I admit I know very little about this area, but how difficult is it to enact laws which make transferring tax-free profit out of one country to another illegal? Very simplistic, and obvious, so there must be a reason why not.
Australia has become the latest nation to decide it wants tech companies to pay more tax, after David Bradbury, Assistant Treasurer and Minister Assisting for Deregulation, declared Google uses a “Double Irish Dutch Sandwich” to pay as little tax as possible on its Australian operations. Google paid just $AUD781,471 of taxes …
Thursday 22nd November 2012 23:54 GMT jonathanb
It's actually very difficult. Certainly in the UK, there's something like 10,000 pages of legislation to try to stop it.
They are entitled to set up shop in any EU country they wish for any reason or for no reason. Therefore it is all down to whether the transfer pricing payments are reasonable for what they get in return, and the various tax authorities around the world will always argue for a bigger slice of the cake.
Friday 23rd November 2012 02:08 GMT Thorne
"It's actually very difficult. Certainly in the UK, there's something like 10,000 pages of legislation to try to stop it."
Actually it's the 10K pages that creates it. The more complex you make something, the more likely you are to leave loopholes.
They need to start by simplifing the laws, not adding new ones
Saturday 24th November 2012 16:48 GMT Anonymous Coward
"They need to start by simplifing the laws, not adding new ones"
You must be new to the UK. The whole point of unnecessarily complicated legislation is that it's a massive and (not so) covert job creation scheme.
That it also benefits their friends in the city is just coincidental. /sarcasm off.
Friday 23rd November 2012 00:26 GMT An0n C0w4rd
The problem is corporation tax, which (AFAIK) is levied on profits. You can't apply VAT here as many of these transactions are inter-company so are VAT exempt.
You can't just replace corporation tax with something based on revenue as then any struggling company will be instantly killed. Letting companies offset loss against the new tax will let Google out of paying tax again as they just pay a hefty royalty to their overseas subsidiaries and hey presto, we're back where we are today
I don't know much about corporate tax law, especially as it applies to inter-jurisdictional transactions, but the solution does not appear to be obvious.
Friday 23rd November 2012 00:53 GMT Jolyon Smith
Taxing revenue instead of profits ...
If it's good enough for individuals, then why not companies ?
Struggling households are killed by the fact that all income is taxed, before the expenses of running the household are - or can be - met. In that situation, the household then receives benefits to keep it afloat.
Essentially this IS what happens, by allowing losses to be offset against tax. The company is effectively given a 100% tax credit. But once it starts generating profits, those tax credit remain in the bank. A company should be required to repay those tax credits once it starts generating profits.
Friday 23rd November 2012 01:53 GMT Dazed and Confused
Re: Taxing revenue instead of profits ...
Struggling households would certainly be killed by taxing businesses on revenue and not on profits.
What do you think would be the impact on your food bills?
Most super markets are very low margin businesses. I know that at one point it was common to run with a zero or even negative margin and rely on the fact that customers pay immediately while the super market pays on fairly long credit terms, so the super markets profit came from the value of the money paid to it by customers and not yet paid to suppliers. I guess that with the low interest rates currently in place this scheme no longer works. Who knows.
So if you make the super market pay corporation tax on revenue rather than profit your food bill would shoot way up because the price of the food would now need to have the tax added to it. And not just by the super market, but by everyone in the supply chain. The farmer, the distribution company, the transport companies, the manufactures, everyone. Unless a totally flat model could be developed (ie real farm shops) you could easily see your food bill double.
This really isn't a simple problem.
Friday 23rd November 2012 09:10 GMT Anonymous Coward
Re: Taxing revenue instead of profits ...
"Struggling households would certainly be killed by taxing businesses on revenue and not on profits."
But how low would that tax have to be? Clearly a lot lower than current corp. tax. I'm not sure that it would have a dramatic effect except on loss-making companies and I'm not convinced that the taxpayer should be supporting them anyway unless they are publicly owned and producing a service that we are happy to subsidize (like local Post Offices, for example).
Saturday 24th November 2012 01:07 GMT Field Marshal Von Krakenfart
Re: Taxing revenue instead of profits ...
The supermarket example is somewhat simplistic, the real scam in the whole process is the lax transfer pricing laws in Ireland and America, The payments are not for services and product, they are payments for intangible royalties and licences.
Have a read of this article to see how the big corporations work Irish subsidiaries helped Microsoft reduce US tax bill by €1.87bn in 2011
“Microsoft Ireland Research reported $4.3 billion of profits in 2011, with an effective tax rate of 7.2 per cent. This income equates to about $11 million of profit per employee.”
Here is a chart depicting Microsoft’s transfer pricing agreements with two of its main offshore
groups. As we can see from the chart, in 2011 these two offshore groups paid Microsoft $4
billion for certain intellectual property rights; Microsoft Singapore paid $1.2 billion, and
Microsoft Ireland $2.8 billion. But look what those offshore subsidiaries received in revenue for
those same rights: Microsoft Singapore group received $3 billion; and Microsoft Ireland, $9
billion. So Microsoft USA sold the rights for $4 billion and these offshore subsidiaries collected
$12 billion. This means Microsoft shifted $8 billion in income offshore. Yet, over 85% of
Microsoft’s research and development is conducted in the United States.
