How to Stop Turning U.S. Corporations into Tax Exiles | Hacker News Reader

How to Stop Turning U.S. Corporations into Tax Exiles

nytimes.com

35 pointshvo63 comments

I am trying to think of companies that should rightfully repatriate cash back to the states, and companies that should not.

Why is it that it is repulsive that Google or Apple chooses to keep their cash overseas, whereas it is fine for Budweiser to do so (ignoring magnitudes for a second)? Because AB Inbev is Belgian? This is a difficult example for me to think of, because the US is one of the interesting countries where the largest companies here (or globally) are almost always American too.

But let's imagine for a moment that there is a company called Apple Inc that only does business in the US and nowhere else, and there is an unrelated company in France called Pomme SA, and another unrelated company called Apfel AG in Germany that happen to sell identical iPads and iPhones. Do they have a duty to transfer cash to each other and their jurisdictions? What if the CEOs of these companies travelled and met each other and went, "oh! we did not know it but we sell the same thing, let's share resources in some way", which country has a right to collect tax on the revenue of the new global organization?

The real debate is really about fairness in transfer pricing (which is difficult if not utterly boring, because typically transfer pricing are for services that are not fungible or even exchangeable in arms length markets, and so the debate within tax jurisdictions are over the nitty-gritty "economics" of the transaction in addition to consideration of foreign tax obligations yadda yadda yadda yawn), and this tax evasion through scary financial structuring like "inversion" is a really catchy thing to publicly excoriate, but it's probably not the right concern. So this is kind of a stretched example.

The point I am getting at is that many American companies aren't 100% American, and it doesn't seem like there is a good reason for insist that all foreign earned cash (from Apfel and Pomme) to be brought back to the US. I do not agree that a company like (say) Royal Dutch Shell, being one of the largest oil companies here, should repatriate cash into the US, and unanimously most of us don't think so, so this is not really the problem we should be getting angry about.

If these tax laws incentivize productivity-destroying mergers then they are utterly moronic, immoral even. The Pfizer CEO said he wouldn't do it but for the tax savings.

All these companies want to do is bring back their cash to the US and pay their US shareholders. It's fair and defensible for Pomme to want to bring cash to France to pay its French shareholders, and for Apfel to bring it to Germany to pay its German shareholders.

These companies are free to do so. They just need to pay their taxes.

Or as an alternative, they can invert! It really does save a lot of money.

Actually though Apple's shareholders are in fact global. They could probably spin off a subsidiary in a tax haven like the UK and pay dividends through that.

The problem is R&D. If you do R&D inside the U.S. then your US proffits look much lower, and your out of country proffits look much higher, but that's an accounting fiction.

As an alternate hypothetical, lets imagine that every multinational happens to be related to a large number of subsidiaries in the Cayman Islands, Bermuda, Singapore, and Luxembourg. Furthermore, suppose that three quarters of all world-wide corporate profits happen to be booked in these four countries with a minuscule population. Clearly there would be a problem.

So long as there is "greyness" in the allocation of profits among related entities, this will be systematically exploited to maximally shift profit low tax jurisdictions.

Although transfer pricing is a significant component, it is not the only one.

The most obnoxious methods probably relate to hybrid mismatches where corporations exploit differences in two tax codes to take deductions in both countries. This may involve a payment that is treated as interest in one country and a dividend in the other. It may involve an entity that is treated like a flow-through partnership in one country and a corporation in the other.

There is also "treaty shopping" where corporations set up faux corporations in countries with favourable bilateral treaties so they may reduce their tax when shifting profits from country A to the intermediary to country B.

Perhaps the solution is not to tax profits then, but find something that's easier to grasp and define?

This article didn't seem like an angry screed about what companies "should" do, so much as a pragmatic strategy to bring in more tax revenue and improve the U.S. economy.

Almost more interesting than Icahn's common sense article are the many talkback comments from the New York Times readership, most of whom appear to be bitterly opposed to corporate activity which maximizes profits.

Has the NYT become a haven for left wing advocacy, Icahn's capitalistic perspective notwithstanding, whose primary readership are socialists? How much of the country do they represent?

I worry about our economic prospects when a significant chunk of the intelligentsia no longer believe in free market economics.

I get the same feeling, and it's pretty much not isolated to just NYT.

Amusingly, I think the non-free-market-uber-alles advocates feel the same way about profit maximization vs. economic prospects for the country.

Is the end to double taxation for the corporate tax only? Human Americans are also double-taxed on income earned abroad.

