand don't even recognize modern corporate governance. Try resolving a conflict between founders/investors about voting rights, class A vs class C shares, bylaws etc. in a court in North Dakota or Mississippi.
Delaware is, for better or worse, the corporate law version of silicon valley. Unless registration and regulation of corporations starts happening at the Federal level (which is unlikely), it will continue to be so.
TL;DR It is mostly due to the corporate friendly and experienced legal system in Delaware. Not so much about taxes. If you are too small or just starting out, you may be better off incorporating in your local state of residence to avoid overheads. Right?
For C Corps, correct! But for LLCs my candid thoughts are form in Delaware only if you have plans to in the future convert your LLC to a C Corp (to raise venture capital from U.S. investors) or you really want the "prestige" of saying your company is from Delaware. Some people say this matters to them and if it does, it is your business, your choice!
Otherwise, I recommend Wyoming. Why? Wyoming is the most popular state for non-residents who are online businesses, e-commerce businesses, or business owners who want an easy and simple way to form and manage their company. It's the most popular state among https://startpack.io customers, has lower annual fees ($50 vs $300 in Delaware), a low filing fee ($100), and was the first state to ever create the LLC. Also don't sleep on Wyoming's prestige as well :) It has a friendly business environment, also allows you to protect your personal info when filing with the state (use the registered agents info) and has even been called "The Switzerland of the Rocky Mountains" (I don't know who coined this term though haha)
The exact kind of thing interstate commerce law exists. And yet we instead fraudulently use it for the war on drugs and restricting what can be produced and sold in-state.
Have learned a ton about LLC formation in Delaware + other states from working on https://startpack.io.
tl;dr if you live in the US form an LLC in your home state, if you don't Wyoming is a very popular option for online, digital businesses / ecommerce businesses, and Delaware is so popular because, in my opinion, it has "prestige" but as an international resident, you won't automatically get tax savings by being in Delaware vs Wyoming for example (if you don't have a physical presence in the US)
If you live in the US -> form an LLC in the state you live in. If you form an LLC outside of your home state you’ll be required to register that out-of-state LLC as a Foreign LLC in your home state. For example, if you form an LLC in Nevada (but you don’t live there), then you’ll be required to register that Nevada LLC in your home state (as a Foreign LLC) in order to do business in your home state. This means you now have 2 LLCs (one in Nevada and one in your home state) so you have to pay 2 State filing fees and 2 Annual report fees
If you don't live in the US -> you can form in any state. If you are an online digital business Delaware and Wyoming are the two most popular states.
Delaware is the most popular state in the US for business formation. I think part of this is because of 1) the prestige of creating a "Delaware C Corp" in the state and 2) it does have a very solid business reputation. However if you are an international, online business, Delaware might not be the best option if you are trying to save $. In Delaware there is a $300 annual payment due to the state each year.
Wyoming is extremely popular for LLC formation for international residents because of the lower ongoing annual fees ($50 vs $300 in Delaware). Wyoming has also built a reputation as one of the most popular state for non-residents who are online businesses or e-commerce businesses. Also dont sleep on Wyoming's prestige as well; it has a friendly business environment and has even been called "The Switzerland of the Rocky Mountains."
Again the thing here which is important to highlight is you end up creating twice the work / twice the costs if you live in the US and form an LLC outside of the state you "do business in" so be careful here!
And internationally, if you're forming an LLC, you can choose any state and if you don't have a physical presence in the US, you actually might not have a US tax filing requirement, but you do have an informational filing requirement if you are a foreign owned US Single Member LLC (Form 5472/1120). If you are a foreign owned multiple member LLC, you file a partnership return. And if you are an LLC that elects to file as a C Corp you file a C Corp return!
> informational filing requirement if you are a foreign owned US Single Member LLC (Form 5472/1120).
Lets say hypothetically someone operating IT consultancy service didn't know about that requirement, is running company 5+ years, has EIN, paid LLC Delaware annual tax but never filled those forms.
1. What in that kind of hypothetical scenario should that person do?
2. Does the penalty for not filling it would affect that person LLC only (as disregarded entity)? so basically he would not be personally liable ?
3. Does your site offer filling those forms as a service?
Great q, I can see if a CPA in my network has a good answer to this (feel free to shoot me an email, link in bio, with more context as well)
And yes we can help with these filings but the circumstance above where a previous filing wasn't completed is an interesting case so will have to see what the best option is give that!
It's not fraud. The companies did nothing illegal. I'd argue they did nothing wrong, either. The real fault lies with the state governments competing for corporate tax dollars.
