American big business faces the G20 in a fight for $2.1T in unpaid tax | Hacker News Reader

American big business faces the G20 in a fight for $2.1T in unpaid tax

theguardian.com

68 pointszerotosixty82 comments

> “For too long, powerful corporations have exploited loopholes that allow them to hide earnings abroad to lower their taxes,” said Democratic presidential candidate Hillary Clinton. “Now Pfizer is trying to reduce its tax bill even further.”

You don't like the loopholes? Close them. Do not blame people for using every single option they are given.

The right thing to do is lower the tax rate and remove the loopholes. The total tax paid could stay the same, but the distribution would be different.

The current system is unfair, you need to pay a lot of money to work out these complicated scenarios, this hurts smaller businesses, and costs a lot of money to implement.

"Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes." - Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934)

"Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant." - Commissioner v. Newman, 159 F.2d 848, 851 (2d Cir. 1947) - dissenting opinion

One problem, which the article discusses just after the parts you quoted, is that there’s a huge amount of lobbying of and money flowing to politicians willing to thwart reform efforts. Closing tax loopholes would be easier if we also had publicly financed elections or stricter limits on campaign contributions, and if the media wasn’t a consolidated corporate cartel.

> “[...] Many influential Republicans, already uncomfortable about the Peru reforms, are expected to use committee hearings to launch an attack on the European commission’s ongoing state aid investigations into suspected sweetheart tax deals granted by Ireland, the Netherlands and Luxembourg to, respectively, Apple, Starbucks and Amazon. ¶Well-resourced rightwing lobbyists are agitating in Washington for a final push against the G20 tax reforms. [...]”

There’s a feedback loop involved between corporations saving billions in taxes -> donations of some portion of that to politicians willing to play along (and offer to give them board seats and high-paid speaking gigs after they leave office, etc. Just look e.g. Bill Clinton’s post-officeholding career.). Same story with industries that receive large government contracts, or which are under heavy regulation. In every case, there’s big money to be made in helping corporate interests at the public’s expense.

Candidates running for public office have great incentive to talk about how they want to close tax loopholes, etc., but once they are elected, the only thing holding them to those promises is personal integrity, and none of the US presidents since Jimmy Carter have been able to face down that kind of temptation. The pressure might be even greater for Congress, as smaller amounts of money directed at unseating particular troublesome Reps goes further, and there’s less direct public attention on each one.

The root cause here is the amount of money required to be elected. Get rid of the need for money and you get rid of the corruption.

I personally like the idea of increasing the number of members of congress so each member only represents around 25,000 people like they did 200 years ago. If your electorate only had 25,000 voters you would not need much money (nor staff) to get elected.

318,000,000 ÷ 25,000 = 12720

That's a little excessive, don't you think?

Well it is voters not citizens so the number is a little less than this, but no I don't think it is excessive. The current system only works because each member of congress has a huge staff - about one for every 25,000 voters. If you increase the number of members of congress then you get rid of the staff.

Of course you will have a problem fitting everyone into the capital building, but with technology there is no need for everyone to be in the same location at the same time. We need to think of innovative solutions to fighting corruption, not just hoping that things will get better if we wish hard enough.

That assumes that all the people that get elected are capable of doing all the things that staff currently does.

I don't think that's a good assumption.

I would certainly hope the people elected are not capable of doing many of the things that the staff currently do - say like soliciting bribes (sorry "donations").

If there is a need for certain skills then there is no reason that this could not be handled by a pool of experts working for congress - say in the same way the library of congress works now.

It is not the root cause. Money would mean nothing if the idiots sitting on the other end of the ad the money paid for bothered to form their own opinion or research something. Politicians need money because ads cost money. They run vapid attack ads, because vapid attack ads work. Vapid attack ads work, because we are stupid and lazy.

Worked in politics for many years: trust me. Money is not the root cause. We are.

I think you are saying the same thing. The commenter to whom you are responding didn't say that money is the root cause, but that the amount of money required to win is the root cause.

And the reason that it costs this amount of money, as you point out, is that attack ads (inter alia) are often successful.

Exactly right. It is the scale of money required to get elected that is the issue. When you have districts with upwards of a million people then they only way you can have any contact with any voter within that district is via adverting.

A 15 second ad is not a good way to get across a complex idea, hence we end up with campaigns built around personal attacks and dog whistles. Get the electorate down to the size where each politician knows the majority of their electorate personally, where you can call up your representative and talk to them rather than some staffer, and where public meetings can work, and then you will change the whole dynamic of politics. It won’t be perfect, but it should be more resistant to corruption as the root cause will be removed.