Only if the math doesn't work out right (same for corporates also). There is a lot of ambiguity though...

Everything over the deduction (currently just shy of $100k) is taxed, minus a further deduction for tax paid to a foreign government on the earnings. Basically, you will pay the higher of US tax or local tax, on earnings over $100k. And you're right, most people don't pay.

Really the bigger pain in the ass is that you even have to file. I've filed tax returns to the IRS for the last 10 years despite not paying a cent of tax to the US during that time, since my local tax is higher anyway. It's ridiculous. And come to think of it, even if they did end the double taxation, it's likely they'd keep making us file, the assholes, considering they also recently began to require that we make a yearly report to FinCEN in addition to the IRS.

So there is ambiguity: what if your Chinese company sends you to the states on a biz trip? The Chinese and U.S. governments both feel like they have exclusive taxation rights, so you just pay tax to both (and no, even the taxes paid are not deductible).

Or what a of health insurance, if it counted as taxable income in your host country, is it taxable in the U.S. also? And then there are "expenses" that I have no clue about. Once you make more than $100k, you hit a lot of difference between the two systems that cause problems; you have to be very conservative in your interpretation of the ambiguity.

It is all a pain, and that's not even fun ting things like American stock grants abroad.

It's messy and expensive to pay an accountant who knows how to get it right, which makes for a big disincentive to take any work abroad. Small jobs are money losers after accounting and filing costs.

Not just messy, sometimes no one really knows what the rules are since you are trying to reconcile two completely different tax codes.

That's kind of what I meant by messy, so few people know how to resolve the two sets of rules.

Actually, it's been a requirement to file a FBAR for many years if you have a foreign bank account with more than equivalent of US$10,000 in it. So that filing requirement isn't exactly new, just that it's gotten more attention lately and now with FATCA you might not get away with ignoring it.

And yes, expats just love that requirement to file a tax return on your world wide income regardless of where it was earned or where you live, because as a US citizen you are the property of the US government.

All the Chinese banks I use now want my Social security number! So....remember to file those fbars kids!

I thought China was not going to cooperate with FATCA. Really surprised they would agree to report on bank holdings to the US gov.

They weren't cooperating until this year. Now they are in full cooperation. It has something to do with fox hunting and the US also agreeing to report Chinese national bank holdings to the Chinese gov.

Yes. The reason is that corporations vote with their feet quite readily, as seen here.

This is more like "voting with accounting". The non-accounting footprint of the corporation-- the location of its employees, its factories, etc-- is largely unchanged.

People would vote with their feet, too, except they're heavily penalized for doing so. If you renounce your US citizenship there's a one-time tax of 40% of your all your US assets and the US claims the right to tax you for the next ten years.

Subjects, not citizens.

For reference, statutory corporate tax rates by country (PDF):

https://www2.deloitte.com/content/dam/Deloitte/global/Docume...

Important part: middle column, where the rate is basically 0% everywhere except the US, where it is 30%.

Why is this the important part? It's not 0% in Austria as listed, it varies too (in Vienna you pay tax for subway infrastructure, among other things). It's the sum that matters, including exploitable loopholes such as trusts and holdings (AFAIK, in Switzerland, a pure holding pays no corporate taxes).

> Congressional leaders agree that passing legislation according to [the Schumer-Portman] framework would stop inversions

Until another country offers an even better tax deal to attract multi-national corporations.

Not really - there are benefits to being based in the US. If everyone just chased the lowest taxed jurisdictions then every corporation would be based in a tax haven.

Corporations aren't repatriating the money they hold offshore. I can see why the US wants a piece of that pie, but they currently aren't getting any pie and are losing piemakers. Taking a smaller cut of something whilst also having that something flow back into the US is surely a good thing.

> Corporations aren't repatriating the money they hold offshore.

Indirectly, they are: "Nearly Half of So-Called “Offshore” Funds Already in the United States"

Earlier this year, a survey was sent to 27 U.S. multinational corporations and found they held more than half a trillion dollars in tax-deferred foreign earnings at the end of FY2010. The survey also found that 46% of those foreign earnings – almost $250 billion – was maintained in U.S. bank accounts or invested in U.S. assets such as U.S. Treasuries, U.S. stocks other than their own, U.S. bonds, or U.S. mutual funds.

https://www.hsgac.senate.gov/subcommittees/investigations/me...

Yes, an important but never-mentioned distinction is that "offshore" is basically an accounting designation, and that money is not somehow prevented from being put to work in the US.