Friday 23rd November 2012 10:42 GMT The Serpent
Re: Taxing revenue instead of profits ...
"you could easily see your food bill double"
You mean like it has already with predictions it will continue to do so forever?
This kind of thing is what pisses me off when talking to anyone in finance (not that Dazed and Confused
is necessarily in that business) - they always make out that this we should just shut up and put up because it could be worse. Well yes, it could be, but they can never explain why it would be. The discussion is always rooted in the 'we've always done it that way' non-argument.
Surely the advantage in this situation is in having all the due tax paid into the system which eases it off as a whole. Some specific prices may rise but the system as whole will be more liquid and therefore all the various parts of it couldn't justify being all grabby and should stop wringing out the public as the only vaguely reliable source of cash. Of course, they aren't and we're all fooked when the public's pockets are finally empty. See Greece at al.
The economy is always treated as this thing in itself, as Herr Kant might say, which can only be prodded a bit but which is out of our control and needs to be largely left alone. It isn't. It is entirely man-made and can be made to do exactly whatever we wish of it, or, as long as there is sufficient requirement and motivation it can be deconstructed and put back again in working order. It would be one of the greatest undertakings of human history but why on earth would we persist with the opposite? Fear of the unknown? Knowledge conquers fear and the economists could have a marvellous time with all the necessary 'what it' discussions which everyone in their field has from time to time.
Friday 23rd November 2012 09:09 GMT K
Sunday 25th November 2012 20:42 GMT Jolyon Smith
Re: Taxing revenue instead of profits ...
A company reclaims all the VAT it pays on the things it buys, i.e. the VAT it ends up paying is on the difference between what it sells and the purchases it makes in order to create the products it sells.
That's not a tax on revenue, it's a first swipe at the profits.
Who's the dumbo ?
Friday 23rd November 2012 10:43 GMT Displacement Activity
@JSmith: Re: Taxing revenue instead of profits ...
It's more complicated than that. First, all income is taxed, in the form of VAT. In most cases, something close to 20% of the money that comes in the door goes straight out again to the government.
Second, we're only talking about corporation tax here, which is a tax on the company profits. To extract real money from the company, shareholders must take dividends, and tax is paid on the dividends at the normal rates.
Third, most companies in this business have margins of maybe 10 - 20% - ie. what's left over after legitimate expenses (wages, etc) have been deducted. The govt and the owners share out the remaining 10 or 20%. If the govt took its share before expenses, there would very quickly be nothing (or less than nothing) left for the owners, and no reason for them to remain in business. And, remember, the owners have to pay income tax on their share anyway, as soon as the money leaves the company.
Friday 23rd November 2012 14:16 GMT jonathanb
Re: @JSmith: Taxing revenue instead of profits ...
"Second, we're only talking about corporation tax here, which is a tax on the company profits. To extract real money from the company, shareholders must take dividends, and tax is paid on the dividends at the normal rates."
Unless you are Philip Green's wife, the clothing entrepreneur, who lives in tax exile in Monaco, while her husband slugs it out on minimum wage in the UK as the tea boy.
Friday 23rd November 2012 11:00 GMT Anonymous Coward
Re: Taxing revenue instead of profits ...
Well actually in the UK at least you get a nice 8K tax free allowance... and I think it should be able to be shared (i.e. 2 people living in a home should be able to pool their allowance if only one is working)
But as a business owner I have been in times where I've barely covered my expenses & paid myself a living wage, if I had to cough up 20% of turnover, my margins would vanish and I would have been on the dole.. So the UK gov would be supporting me not the other way round!
Saturday 24th November 2012 03:01 GMT david 12
>You can't apply VAT here as many of these transactions are inter-company so are VAT exempt.
In AUS, VAT (GST) is a tax on income. You get a rebate for GST expenses. If Google books 200G$ income, they have a tax liability ot 20G$. Since there haven't been any claims that they are avoiding GST, I assume that they are paying a flat 10% off the top of all transactions. Normal AUS companies pay much less, since they can claim back all expenses, which in normal businesses are a massive fraction of revenue.
On the other hand, if they have structured each payment to be paid to an offshore company, they are avoiding GST. To handle this, the goverment applies an 'uplift' GST component to imported goods worth more than 1000AUD
If Google is avoiding GST, and 'uplift' is not being applied to services, this should be corrected.
Friday 23rd November 2012 06:48 GMT Anonymous Coward
They have already been enabled for VAT (the anti-carousel fraud provisions) where customs and excise collects from you what it considers to be a reasonable amount of VAT in advance and you fight a losing battle for a rebate with it later on.
From a business perspective that arrangement sucks rocks and frankly, Google, Starbucks and Apple will doubly regret the day when they precipitate it being enacted for corporate tax as well as for VAT.
Thursday 22nd November 2012 23:28 GMT Emperor Zarg
Instead of constant rhetoric and hand-wringing, perhaps Governments worldwide should have a long, hard think about exactly why they feel entitled to plunder from corporate and individual citizens.