Although, anybody who has been involved in municipal or campus politics can attest that, at least occasionally, oversimplification and attack ads work in those markets as well.

All things considered though, I agree with you.

One other thing to overcome though, is gerrymandering. If we have 10x-100x the number of house districts, the gerrymandering algorithms will have a field day unless we take action to stop them in practice first.

Why do politicians need to buy ads? If the districts were small enough that you could get elected without massive advertising then you would remove the need for money to buy ads. Large districts mean advertising is they only way you can make contact with the voters.

The need for money is the root cause.

There are huge problems with that idea. California represents 10% of the population. Good luck convincing the other 49 states to give up that much power.

Another huge problem with that idea is that congress is not held accountable for their decisions by the public. In my opinion, this is because they are able to split the blame 100 different ways in the senate and 435 different ways in the house, making no one responsible for any given decision. Your suggestion makes this problem much, much worse and guarantees more bureaucracy.

California would still have 10% of the representatives, they would just have many more like everyone else. There would be no power shift from state to state.

So you are saying the problem is no one is held accountable now, but the problem will be worse with smaller districts because then no one will be held accountable?

I think having smaller electorates where you can get elected by knowing your constituents personally rather than via advertising and attack ads would be an improvement.

The second part is just my own bullshit, but yes. I think that we want to be able to point to someone and say that it's their fault. I think that's why we don't care who our representatives are. We don't see them as being directly responsible for what happens. Even if I'm wrong, more representatives will mean more bureaucracy, which means slower governing.

If you could personally call up and speak to your representative and they had to speak to you in person to get elected then I think you would be happier. You could at least hold them responsible for their actions and your vote would count much more for them than it does now.

I don’t see how having more representatives will increase bureaucracy. We would basically shift from having one representative with 19 staff to having 20 representatives with no staff. The net cost should be zero.

It's my own bullshit, but I just think that when something comes up like a drug company raising the price of aid's meds from $13.50 per tablet to $750 that we want the ability to point to a single person and be like, "this is your fault. you are supposed to be making sure this kind of stuff doesn't happen." Right now, no one is held responsible. You can't blame the people who run the company. They're just trying to make money like the rest of us. They're following the law. Just my opinion.

> I don’t see how having more representatives will increase bureaucracy.

For the same reason a dictator is the most efficient form of government. It's just how governing works.

Dictatorships have a massive problem with bureaucracy. They have all the normal bureaucrats and then on top of this they need another whole set to watch the first set. Lean government and dictatorship are not concepts that readily go together.

This is a very naive view. Ancient kings were not elected yet were beholden to money just as much as modern politicians. The fundamental issue is that at the end any government runs on people with weapons who require money to brandish these weapons (otherwise they will have to do something else including but not limited to brandishing for their own interest or leaving the whole brandishing business for more productive endeavors).

For a short while you can make the people with weapons work for free with an ideology. But this won't last forever and eventually you will either have to pay them or forget about your government (see USSR vs PRC to see how both ways work).

> there’s a huge amount of lobbying of and money flowing to politicians willing to thwart reform efforts

I suspect all these companies would get behind a low, flat tax.

That's hard to lobby for.

Strategically, it makes more sense to lobby for a special tax break or loophole and let everyone else fend for themselves. All of this lobbying could disappear if every country adopted flat, nearly equal rates.

For the record, flat tax is hugely regressive. It hurts the poor more than the rich. The reason is the marginal utility of money.

With a flat tax of 20%, someone making 80k would pay 16k, and someone making 30k would pay 6k. Sounds good on the surface, except losing 6k hurts the second person far more than losing 16k hurts the second person.

There are ways of simplifying the tax code while keeping it progressive. The bracket system we have for income taxation is good. They just need to close loopholes, eliminate a lot of deductions and tax capital gains at the same rate as regular income.

This is a discussion of corporate taxes not individual income taxes. Much of your comment is not germane.

It also applies to corporations. Flat tax hurts smaller/less profitable corporations more than more than bigger/more profitable ones.

So if a smaller/less profitable corporation is wholly owned by a multi millionaire it's still a good thing if that corporation pays a lower tax rate?

That's an extremely strange assumption.

Smaller = less profitable? What? Why would you think that?

Less profitable as in total profit amount, not percentage of revenue.

I should point out that when I say it makes more sense strategically, that I mean a dollar spent lobbying for a tax break will pay off sooner than a dollar spent lobbying for a flat tax.

I don't mean strategically as in trying to get a leg up on the competition.