That's not how things actually work. If it was, every nation but one would lose all of their corporations to that one country with the lowest rate.

The decline in the benefit of a lower corporate tax rate accelerates as you go lower. For example, going from 35% to 25% might reduce your corporate inversions by 75%. Going from 35% to 10% might reduce your inversions by 85%.

The challenge is to find the level where you gain the most as a nation overall. If you have something to offer other than just the low tax rate, it will never make sense to chase toward zero. The closer you get to that ideal level, the more other factors come into play to your nation's benefit in regards to keeping companies. The US has vast benefits for a company like Pfizer that would compensate for N% additional tax rate.

I agree with you in general but there is another thing you're missing: the double taxation discourages investing in new businesses in the United States.

If a VC is looking at two very similar businesses selling internationally, with one seated in the US where their profits will be doubly taxed, and the other running in a different country where profits are not subject to this, then ceteris paribus, they should expect investment in the non-US company to be more profitable.

ceteris paribus

i.e. unicorns and rainbows. You're essentially just responding to every response to your posts with "yeah but more assumptions make it true!"

No, it's not unicorns and rainbows. My argument does not rely on the existence of such ceteris paribus firms, my argument is that this will affect decisions to invest on the margin. Maybe right now, the margin is deciding between a great company in the US versus a crap company in Ireland, but the one in Ireland looks more attractive due to tax reasons. This policy change would push it back in the right direction. The point is that because there is a margin somewhere, it must be shifted by these policy decisions.

I don't see myself relying on strong assumptions. I am laying out some simplified models to explain the core mechanisms of what's going on.

Correct. That's why 0% is preferable to 8%, and Schumer-Portman should be thought of as a medium term stop-gap measure. 0% is the only stable rate. Eventually that will happen, but for the time being 8% will work as other revenue adjustments are made.

0% is only the stable rate in theory (and only if you ignore every other business consideration in the theory). It will never work like that in reality, where countries often have dramatic benefits to offer that compensate for paying more than 0%.

All nations would have to go to zero in the category of what other benefits they have to offer (their sum value proposition outside of their tax rate). That's not going to happen. Those benefits add up to being worth a certain amount of tax depending on the nation and the corporation's specific context. If this wasn't true, every relevant corporation would have flooded out of the US (or Germany) long ago, seeking much lower rates.

I agree to an extent, but nations are also competing on all of these other factors that make them more attractive places to do business. Some costly health care surcharge in France could be reduced as easily as the foreign profit taxation in the US.

Also, it only takes one Ireland to drive the entire world toward 0%.

Such a pile of crap, by Icahn, of course. Corporations do not exist in a vacuum of social irresponsibility and their first duty is certainly not to their shareholders but to the people they employ and to the societies they thrive on.

No, actually what you're saying is a pile of crap. The only irresponsible ones in this situation are the members of Congress. The United States is not immune to economic forces, yet for years despite all the evidence to the contrary they've been in utter denial about this. All they have to do is pass a simple bill to make the US tax code work the same way as it does in every other god damn country in the world, then no more jobs get moved overseas.

> No, actually what you're saying is a pile of crap.

In Germany, our constitution says in §14.2: "Eigentum verpflichtet. Sein Gebrauch soll zugleich dem Wohle der Allgemeinheit dienen.", translated roughly to "Ownership creates duties. Its use shall be for common welfare."

For me, looks like the failure is in the US constitution which does not focus on the common good.

> In Germany, our constitution says in §14.2: "Eigentum verpflichtet.

You can tax the property of people without taxing corporations. The former can be done with reasonable effort and effectiveness because the location of someone and their home's can be determined. Taxing corporations has proven unreliable and ineffective because they're often just a mailbox in s tax haven and profits are moved to other entities easily (via licensing fees etc.). There's also no real need to tax them, as you can tax their owners.

Yes. I would even argue that advancing the common good includes a mandate not to pass unenforceable welfare-destroying tax laws.

Fully agree, if the state did not tax corporations they could work near maximum efficiency if correctly managed, while the state still could get his share whenever an owner extracts a part of the profits for private use.

> while the state still could get his share whenever an owner extracts a part of the profits for private use

The problem is: this won't happen, as people by nature are too greedy. They will spend the minimum until someone finds a tax loophole and then in a rush all the money is gone and untaxable.

> The problem is: this won't happen, as people by nature are too greedy. They will spend the minimum until someone finds a tax loophole

Typical extracted profits are dividends. In my country, tax is due and payable by the corporation as soon as dividends are issued and unless you're a majority owner, you have no control over when dividends are paid (certainly true for Google, Apple, Microsoft etc. shareholders).