> By incorporating there, a company based in another state could save big on taxes and enjoy perks like unlimited market expansion. A flood of conglomerates took up this offer and New Jersey earned so much from taxes that it was able to pay off its entire state debt. Pressured to incentivize businesses to stay, other states offered their own lenient corporate tax policies. In this so-called “race to the bottom,” Delaware emerged victorious.
The state that wins (Delaware) gets to collect a huge, recurring tax check from big businesses. But it costs the other states far more in exchange. It's a positive for the state, but a net negative for the nation as a whole.
> For the state of Delaware, these small fees add up to as much as 41% of the state’s entire revenue. In 2019, they collectively amounted to $1.4B. For other states, the deal isn’t so sweet: It has been estimated that the Delaware loophole costs other states as much as $9.5B per year in collective lost tax revenue.
Then there's something the article doesn't touch on: the other states still need revenue. The other states are incentivized to bleed their local businesses dry, which makes it difficult for them to compete with the businesses big enough to exploit the loophole. If you're a business who can exploit the loophole, you're just handicapping yourself by not doing so - no matter how altruistic your intentions.
The takeaway here should not be "businesses are bad". The takeaway should be "our tax code sucks and we need to come together as a nation to fix it". Of course, even if we fix it in the US, we still have to worry about the same thing happening at a global scale...
Most tax avoidance has nothing to do with ambiguous tax law. Most of it is very specific. And if something isn’t specific enough, we already have regulatory agencies who regularly exercise the power to further clarify them.
A company moving their income from one location to another to take advantage of lower tax rates is no different than the current exodus of remote-working tech workers from the coasts to lower tax areas.
People make decisions based on the law. This isn’t a bad thing, this is what we hope and expect to happen. If the laws do not produce the desired effect, that’s the fault of the legislature, not those following it.
But who writes the law? Look into "regulatory capture" and how companies tilt the tax law to their favor.
If it costs less money to lobby the government into changing the laws than paying those taxes, the companies will do that. And that's what's been happening!
The spirit of the law isn't written down, and it is unreasonable to expect people to infer it and comply with that inference.
If you believe in the rule of law, you believe in the idea that people should only be required to follow the letter of the law. The point of laws is letters - there is literally nothing else to it.
Expecting people to follow unwritten law is not a belief in the rule of law.
Delaware is generally no different than any other state. The state where you do your business activity is where you pay taxes, not necessarily the state where you formed your business entity.
Correct, this is an important note for international LLC owners as well as many folks think the "in-state" US tax laws apply, however, if you don't have a US physical presence you might only have an informational filing requirement (vs a US 1040NR tax filing requirement). I wrote a full thread on this here in case anyone is curious! https://twitter.com/arjmahadevan/status/1380556571395112960?...
Maybe states should learn from Delaware. The minimum tax required for an LLC in California is $800. So even if you have an LLC that makes no money, you still have to pay California $800 per year.
California actually started to waive this fee in year 1. "As of June 2020, the $800 franchise tax fee has been waived in the first year in California."
Otherwise, you end up paying the annual fees twice in ~ 1 year.
Here's an example before CA started to waive this fee of how brutal this could be in CA for LLC owners:
California has an annual franchise fee tax of $800. This fee is due every calendar year, not every 12 months.
Calendar Year: January - December
Every 12 Months: 12 months from Today
So this means if you were to start an LLC that was "born" or "officially created" on December 31st, 2020, you would be responsible for paying the full $800 franchise tax fee for the year of 2020!
Fast forward to January 1st, 2022, one year and one day later, even though essentially only one year has passed by, instead of owing $800 to the state of California... you would owe $1600!
To make things worse, the first annual franchise tax fee payment is due within the first 3-4 months from when your LLC is formed, and from then on, due by April 15th each year. So if you were to create a California LLC that went in to existence on December 31st, 2020, you would have to pay $1600 in the first 5 months!
To be fair, you have to wonder what the point of corporations even paying taxes is. I always thought that they should wait until the shareholders or employees actually received money/goods/services from the Borg. In a highly simplified world, 100% of profits are passed through, but then you currently get the issue of dividends being non-deductible (that's true, isn't it?). Odd.
On the other hand, with the Senator from Mastercard running matters, I don't expect to see any consequential changes.
The key issue with that is that in this case the shareholders can defer the distribution (and thus the taxation) for multiple decades and potentially forever. If you need to get some spending money/goods/services from the Borg, you can instead sell a small share of the Borg; if you'd want to invest the profits somewhere else, you instead have the Borg invest it there (because that's untaxed in that case), if you'd want to buy a fancy villa you can have the Borg buy it and rent it to you - even at a fair price, the key thing is that you're only taxed on the amount you'd need to extract for rent, but the purchase is with pre-tax money.
