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.
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.