> There's also no real need to tax them, as you can tax their owners.

Thats what happens in Ireland, corporation tax is lowish (12.5%) and theres not that many loopholes/concessions as in other EU states where companies can reduce their corporate tax to near nothing already

BUT personal taxes are a murder

Lets say you are a director of startup and the company has€100000 left after costs and taxes etc, lets say as director you want to pay yourself a salary of 100K for your hard work, you be lucky you be left with 50K after income tax, PAYE/PRSI insurance tax and "Universal Social Charge"

On the money that you have left you would have to pay for medical insurance (aint free here like UK), VAT of 23% on almost anything you buy (more for cars, less for food etc), new property and water taxes and so on

Keep in mind that Ireland gets blamed for alot of this goings on, but its just a step on path large corporations take to move money onto Carribean.

That doesn't scare me, it's about the same here in Austria - on top of 25% corporate tax, 25% tax on dividends (capital income).

How on earth can this be a law? This is such a broad and general statement that it could be used for whatever reasons to confiscate private property.

Sadly, laws aren't written like executable code. They're something vaguely resembling executable statements that require a lot of judgement by the person (trying to) interpret them to actually get to something that can finally be acted upon.

As such, law contains many places (usually preambles and stuff) that are there to just give context and aid the interpreter in filling in the gaps, when he centuries later tries to decide on what elected officials that formulated the law were hoping to achieve.

It's sort of like having "0" == 0 in PHP .. "How on earth can this be a programming language?" .. but ultimately its still here and gets the job done .. and in some niches its even borderline-useful .. because it's written by people that ultimately are imperfect and guided by lizard brains .. and the target audience are imperfect people too ..

I know that, but not all laws are unspecific like that one. In fact, most laws specify in which cases they apply.

But with such a law it is impossible to specify anything. It just states that private property is to be used for the "common good".

What is the "common good"? I have my understanding of the common good which might be different from yours, so how are you going to codify that? This is a prerequisite to judging entities for infractions against this "common good".

..and that's why you get lawyers to plead their clients cases, various chances to appeal a ruling, a separation of legislative and judiciary powers and ultimately even judges that are voted in and given tenure instead of just hired.

Yes, the state humanity finds itself in is a sad one. Patch atop patch atop patch .. for centuries (millenias?) by now. But what can you do? Everything else so far has failed in even more spectacular ways.

"The Constitution, on this hypothesis, is a mere thing of wax in the hands of the judiciary, which they may twist and shape into any form they please."

- Thomas Jefferson

It's a constitution. You create actual laws based on the general statements in the constitution and enforce those laws. It's up to the constitutional court to interpret the constitution and decide if the other laws follow it correctly.

Still you will have to codify in some way what the "common good" is, because some way or another humans must be able to judge if something is against the common good or not. I wonder how someone could possibly do that.

The problem I see is that everyone will have his own idea about that. For some it will be upholding religious morals, for others it will be socialism. Could be really anything.

By that logic, the USSR and mid-Revolution France were the best of all societies, because their constitutions valued individual liberty AND the common good. Let's emulate them in all ways, shapes, and forms! /s

What a constitution says and how a country operates are two different things.

Also, and this is something I think we're all guilty of, you're comparing documents from two radically different eras. By German constitution I'm assuming you mean the Basic Law? There are lot of differences between the Englishman of 1789 and the Germans (as coerced by the French, English, and Americans) of 1949.

"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."

"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."

- Judge Learned Hand (https://en.wikipedia.org/wiki/Learned_Hand)

There's no legal responsibility on me to be nice to my elderly parents either. Doesn't mean it's not The Right Thing To Do.

We legislate that you can't murder, torture, kidnap, or assault your parents. What you do beyond that is up to your conscience.

Given that corporations are conscience-less entities, the de jure minimums become the de facto outcomes.

Read the quote closer. It wasn't just talking about legal responsibility. It was talking about "patriotic duty", "sinister", "public duty", "voluntary", and "morals".

Being mean to your elderly parents conflicts with a few of these ideals.

That's a nice ideal but unfortunately it's false [0]. Corporations are legally required to operate in their shareholders interests. They have wide latitude [1] in their decision making abilities but they're still required to act in the best interests of the company and its shareholders.

[0]: https://en.wikipedia.org/wiki/Dodge_v._Ford_Motor_Co.

[1]: https://en.wikipedia.org/wiki/Business_judgment_rule

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