I would be a lot more comfortable with this approach if the powerful corporation had not bribed the current system into existence. Yes the best solution would be to lower rates and reduce loopholes, but until the corruption that allowed the current tax system to arise is addressed all you will end up with a lower rate and the same number of loopholes.

What exactly is the "loophole" here, and how could small companies take advantage of it?

The loophole is setting up a multi-national structure to implement the base erosion and profit-shifting strategies discussed here:

https://www.oecd.org/tax/aggressive/beps-2015-final-reports....

How is that a "loophole." Multi-national structures seem like a necessary facet of the tax code. And the listed strategies don't seem to take advantage of obscure provisions, but basic mechanics of the tax system: deduction of costs from gross revenues, etc.

Take a closer look at the sections on hybrid entities, treaty shopping, and transfer pricing. There are loopholes wide enough to let tanker ships pass.

"loophole" is a word for "a completely legal tax maneuver I don't like"

Worse, it's often a work for "a completely legal tax provision I don't understand."

Politicians complain ... but ... c'mon, they have had plenty of opportunity to fix things. Still do.

"You don't like the loopholes? Close them."

The problem is the loopholes extend way beyond the tax code into the election system, specifically campaign finance and things like the Citizen's United ruling and into things like the weakening of the media ownership rules which bring us a level deeper into the morass with a largely uninformed (and often just plain scared) electorate. Thus we have mostly shitty bought-off politicians (on both sides) representing "us", but mostly really representing their donors who are big business.

The current system is unfair by design, as much as big corporations complain about it these issues (like taxes too high, but with plenty of loop-holes) serve as a giant moat for them to avoid the establishment of any serious competition because you have to hit a certain scale before you start to worry about things like how to hide tens of billions of dollars offshore.

We are honestly probably way beyond really fixing this stuff at this point, no matter how easy it is to say "Well just fix it" or "just close the loopholes".

America's entire large-corporation/government system needs something like a defrag and full reinstall, but there's basically no way to do that while keeping things running.

Tax loopholes existed long before Citizens United and the end of the Fairness Doctrine. In fact there were more tax loopholes in the 1970s and 1980s than today.

Agreed. As long as private money does the nominating of our political candidates, then the piper (loopholes) will need to be paid. If we were to switch to government funded elections, then there would be no pressure on the legislature to return the favour once they are elected. The only snag I see with publically funded campaigns is determining who qualifies for the public funding.

> You don't like the loopholes? Close them. Do not blame people for using every single option they are given.

You say that as if it's not the corporation's lobbyists that create and defend the loopholes.

I've said it before and will say it again, what I take issue with is that people don't have access to the same loopholes as corporations do. It's surprising that there isn't a bigger uproar over the fact that corporations pay a lower effective tax rate than people do.

> It's surprising that there isn't a bigger uproar over the fact that corporations pay a lower effective tax rate than people do.

Why? At the end of the day a person will make the profit, every corporation is owned by someone. So that person should pay the tax, not the corporation.

The only issue is the ability of corporations to defer the tax paid by their owners endlessly. If you changed that, you could get rid of corporate tax entirely.

Great quotes there at the end of your post.

I've always shook my head at how people get mad at other people (individuals/corporations) for doing smart things with their money.

What needs to be done is change the unique incentives for American companies to participate in such byzantine international tax avoidance schemes in the first place. The US is practically the only country that taxes profits internationally regardless of origin. It should remove all taxes on bringing foreign profits into the US and lower the overall corporate tax rate while closing the loopholes that render the 'headline rate' so ineffectual in the first place.

Corporate domicile is essentially a market and corporations have a choice where to domicile themselves. So instead of governments making futile attempts to legislate their way to a solution why don't they do as participants in any other market do and actually be competitive? This means reducing costs and finding savings to compete on price, i.e. lower rates of taxation. If government was a private enterprise, it would go out of business.

Government isn't a private business so it makes little sense to make such a comparison. Tax should be paid in the jurisdiction the profit is earned.

> Tax should be paid in the jurisdiction the profit is earned.

Why should it be that way?

One problem with these loopholes seems to be that it is not easy to determine where the profit is earned.

The reason why is you will end up with every country in the world taxing each company on their worldwide income. Any company operating in more than one country will be taxed out of existence.

It is not that hard to determine where the income is earned provided countries share data.

It is hard, though: not least because determining where income is earned depends on defining "income". Revenue is maybe easy enough, but what about expenses? Depending on the industry, there's plenty of opportunity for chicanery which makes it far from "not that hard".