Whatever the question, their answer always seems to involve increased and frequently byzantine taxation.
Friday 23rd November 2012 01:02 GMT Anonymous Coward
There goes this bloke asking a perfectly legitimate question "what do I get in return for ever-increasing levels of taxation?" and he gets downvoted.
Taxation in itself? We can talk about it. The obscure, confusing, not really accountable way it is currently implemented? No, thanks!
Talk about a captive audience.
Friday 23rd November 2012 02:15 GMT Thorne
Friday 23rd November 2012 09:52 GMT James Micallef
"what do I get in return for ever-increasing levels of taxation?"
Top brackets of taxation used to be in the range of 70-80 percent, so personal taxation for middle class is actually quite low by historical standards. The problem is that the richer people and corporations started to find ways to avoid paying tax* so more and more tax had to be taken from middle and lower classes in the form of payroll tax, sales tax etc (When income tax was originally set up, it was ONLY for the rich, the poor didn't have anything to give anyway).
So your "ever-increasing levels of taxation" are due to entities like Google finding ways to not pay tax. As to "what do you get", definitely there is a lot of waste and uselessness going on in government, but what you DO get is an infrastructure that can support modern life and businesses - roads and bridges, power, communications, a system of laws, property rights and justice without which companies could not operate **.
* sure, in many cases legally avoiding tax, but bottom line they're 'lobbying' legislators to make tax laws that favour them. Although lobbyists can't directly pay legislators anything, they're indirectly sourcong campaign contributions etc so basically lobbying is legalised bribery)
** European countries spend approx 6% of GDP on infrastructure renewal and maintenance. That bastion of tea-party-ists over the pond spends 3%, mostly because the people and companies there keep voting for tax-lowerers. Guess which one of those has aging decrepit infrastructure that still depends on investments made between the 50s and 80s, and will need to spend trillions just to maintain what they currently have?
Friday 23rd November 2012 02:34 GMT Joe 3
"Instead of constant rhetoric and hand-wringing, perhaps Governments worldwide should have a long, hard think about exactly why they feel entitled to plunder from corporate and individual citizens."
Are you for real? How do you think the roads and the street lights and the fire brigade and countless other things are paid for? Companies and people are only able to make money because other people feel confident enough to spend it, so it's only right that they should put back in to help pay for the things that keep that society running.
Friday 23rd November 2012 12:35 GMT Anonymous Coward
"Are you for real? How do you think the roads and the street lights and the fire brigade and countless other things are paid for?"
Most public spending is hugely inefficient, and a fair chunk is on non-essential stuff. Roads, fire services and street lights represent a fraction of the total, with the largest single item usually being a welfare system that is a complete mess.
Looking at most Western economies, you'll find that they almost all spend a huge amount more than they bring in through tax. It has worked in the past because they flicked the debt onto future generations, and with rising populations and rising incomes it didn't seem to hurt at the time. Now that incomes have topped out for perhaps the next two decades (ie we aren't going back to REAL 4% pay rises any time soon), and the baby boomers are approaching retirement, so it is becoming less and less practical to keep increasing the national debt. Sooner or later, somebody has to pay, or the country has to default (and that's only a means of making a slightly different group of people pay). Look at Greece to see the ghost of Christmas future.
Or try it yourself. Spend 20% more than you earn, each and every month. Then see how long you can do that for, and see what the eventual outcome is. I'll guess it won't be fun in the end.
There is a way round this, and that's to keep spending the same ludicrous sums on crap (which is what most "public services" are), but to increase gross tax income by 20% to cover current spending, plus a further increase to pay down the existing debt, say another 20% if you want to get the existing national debt eliminated in a generation. At say a basic tax rate of 25% (that's about average when factoring in allowances and employee payroll taxes), that means you'd need to up that to around 38% or thereabouts as an average.
Sound good to you?
Friday 23rd November 2012 15:45 GMT DF118
Re: @Joe 3
Somewhat of a red herring there sir, since if proper tax dues were not being so consistently avoided (and evaded) then the overspend to which you refer simply wouldn't exist. (That does of course ignore the principle that one's outgoings tend to rise in line with income, and I wouldn't for one second attempt to argue that public spending isn't an insatiable black hole, but my point stands.)
Friday 23rd November 2012 17:13 GMT Shocked Jock
Re: @Joe 3
"Most public spending is hugely inefficient, and a fair chunk is on non-essential stuff. ....with the largest single item usually being a welfare system that is a complete mess."
Really? Suck this and see:
"Looking at most Western economies, you'll find that they almost all spend a huge amount more than they bring in through tax. It has worked in the past because they flicked the debt onto future generations,"
Current national debt is not paid by future generations. If it had been, then the aftermath of the Second World War would have been a crash. On the contrary, that war was followed by constant growth once the Bretton Woods system, with managed intervention and stimulus from governments, was brought into being. (By the way, it's a bit beside the point, but the eventual crash was assured once the ideologues had driven out evidence-based fiscal management in the mid-1970s.)