If we would wait until the shareholders actually receive the money, it means they have the ability to arbitrarily decide when the revenue will be taxed, so they'll ensure that it definitely isn't taxed now. So the result would be that profits are never passed through until/unless absolutely necessary - or perhaps they can wait out a couple governments until some decades later the rules change.
It seems to me that that argument could be made for any appreciating asset class.
Real estate (especially in Prop 13 California) would go up in value and could be borrowed against. Same with collectibles. I hear what you are saying in that the gaming on a simplification begins on Day 2.
With tax law, I'd say that the West is covering new ground in the last 100 years. Multiple mitts in the pie of legislation who all want something different (money, partial control of the taxee, veering of social goals) resulting in increasingly arcane rule sets, edge conditions resulting in tax court decisions with yet more fuzziness on the outlines.
The death of self employment and economy of scale of the modern corporation leads you to some weird places.
No, the argument is about revenue generating asset class, and the thing is is that such a deferred taxation enables, and motivates (perhaps even forces) one to effectively convert any revenue generating asset class to an appreciating asset through a corporate wrapper. And the deferral of taxes breaks the process of governance, as there's no income now to pay for the common expenses now.
Real estate is a good example - assume non-appreciating real estate, which is the historically main example of a revenue generating asset (i.e. the rentier landlord class historically). If you defer taxation of profits until they're removed from the company, then any rent-earning landlord can instead of earning rent, getting taxed, and investing that after-tax money in more real estate would establish a corp for that, and use the rental profits (untaxed) to buy more real estate within that corporation. It gives a tax advantage (ability to arbitrarily defer) to everyone who can put their earnings under a corporation, and punishes those who can't.
The key problem with such taxation is essentially the same as moving to a consumption-only tax - it means that you disproportionally tax the people who (have to) spend all their income to buying things for consumption (i.e. the poor), and don't tax the people who use their income to buy revenue-generating assets and control (i.e. capitalists); it's a rich-get-richer, poor-get-poorer form of taxation.
Corporate income tax is double taxation--in theory.
On the other hand, as others note, there are so many ways for individuals to defer taxation, for example in the case of 401 (k)s, or even eliminate it in the form of large charitable contributions or other mechanisms. So I'm not entirely opposed to some level of corporate income tax.
Well, there's also the bit about not having to deal with a long list of fees and onerous requirements like many states have, when all you're trying to do is start a business, build a product and hopefully find some paying customers.
This is exactly how people treat someone being honest. You don't know what is his opinion after reading the article, so you can't say he reinforced anything.
The high GINI scores in the USSR always cracked me up.
The tendency for money and resources (and pretty women I suppose) to pool has never been well dealt with. All large-scale systems for business and government seem to devolve into dogfights over scarcity.
No the point is that PEOPLE will try to take advantage of tax codes regardless of the ideology presumably followed by the country. It has nothing to do with capitalism. You could undoubtedly find examples of elites avoiding taxes under feudalism, or in the theocracies of the world, in Communist nations, and capitalist ones.
The thing you ascribe to capitalism is a failure not of some ideology but a problem with human nature. If you blame capitalism and throw up your hands the problem can't be addressed.
Do you consider places like Texas and Florida to be "tax havens" because they are increasingly attracting more and more people to move there from places like California and New York for personal tax advantages?
Corporate tax havens, income tax havens, property tax havens, sadles tax havens are all part of the one side of this system. On the opposite side you have over serviced areas, daily door to door mail delivery, public transit, universal health care all available in over taxed havens.
The federated nature of united states allows each state to set different tax rates / service levels. These states compete with each other to attract people / capital.
The nature of how the system works means tax havens are not parasites. They are part of an ecosystem system that competes. The freedom to make those changes is what makes them successful over a system who would limit that.
On the country level its more extreme with currency havens.
Indeed, even the Geoffrey case the article notes is famous for Geoffrey losing in South Carolina, and having its income taxed in that state.
Nonbusiness income is taxed to commercial domicile, which does promote moving headquarters to a tax haven. But much less income is considered nonbusiness income than you’d expect, and further commercial domicile is a separate concept from place of incorporation.
By far the dominant reason for Delaware as a corporate place of incorporation is its well developed corporate law and courts. It is more favorable to corporations in part, but not excessively so—VCs would not be pressuring corporations to incorporate in Delaware if it purely screwed shareholders at the corporation’s benefit.
There are also estate planning and asset protection benefits of using Delaware (and certain other states) LLCs.