Example: you're a large tech company who can afford good accountants and complicated legal structures. Your high-tax jurisdiction European subsidiaries can "license" a whole bunch of "intellectual property" from their counterparts in Ireland/Luxembourg which significantly beef up their costs to the point that net income in the high-tax jurisdiction is minimal and it all gets booked somewhere which will charge you less.

Kind of like how Apple manages its assets via a Nevada subsidiary to avoid paying tax in California, and how Microsoft does something similar with software licensing. Except at least in the US case there's still tax revenue going to the federal government.

When I said not hard I should have said it is possible :)

Intellectual property is certainly a major way of avoid tax, but there are many ways of solving this. You could only allow each country to apportion IP costs on the basis of where income is earned. Alternatively, you could prevent deduction for IP licenses to entities owned by the parent company. Once you have the information of where the money goes then you can certainly tax it fairly.

Let's say I write a book and make $1 million in sales from customers in 100 countries... Do you think that each country should collect taxes on the profits (not on the sales) from the customers that reside in the country? And if yes, how would the profit be determined? What if I took a $999,999 salary to write the book? Do you also think I should pay income tax on that salary to each country I sold the book to?

I'm not an accountant so I don't know the details but, for the record, the vast majority of countries in the world only tax corporate income earned within their borders. The US is a rare exception to this standard.

How about we tax companies based on revenue realized in the US? Also, companies that have 60% or more employees in the US would be taxed at a lower, (moderately progressive) rate and international companies at a higher rate.

It could be a sensible way to account for the fact that international companies realize huge profits in the US (big market, etc), without contributing ANYTHING to training workers, maintaining telecom, logistic infrastructure, etc.

>It is not that hard to determine where the income is earned provided countries share data.

It actually is, because that requires you to be able to easily identify which transactions are shams designed only to move the profits to a low-tax country.

Let's say the books indicate that the project required the licensure of umpteen billion dollars of IP from Luxembourg. How do you know that the U.S. branch didn't "really" need that IP (or it wasn't really produced in Lux) from only looking at the balance sheets?

If the parent company happens to own the company licensing the IP then I think it is pretty easy to tell the whole thing is a sham.

But it's also possible for artistic works to legitimately have different pieces created by artists in different countries, and still be parts of the same parent company. An objective answer would require internal value accounting of an ultra-illiquid, ultra-sparsely traded good, which would be hard for experts to gauge, let alone accountants.

These artistic works are not created in places like the british virgin islands. It would be pretty easy to just put in place a rule that internal IP can only be licensed from the entity that created it.

That's what they were already doing -- the whole problem is that it's hard to find a rigorous way to say which entity "really" created it in the sense of which portion of the value came from where. If Pixar:USA claims that the scribble on frame 33 (added by Pixar:Luxembourg) was worth $10 million, how does that show up on a accounting document that a tax authority could reject as being a sham?

I think this is solved using what lawyers term as what a "reasonable man” would think. The simple rule is if a low tax jurisdiction seems to be earning a disproportional share of the companies profit then there is something fishy going on.

Not really. E.g. pursuant to their restructuring, Alphabet companies are required to pay for services they use from each other. Subsidiaries are still separate corporations and it's an abuse of the corporate form to just share all resources with a corporate parent while pretending the companies are distinct entities.

I know of no good economic reason for alphabet companies that are 100% owned by a parent outside of the needs of foreign investment.

> Tax should be paid in the jurisdiction the profit is earned.

> Why should it be that way?

Because the entity earning profit (person or corporation) used resources to their advantage that were paid for by the taxes in that jurisdiction.

i.e. Facebook employees drive to work on public roads, use public police, firemen and military to keep them safe, attended public elementary schools, eat food approved by the public FDA, enjoy breathable air and drinkable water governed by the public EPA, etc. etc. The list is endless.

So they're getting benefit from all those things funded by public taxes, therefore they should contribute to those taxes. If they're not paying taxes, they shouldn't be allowed to benefit from all those things.

Governments should act as such. Corporations are highly mobile and operate in a global market. We are all customers of government, and it is only because they have a captive monopoly that they are not in fact at all competitive and extremely inefficient. Unfortunately for them, globalisation has changed this and their complete disregard for competition is costing significant revenue.

That is what happens. And then you get huge number of companies headquartered in Bermuda or the Cayman Islands or whatever,† where there isn’t any need to collect taxes at all. Of course, the companies involved still take advantage of all the government-provided services in the US, Europe, etc., which is why those states are getting together now to fix the rules.

† Where “headquartered” means they have a P.O. box there.

Exactly. Who do you think is Pfizer's biggest customer - a hint - it is the one who is banned by legislation from being able to negotiate prices and the same one who they don't want to pay any taxes to.