Thursday 22nd November 2012 23:54 GMT C. P. Cosgrove
The Byzantine nature of tax legislation is a large part of this problem, competition between nation states is much of the rest of it.
While the complexity of tax legislation boggles the mind, and probably provides more revenue for lawyers than patent litigation, as long as one state taxes businesses at a lower rate than another, then companies - who are out to maximise after-tax profits - have a perfectly understandable incentive to move their earnings to a state with a lower tax rate. And the subtleties of transfer pricing provide the perfect mechanism.
Contrary to what was claimed at a British Parliamentary Committee the other week, it is not a moral problem, it is a legal problem, and Governments write the laws and negotiate international agreements. The solution lies in their hands.
One of the basic principle of tax legislation was settled in the Victorian era when My Lord Justice determined 'That no man ( or company ) is required to arrange his affairs for the benefit of the Inland Revenue'. Perhaps all that can be said is that these international companies are complying with My Lord's judgement.
Friday 23rd November 2012 01:01 GMT Anonymous Coward
Re: Byzantine ?
competition between nation states is much of the rest of it.
Do you recall Gordon Brown's huffing and puffing about tax havens several years ago?
The real truth is that for anyone born outside the UK and rich enough, the UK itself is a tax haven.
Yes, it is competition between nation states.
Thursday 22nd November 2012 23:58 GMT ratfox
Chalk this up to disruptions of the internet
If a foreign company sells stuff in a country, the country used not to care. This was such a small part of the economy that it mattered little. Now that large parts of an economy is transborder commerce, it becomes feasible for companies to shop around and earn money where income is taxed less.
Fixing is going to be "fun". I would just tax the transactions, but to take a variation of an old example, if an Australian resident on a British website clicks an ad for a German company brokered by an American company, where is the transaction happening?
I wonder in particular what this $AUD1bn means (note that this is of course revenue, not income). Is this money that were paid by Australian companies to Google because somebody clicked on their ads? Or is it money Google earned because Australians clicked on the ad? And how much of it goes in fact directly to the probably Australian website which was publishing the ad?
Monday 26th November 2012 10:23 GMT bugalugs
Re: Chalk this up to disruptions of the internet
" to take a variation of an old example, if an Australian resident on a British website clicks an ad for a German company brokered by an American company, where is the transaction happening? "
The German company contracts accountable advertising exposure from the American company and makes the appropriate expense claim. The British website contracts accountable content from the American company and makes the appropriate income declaration. The Australian parts with their credit$ for the advertised goods / service. The German company despatches the goods and makes the appropriate income declaration. The Australian has obtained a right in Australia, rightly subject to applicable Australian law, no ?
Props to Mr Bradbury for articulating a difficult issue.
Friday 23rd November 2012 01:15 GMT Best Before:
Greed is good....
Commercial and Investment banks have been doing this type of offshore accounting for a hell of a lot longer than Google and the rest, (look at where a majority of the worlds banking industry situate their trading arms in Asia Pac, Singapore or HK the lowest tax rates in Asia!) the simple answer is that there is no simple answer to any of this.
Yes it is unfair and guess what the middle & lower classes will always get screwed by tax whilst any company (or individual for that matter!) that can afford the high price accountants will always find loopholes in tax law, big up the government for trying to close them down but in reality its a game of cat & mouse and believe me the government are definitely the mice...(so are the MC & LC..)
Friday 23rd November 2012 01:50 GMT Jolyon Smith
Re: Greed is good....
It's no surprise that the organisations that largely are responsible for setting up the "The System" went about it in a way that they were able to then take advantage of. They have been allowed to do so for so long because the system itself largely depends on their participation, and in turn the economies of the world depend on them.
The Googles, Apples and others that have come along and now are taking the same liberties have no such excuses.
If we can't fix this system, perhaps it's time for an entirely new one ?
Friday 23rd November 2012 01:25 GMT Lars
Lets try to stop this
It would be stupid to demand "clever" companies to stop being clever. So it has to be about legislation, multinational, as those companies are multinational too. What a problem indeed. Who is fast, who is slow.
I think we know the answer to that. What pisses me off is when taxation is turned against you by those multinationals who tend to ask - do you want to pay more tax. No, No and NO.
But I don't build the roads or anything (and for you Americans, they don't finance the Army the Navy, NASA or anything). Except I do and they won't.
Had a beer, need some more, but essentially they are screwing both me and you.
Friday 23rd November 2012 10:09 GMT James Micallef
Re: Lets try to stop this
"it has to be about legislation"
I agree. Unfortunately the way it works is:
- Laws are made by legislators
- Legislators are elected by people who mostly do not know the candidates personally, and whose information on the candidates are limited to media exposure + ads
- A bit of statistical analysis shows that to get elected, legislators need to spend mega$$$ on their campaigns, and having cash to spend is one of the strongest indicators of who will win an election.
