Yes, Hollywood and Silicon Valley executives are tied to California because that's where the jobs are. But people who rely only on investment income (ie. retired people and the very rich) can often be found moving jurisdiction to avoid tax.
A corporation may exist only on paper but the value that it creates comes from a mixture of social, human and physical capital - and that occurs at a particular place. Facebook could move its place of incorporation to Delaware overnight, but the place where it 'adds value' is rooted in California.
Regarding the widget manufacturer: Yes, in some cases a transfer profit of 20% will be sufficient to wipe out all reported profit in the high-tax jurisdiction. But how common would that be? If Apple were to able to inflate the cost of manufacturing an iPhone by 10% there would still be plenty of US profit left to tax. If Ford could inflate the cost of all the components it imports from low-tax jurisdictions (not high-tax ones like Japan) by 10% would it have a significant effect on reported profit?
You are right about the software licences - I made a similar point here:
https://news.ycombinator.com/item?id=5731680
If the software was developed in Ireland then the UK shouldn't be able to tax the profit.
>Yes, Hollywood and Silicon Valley executives are tied to California because that's where the jobs are.
That's where the jobs are because that's where the employees are and vice versa. There is a reason you don't see many software companies setting up shop in Des Monies and trying to attract engineers with the low cost of living.
>Facebook could move its place of incorporation to Delaware overnight, but the place where it 'adds value' is rooted in California.
That's what I'm saying. You should tax the things that "add value" (employees, real estate that implies use of local infrastructure, etc.) rather than trying to tax profit, because profit doesn't have a country.
The problem with the alternative is that just because your country contains something that "adds value" doesn't mean a corporate entity in your country can make any profit from it. Suppose your country has great engineers. If the engineers are the valuable commodity and the market is efficient then they'll get paid close to the value they provide to the company and leave little as profit for the corporation. You can have a company which is providing huge value to the economy but is having to pay its employees the lion's share of that revenue in order to retain them. That company won't have very high profit margins because if it kept more of the profits for itself its engineers would quit and join a competitor that pays better.
The only way that doesn't happen is if the company has something its competitors don't (strong trademarks, trade secrets, some unusually valuable copyrights or patents, etc.) But then the value of that non-geographically-dependent asset (which is all that keeps the company from having razor thin margins) can be whisked off to an entity in a low tax jurisdiction, leaving the entity within the higher tax jurisdiction in the position of having extremely small margins again while the profits accumulate in the entity associated with the movable asset.
>Regarding the widget manufacturer: Yes, in some cases a transfer profit of 20% will be sufficient to wipe out all reported profit in the high-tax jurisdiction. But how common would that be?
You're asking how common it is for a company to have a less than 10% profit margin? I would say that covers most companies. The primary exceptions (which Apples clearly falls into) are the companies that sell products covered by high value copyrights, patents, trademarks, etc. Which leads to what we've been discussing with software licenses.
The problem simply is that you can't have significantly higher taxes than the next country on anything that can be easily removed from your jurisdiction, or that is exactly what will happen. And the profits of international corporations fall into that category.
Ok we have a misunderstanding about the term, 'add value'. I was using it to mean profit but you are using it to mean costs. My gut feeling is that taxing costs instead of profit will lead to warped incentives, but I admit I cannot think of a good example just now.
> You're asking how common it is for a company to have a less than 10% profit margin?
No - I wasn't clear, sorry. I was thinking a company might typically have the following costs as a percentage of revenue: (a) domestic costs 40%; (b) imports from high-tax countries 25%; (c) imports from low-tax countries 25%. Increasing this last figure to 27.5% would not wipe out the company's profit margin.
> the value of that non-geographically-dependent asset ... can be whisked off to an entity in a low tax jurisdiction
A company's advantage over its rivals often geographically dependent. Toyota's famed culture of lean, just-in-time manufacturing allowed it to become the biggest carmaker in the world. That culture was a company asset rooted in Japan that could not be whisked to any tax haven.
As for intellectual property, is there absolutely no way to structure the tax code so that growth in the value of these assets can be taxed? What about a simple rule that says IP cannot be transferred across borders within the same company? That is, the value of a patent is tied to the country in which the R&D was done. The value of a book's copyright is tied to the country in which it was written. The value of a software licence is tied to the country in which the software was developed. Etc.
> The problem simply is that you can't have significantly higher taxes than the next country on anything that can be easily removed from your jurisdiction, or that is exactly what will happen. And the profits of international corporations fall into that category.
If that was the case then the corporation tax for most of the Fortune 500 would be zero. The current system, although imperfect, is still somewhat functional.
A corporation may exist only on paper but the value that it creates comes from a mixture of social, human and physical capital - and that occurs at a particular place. Facebook could move its place of incorporation to Delaware overnight, but the place where it 'adds value' is rooted in California.
Regarding the widget manufacturer: Yes, in some cases a transfer profit of 20% will be sufficient to wipe out all reported profit in the high-tax jurisdiction. But how common would that be? If Apple were to able to inflate the cost of manufacturing an iPhone by 10% there would still be plenty of US profit left to tax. If Ford could inflate the cost of all the components it imports from low-tax jurisdictions (not high-tax ones like Japan) by 10% would it have a significant effect on reported profit?
You are right about the software licences - I made a similar point here: https://news.ycombinator.com/item?id=5731680 If the software was developed in Ireland then the UK shouldn't be able to tax the profit.