This is certainly an issue to be discussed and addressed, but the headline, directly from the article, is incorrect, re: "$2.1T in unpaid tax":

> In total, US multinationals are sitting on an estimated $2.1tn in untaxed offshore profit...

US corporate taxes on $2.1T are @ least 65% less than the $2.1T profit, itself. The correct title would phrase it as "unpaid taxes on $2.1T".

This is graudian sub-editor's mistake - we should be happy that the headline is even close to the article content.

Paying the minimum amount of taxes you are legally obligated to pay is the most noble of endeavors. Good luck and God bless.

Wouldn't moving taxes from income to sales-based resolve many of these issues?

The problem with basing company tax on sales is some industries have higher margins than others. If you introduce a flat turnover tax on business then you effectively tax low margin businesses more than high margin businesses. It also creates an incentive for businesses to vertically integrate even if this is not the optimal economic structure.

Out of curiosity, does value-added tax solve this problem?

Value added tax is a consumption tax, not an income tax. The tax is paid by the consumers and is highly regressive (i.e. the poor are taxed more than the rich).

There have been some attempts to tax companies based on gross income, but it tends to only be applied to a limited range of companies like utilities [1].

Personally I like Land Value Taxes [2] since they are impossible to avoid, but this makes them very unpopular with the rich and powerful who own most of the land.

1. https://en.wikipedia.org/wiki/Gross_receipts_tax

2. https://en.wikipedia.org/wiki/Land_value_tax

And yet, this doesn't "cost" governments anything, because governments don't need tax to fund spending.

In fact, corporate taxes are stupid, they should be 0%, so should income tax. I like Randall Wray's model of a broad based consumption tax offset by transfer payments to low income earners, a job guarantee and a tax on the volume of your house. Genius.

It's a pity no-one understands how the economy actually works, though!

But doesn't a consumption tax just dis-incentivize consumption? Is that bad? (willing to accept LMGTFY link!)

Minus what seems to be a bizarre loss of website data this weekend, I've always been a fan of a national sales tax, with all associated exceptions where it makes taxation less regressive.

http://fairtax.org

Another way to put that is that it would encourage saving and investing. In the long term, that's better than encouraging spending, since the money would go towards growing the economy. (Assuming it isn't invested in beanie babies and lottery tickets.)

Everyone has to consume. Consumption is a necessity, and is unavoidable (and therefore unevadable). Some level of taxation is required since it determines the level to which government can spend without devaluing the currency, and it's also a tool that can be used to drain money out of the economy. But it's not required to "fund" anything -- what you want out of a tax is one that allows you to apply policy effectively. Putting tax legislation in place and enforcing it are two very different beasts. Having a consumption tax with sufficient offsets for low income earners is far less likely to result in evasion because everyone must consume, and no-one will refuse being GIVEN money (income tax is sort of the opposite: we don't tax consumption, but we tax income and try to tax high income earners more, which they do their best to evade; low income earners would never "evade" their transfer payments).

Prices and spending habits will adjust accordingly -- you're giving people a huge tax break in one area and adding a burden in another. There wouldn't be any impact on aggregate demand, but fiscal policy would be much easier to implement.

Video on how this works: https://www.youtube.com/watch?v=i35uBVeNp6c

Book on how this works: http://www.amazon.com/Modern-Money-Theory-Macroeconomics-Sov...

The greatest trick the devil ever played was income tax. It disincentives productive endeavor. 0% corporate and income taxes would usher in a huge productive renaissance. In the US, It could be entirely funded with a 2% wealth tax on the top 2% (personal wealth above ~$10 million). All those IRS workers would be freed up to engage in productive activity too.

It doesn't need to be "funded". Government spending creates money and taxes destroy it. The role of taxation is to drive demand for currency, and drain money out of the economy. It can also be used to disincentivise behaviour. But tax cuts don't need to be "funded", because governments have no issue with affordability -- they issue the currency.

Video on how this works: https://www.youtube.com/watch?v=i35uBVeNp6c

Book on how this works: http://www.amazon.com/Modern-Money-Theory-Macroeconomics-Sov...

I don't care much about the US, more about the EU region - and I take a wild guess here that the amount of unpaid/tricked-away taxes exceeds the amount of taxes due to the US.

Still, the situation has to be tackled, and better fast. Many countries in the EU suffer because Big Capital doesn't fulfil the tax obligations.

You should care about the U.S. We live in a global economy (this isn't new). What's good for your neighbor is good for you (and vice versa).

It is so infuriating to read articles on this topic over and over again, year after year.

That probably indicates it's a festering problem which needs to be solved.

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