- The companies and individuals who can afford to will pay for the expenses to get a candidate elected. Once elected, even if the legislator then goes ahead and does his own thing, next time round no cash = no re-election
- Legislators in general want to be re-elected
Is it possible to change things so that money is no longer a determining factor in an election? When the porcine community takes up aviation
Friday 23rd November 2012 04:37 GMT Flocke Kroes
Tax efficiency is required to stay in business
If Microsoft were not efficient about avoiding taxes then they would be less price competitive with Apple. If governments magically become competent at wording tax law and get the big search engines to pay more tax, then the price of advertising rises, the advertisers make a little less profit, pay a little less tax and pass some of the pain on to their costumers. The business customers make a little less profit, pay a little less tax and pass some of the pain on. Finally real people pay a bit more for their goods.
If you think Google paying more tax will reduce your tax bill will make you better off then you are living in a fantasy world. A government with increased revenue just finds more daft ways to waste it. I am sure politicians are well aware of this. All this talk about multinationals paying very little tax is just tactic to distract us from the latest expensive failed government initiatives.
Friday 23rd November 2012 08:48 GMT Anonymous Coward
Friday 23rd November 2012 10:19 GMT James Micallef
Re: Tax efficiency is required to stay in business
"If you think Google paying more tax will reduce your tax bill will make you better off then you are living in a fantasy world"
For most of the post-war period up to the 70s, the richest 1% in the US made about 10% of the income. A CEO was paid AT MOST 10X what the lowest paid worker in the company made. Currently the richest 1% make about 24% of the income, and a CEO can easily make 1000X what his lowest-paid worker makes.
So yes, if all large companies and rich individuals* paid their fair share, the median quality of life would be higher. I'm not advocating a socialist punitive tax rate here. Just that a billionaire pays at least the same real rate as a middle income earner and a mega-corporation pays at least the same real rate as the corner store or 10-employee local company.
* Mitt Romney paying 13% overall tax? Buffet paying lower %age than his secretary?
Friday 23rd November 2012 10:45 GMT Asiren
Re:(Original post) Tax efficiency is required to stay in business
That just doesn't make sense. It's the argument of the "trickle down economy" where the more money the people at the top make, the more they'll spend.
Except that nearly never happens. The more money a corporation makes, the more money gets paid out to its executives and shareholders, and the minions and suppliers still get squeezed "to increase shareholder value". In fact, the more clout a company has, the harder they squeeze their dependants to increase their own profits.
Apple as an example: Sitting on a HUGE PILE of cash reserves. Why? "In case of change of market conditions or potential acquisition targets." So, a company making that much money, with the market share it has, could:
1. Pay more tax. (No Double Sandwich)
2. Pay better wages. (And I don't mean to management...)
3. Pay fairer prices to its suppliers. (So Foxconn workers don't commit suicide so often.)
What do we see instead? Right after Jobs dies, shareholders pressure for the cash to be paid out as dividend, doled out to the "haves", so that the "have-nots" get squeezed even more.
I have yet to see someone turn down a money-making opportunity because "It doesn't make enough profit." If there's money to be made, someone will do the job. If everyone plays by the same rules, the level playing field will keep everyone straight.
But it's not. And it won't.
Friday 23rd November 2012 04:46 GMT Ole Juul
Friday 23rd November 2012 05:11 GMT Anonymous Coward
Free market tax
Governments as usual don't really understand half of what they say and do.
The power of the free market has been a standard part of rhetoric for years now, isn't this tax efficiency simply a global free market in tax?
Sounds like "do as i say, except don't do that".
Good Luck to google and the rest of them, if i had their tax accountants i would be praising them for their creative work.
Friday 23rd November 2012 07:24 GMT Anonymous Coward
two types of avoidance - or is it three
1) having the income from selling a service in one country paid to a company in a lower rated nation
2) making inflated "royalty payments" from one company to another company with the same ultimate owner to siphon off income in a non-taxable form
3) having a business based in a country but doesn't pay any tax in that country because the management is in another
now while no 1 seems a relatively straight forward and not so iffy practice - consider an agent arranging for a business to buy products from another country, the other two seem rather more questionable. No 2 . is a form of artificially fixing the price of something and No 3 is what makes a tax haven - probably the worst practice of the lot.
Friday 23rd November 2012 08:04 GMT ratfox
Re: two types of avoidance - or is it three
There are very good reasons for a company making most of its money – possibly all of its money – overseas. Rovio, the maker of Angry Birds, probably makes comparatively very little money in Finland. In fact, it is probable that if you did not count the income from outside of Finland, the company would be losing money. So which country gets to tax them? Finland, which probably paid for the education of the employees, and created the society where their talent for innovation was nurtured? United States, where are based most of the companies who actually charge the users (Apple, Google, Microsoft)? The countries of the users, who are managing economies that allow citizens to buy unessential products like games for smart phones? If Google bought Rovio, what would change, and why?
Heck, for all I know, Rovio has a subsidiary in the Cayman Islands which is "managing" Rovio's intellectual property for the whole world, and Rovio is not paying tax anywhere because that subsidiary is their only profitable company anywhere in the world.
Friday 23rd November 2012 08:22 GMT John H Woods
Re: two types of avoidance - or is it three
How about: Amount of tax Rovio owe to Finland = (Amount of business done in Finland / Amount of business done Globally) * Global Profits
They are already paying for the Finnish education system by employing Finns, who pay tax to Finland.
ratfox: "Heck, for all I know, Rovio has a subsidiary in the Cayman Islands which is "managing" Rovio's intellectual property for the whole world, and Rovio is not paying tax anywhere because that subsidiary is their only profitable company anywhere in the world." But the Cayman islands would clearly not be where they are making that money, and it should be clear that a loss-making Finnish company whose principle source of expense was a royalty payment to the Cayman islands, is not really making any real loss.
I realize this is naive, but am too naive to see why it is. Can you explain? Is it because there is no real way for the Finnish government to look at that loss-making company and say, "that's really part of the same company that's making a huge profit over there"
Friday 23rd November 2012 09:21 GMT ratfox
It is not naive
It is not naive. This is exactly what Apple and Google are doing with their Bermuda/wherever offices. Most of the income they make in countries outside of the United States is declared in there, because royalties paid by their subsidiaries all over the world ultimately end up there. Most of that money never comes in the United States, and they don't pay tax on it in the United States. And the US government knows it, and does not say much about it, because it is in fact legal for a US company to do that (Finland might be different, though).
A slightly perverse effect of this is that companies now have an disincentive to invest that money inside of the United States, because if they did, they would first have to bring the money in the country and pay tax on it. And so, they lobby the US government for a tax holiday, which would allow them to bring the money with lower or no tax, arguing it is better for the United States if the money is invested there rather than just growing in an offshore account. This article gives some details.
Friday 23rd November 2012 21:52 GMT Fatman
Re: It is not naive...lobby the US government for a tax holiday
And, IIRC, the last time that happened, most of the companies that benefited from the tax holiday did not use the money for investments (as their paid liars had pledged), rather, it went to the stockholders in the form of dividends.
I have no doubt, that if another tax holiday were to be enacted, the same result will occur.
Friday 23rd November 2012 09:52 GMT Aitor 1
Friday 23rd November 2012 08:05 GMT John H Woods
I still can't understand ...
firstly, I don't understand the politicians calling it morally questionable. Listed companies have a *duty* to maximize their profits.
secondly, politicians write the laws, and it this case, it appears they are even thinking of doing something
Given those two points, why is it acceptable for UK politicians to complain about this sort of practice whilst they do nothing about it, preferring to enact more pettifogging unnecessary legislation on other issues?
And why is it so complicated? Take the example given by ratfox: " if an Australian resident on a British website clicks an ad for a German company brokered by an American company, where is the transaction happening?" To me it is clear that the transaction is happening in Australia.
If I buy something on a website in Singapore, HMRC will be after me for the duty as soon as it comes into the country. Surely advertising is just a virtual product? I get that taxing purely on transactions will hit low margin business, but don't understand why the amount of tax payable by a multinational to a nation state isn't just their global profit multiplied by the relative size of their business (i.e. proportion of their revenue) turned over in that nation state.
Friday 23rd November 2012 10:04 GMT mark l 2
Re: I still can't understand ...
"if an Australian resident on a British website clicks an ad for a German company brokered by an American company, where is the transaction happening?" To me it is clear that the transaction is happening in Australia."
What about smaller business selling virtual products on the internet, such as say a small publisher of e-books based in the UK whose turnover is just enough that they have to pay corporation tax. They might sell only sell 100 copies of the e-book in Australia but yet would have to pay Australia tax on those sales, then what if they sell another 20 copies in Singapore, 80 copies in Belgium, 50 copies in Ukraine etc and all the countries all over the world demand their cut of sales made in their country. After the company has paid off the tax in all of these juristictions and employed accountants in all these countries who know local tax laws there will be no money left in the company so they go bust.
Hardly helping the economy is it?
Friday 23rd November 2012 10:35 GMT John H Woods
Re: I still can't understand ...
Ah, sorry I explained that poorly. What I meant was:
If I, in the UK, buy a camera from a company in Singapore, they make some profit and I make a saving. Their profit is taxed in Singapore as corporation tax. I have to pay VAT on the camera, and that goes to the UK. If I am a reseller, I charge VAT on the sale, and reclaim the VAT on the purchase. I therefore pay UK tax at the UK VAT rate ON MY PROFIT, regardless of my revenue.
If, for taxation purposes, a virtual product were still a product, as in your example, the UK company would pay corporation tax, at the same (UK) rate, on their profits, regardless of where their sales occurred. The Australian buyer pays sales tax at the same rate he would if he were buying in a store in AUS.
Now, if a UK subsidiary company choose to operate at a loss by paying a huge royalty fee to a parent in a nation with lower corporation tax, that would still be allowed. But they have to pay VAT on the 'virtual product' which is a 'licence to trade under that name for one year' and, because they obviously don't sell this licence onwards, they have effectively paid tax, at the VAT rate, on all their profit. If VAT and corporation tax were charged at the same rate, it wouldn't matter whether they declared the UK operating profits as having really occurred in the UK or not, they'd still being paying the same amount.
Again I suspect my simplistic approach is due to ignorance, but I'm interested to know what I am missing.
Friday 23rd November 2012 08:08 GMT Vince Lewis 1
Friday 23rd November 2012 09:27 GMT Richard IV
Re: two simple laws
That still won't catch them. The local subsidiary will be set up to pay at least 100% of what, in a company trading in a single country would be called profits, to the minimally taxed subsidiary in another country. It's the tax exemption specifically on royalties that causes the Netherlands to be used, for example. Transfer pricing on intangible goods such as IP is effectively at whatever a multinational says it is.
May I suggest Law 3?
Intra-group capital transfers leaving a country are taxable as profits.
Friday 23rd November 2012 15:55 GMT James Micallef
Re: two simple laws
"Intra-group capital transfers leaving a country are taxable as profits."
Good idea, but how do you know that holding company XYZ set up in a Caribbean jursidiction that hides it's directory and shareholders behind layers of anonymity is in any way related to Corporation ABC that is paying tons of royalties to XYZ?
And say you set it up so that by default ALL IP/capital transfers are taxed as profits unless the company in question can prove that the counterparty is not related by providing full disclosure of ownerships? In reality companies can in theory have infinite layers of ownership and infinitely complex structures, and in practice they will be complex enough as they need to be to avoid investigation.
Every preventative measure I think of either cannot be implemented just in 1 country, or I can think of a way around it pretty quickly myself. Endless Rabbit hole!!
Friday 23rd November 2012 22:53 GMT Richard IV
Re: two simple laws
I don't disagree with you, but it doesn't stop one fantasising.
Setting a nesting limit on corporate ownership could be fun - have them either wholly owned by individuals, joint ventures entirely owned by companies entirely owned by individuals, and subsidiaries entirely owned by one company entirely owned by individuals. Maximum depth is 2, which shouldn't be too hard to investigate if you also have ownership transparency laws.
As could taking companies' legal personhood to a perverse limit - abolish corporate slavery, or have citizenship tests and work visas for companies.
On a slightly more serious note, it should be incumbent on governments, who, after all, are giving moral rights to entities in the form of intellectual property law, to therefore demand a certain level of moral responsibility from those to whom it gives those rights. Sadly, governments avoid doing this on the basis that all growth is created equal, which it plainly isn't. Company law is set up explicitly to require a chrematistic approach - the focus is on maximising profit for the shareholders. Requiring an economic approach in the old resource husbandry sense of the word - maximising distribution (to shareholders and tin taxes) could be another way through.
Fantasy indeed *sigh*
Friday 23rd November 2012 15:16 GMT James Micallef
Re: two simple laws
It's very simple to understand as a concept, not that simple to implement in a written set of rules. For example, forcing small software companies to pay tax in every country that someone might have downloaded their software from is impractical - so tax is paid where the company is based. If a company is based in a higher tax country and is "buying" intellectual property to get it's profits and taxes down, you could ban transfer pricing of IP. But then, there genuinely are companies who buy IP from completely different companies as a legitimate part of business. So you can't ban all IP transfers.
So is the solution to ban IP transfers only between branches / subsidiaries of the same company? Maybe, but then instead of calling it's affiliate 'Google Bahamas' they would just call it 'Tech IP XYZ limited', and no-one can *prove* that they're the same company because under Bahamian (or wherever) law, the company directors / shareholders can be kept secret.
It's a sort of whack-a-mole... every part of the law that aims to catch cheaters will catch up some innocent parties, and parts of the law designed to disentangle innocent parties will be used as loopholes by teh Googles of this world
Friday 23rd November 2012 09:23 GMT Shagbag
I'm amazed at the simplicity of the structure. It's ingenious. And perfectly legal.
It's become very clear to me that Governments all over the world are failing to come to terms with the way international business is now being done. Double Tax Agreements negotatiated decades ago could not have foreseen how powerful the internet would become as a means of effecting trade (that's 'effect', not 'affect').
The fact that Google, et. al. are able to do this means those Governments have been caught with their trousers down and are now pointing at Google, et. al. saying "don't look at me althought I look absolutely ridiculous, please look at Google instead who are obeying all tax laws I've created".
What a farce.
If Google was an individual born in the UK, they'd be getting a CBE by now like another, well known user of tax avoidance schemes - Gary Barlow. Yes. Let's all give Google a CBE as I fail to see the difference.
What REALLY pisses me off are the fools who swallow the Government's misdirection and start slagging off the tax avoiders WHEN IT IS THE LEGISLATORS' FAULT. FFS, people, stop being idiots and start complaining to your MP for the piss-poor performance in letting this type of thing happen.
P.S. IT Contractors (ie. those alienating income from personal exhertion into lower-taxed corporate vehicles) should think twice before complaining - what's good for the goose is good for the gander.
Friday 23rd November 2012 09:25 GMT Headley_Grange
It's the wrong discussion
Governments love this because it distracts us from what we should really be discussing; why is corporation tax in Aus (and UK) so bloody high? If Aus corporation taxes were as low as Ireland's then Google (and all the other companies) wouldn't have to bother with all this tax avoidance and the net cash tax take would be higher.
I assume that all those who criticize Google and the other companies who avoid tax in this manner are squeaky clean in terms of tax avoidance; no ISAs, no Premium Bonds, no shopping in duty free on the way out of the country.
Friday 23rd November 2012 10:01 GMT Ally 1
Re: It's the wrong discussion
That would be good. If the Australian government reduced corporate to Ireland's rate then Google could miss out that step and syphon the cash directly to Holland in royalties which would save legal and accountancy fees and enable them to have an even larger pile of dosh sitting in the Carribean?
Friday 23rd November 2012 10:59 GMT Richard IV
Re: It's the wrong discussion
"I assume that all those who criticize Google and the other companies who avoid tax in this manner are squeaky clean in terms of tax avoidance; no ISAs, no Premium Bonds, no shopping in duty free on the way out of the country."
Ah, the old argument that all tax avoidance is created equal.
Why do governments give tax breaks for things like ISAs, charitable donations, duty free etc? It's as an encouragement to do stuff that they want people to do - have savings, give to charity, spend more money in this country if you're foreign. There are a similar set of breaks for companies - do R&D, help build up bits of the economy that we consider important and so on.
What about the breaks as regards multinational corporations moving capital between their subsidiaries? It's because governments have been persuaded that it is unfair for companies to be taxed twice on the same bit of capital, and indeed it is up to a point.
The madness comes when those subsidiaries can claim for the good things that have been done by their sibling companies worldwide as if all those good things had been done by them. Hence the Dutch royalties exemption (to encourage local companies to create internationally profitable IP) is twisted to move IP created elsewhere into what becomes a tax haven.
To me, this is the corporate version of those families the tabloids keep finding who have a million kids and live entirely on benefits in two council house next door to each other. At least those families are largely consanguineous - the corporations adopt a few orphans or kidnap some street urchins for good measure.
If we found some way of ensuring worldwide that subsidiaries of multinationals could only claim credit for stuff that they themselves had done, then the madness would largely go away - double taxation prevention would be sensible and corporate good would be properly rewarded.
Friday 23rd November 2012 09:45 GMT g e
So why not something along the lines of
1. If you are an business of at least a certain size, or operating under the brand of a business of a certain size you are required to have a registered UK branch and offices.
2. If your turnover vs profits quotient is less than 1% (say) then you're not allowed to claim back your VAT.
So, it'll cost you your VAT clawback to cheat the HMRC by claiming your outputs are really close to your inputs when you're a known large organisation (or a convenient subsidiary of one) which is raking in money but claiming it all has to go to the licensor of the brand you claim to be under.
You get the idea, I'm far from an accountant which is why I pay for real ones ;o)
Friday pint for everyone
Friday 23rd November 2012 10:22 GMT James Micallef
Friday 23rd November 2012 11:46 GMT johnck
Here's an idea
Most of the multi-nationals that use the tax systems of the world, legally, to reduce the amount of tax they pay also do a large amount of business with national governments. So if the governments of the world wanted to do something about this they could make it part of the contract conditions that companies are not allowed to reduce tax in this way.
Sure some of them may not go for government contracts, but a lot will as they make a lot of money from them, and will it be such a loss if contracts are given to smaller companies. It’s not as if big multi-nationals have a great track record on delivering government contracts, and people will still be employed, just at smaller companies.
Monday 26th November 2012 01:06 GMT Anonymous Coward
Tax is just a price
Tax is the price you pay a government for the "service" of being there. Of course the price varies for different circumstances - just like the big jar of coffee with twice the contents isn't always twice the price of the smaller jar. Sometimes it's deliberate: a 'buy one, get a second half price' type offer to boost sales when business is slow or whatever; sometimes, they make mistakes, like Tesco's occasional incidents of over-generous special offers (£1 of bananas getting you £1.20 worth of Clubcard points, or six bottles of posh wine at a reduced price getting you another discount for buying six bottles plus a third discount for buying before a particular date, making an 80% discount.)
Of course I buy things cheaply: if the 200g pack is cheaper per g than the 300, I'll buy it instead; if it's cheaper in Asda than Tesco, I'll go and shop in Asda instead. If there's a short-lived mega-bargain on wine, I'll stock up on that - even if Tesco didn't expect it to work out as such a bargain when they designed the offers. Google and co are doing exactly the same thing with governments, but on a bigger scale: Ireland has a lower price for the service of "putting a company here", so Google buy from Ireland not the UK. If the UK doesn't like it, it can either try to stop Ireland making "sales" (known as protectionism, and generally prohibited by WTO and EU rules) or cut prices to be more competitive. Or, just accept it's lost that sale and focus on making money from the remaining 'customers' it still has. Keeping high prices then whining when people don't buy from you is just stupid.
Monday 26th November 2012 05:17 GMT scottf007
It is simple to get a solution. If the company has a local sales force/presence then it is illegal to sell product from another subsidiary. If they do the directors are personally liable. Google Australia would need to bill everything through Australian company. To claim royalty fees etc they would have to substantiate all costs on an international level and disclose all subsidiary companys or it is void.