U.S. Moves to Thwart Use of Foreign Acquisitions to Dodge Taxes
nytimes.com
nytimes.com
For example, if a British company earns income in Germany, its pays German taxes on its German income. But if a US company earns income in Germany it pays both German taxes and US taxes.
This is not about avoiding tax on profit earned in the US, after the inversion companies continue to pay US taxes, they just don’t pay taxes on income earned outside of the US.
If a UK has a German subsidiary, that's different.
But it doesn't work even in the US's case. US companies will routinely "sell" their intellectual property to a subsidiary in e.g. Ireland and then license to back to the US company to avoid paying US taxes. There are some highly successful US companies who, per the books, make nearly $0/year profit within the US.
(While Ireland's corporate taxes are low, their personal taxes are ~59% over ~100k, and that _includes_ capital gains, and a lot of things that are tax advantaged in the states)
[1] This explains the loophole that was closed: http://www.pearse-trust.ie/blog/bid/102942/Changes-To-Irish-...
I assume you mean to the US, but many of these companies don't pay taxes in the countries in which they operate either.
As an American making the same money as your non-american co-worker you are left with a lot less just for having a US passport.
It is even possible you have never set foot in the US yet are required to pay uncle sam's taxes.
Wanna get rid of your US passport? Not before you pay 10 years projected taxes and pay an abhorrent fee. You will also be listed on a government website so you can be shamed like a sex offender.
Specifically, double-taxation is when you pay taxes twice on the SAME earnings. Take the example of a US citizen living abroad in a country with lower income taxes. They will have to pay foreign as well as US income taxes: two like, you point out, rather than one. But the IRS agrees that double-taxation is mean, so they give you a foreign tax credit for the tax you've already paid. You pay an amount to the IRS to make up the difference in income tax. If it were double-taxation you would have to pay the full US income tax on the money you earned, after already having paid the full foreign income tax on it as well.
(Note I've been talking about plain-vanilla income, it's a whole new ball-game if you think about other investment income.)
Double taxation is the levying of tax by two or more jurisdictions on the same declared income (in the case of income taxes), asset (in the case of capital taxes), or financial transaction (in the case of sales taxes).
This is exactly like state income taxes. It's not "double taxation" because you get to deduct your federal taxable income by the amount you pay in state income tax.
Here's a simplified model to illustrate:
Wlog, suppose the US charges a straight m rate per dollar, country X charges n. Suppose first k dollars of an expat are untaxed by the US.
Let's say the expat makes j dollars, an equivalent US citizen in the US makes the same, and so too a citizen of X.
The citizen of X is taxed nj by X, the US citizen resident in the US is taxed mj, and the expat would be charged (j-k-nj)×m by the US and nj by X for a total of m(j-k-nj) + nj if it were a deduction to taxable income.
Notably if there's no fixed deduction, every tax rate causes you to pay more than otherwise.
And it's not abhorrent. If you earned enough money to think it's advantageous to lose one of the most valuable passports in the world, you probably earned that money in large parts due to the support of the people and infrastructure of the United States. You don't get to drop your duties once you win big.
[1] $97,600 for 2013, $99,200 for 2014 and $100,800 for 2015
a) cole seems to specifically be talking about very wealthy people who did work and earn money in the US but who renounced citizenship largely for tax purposes (e.g. Eduardo Saverin)
b) cole talks about the foreign-earned income exclusion, which is misplaced (for people like (a) this is very different from income earned on investments and for wealth which is subject to the exit tax)
There's a smattering of outright incorrect things too like having to pay taxes for 10 years after renouncing.
The parent never proclaimed America was the best in any regard, nor hinted at such an attitude.
Nobody needs to think their country is the best just to implement negative tax policies. All it indicates at a base level is the desire to maximize tax revenue. That goes for countries with extremely high tax rates on high income, which is semi-common in the developed world: it does not necessarily mean those nations must think their country is the best, therefore they can tax the rich whatever they like and said rich won't leave.
Imperialism doesn't work that way. Don't the door hit you on the way out though.
Article in Dutch: http://nos.nl/nieuwsuur/artikel/2044332-amerikaanse-belastin...
How woudl you feel if HMRC wanted a share of your parents estate.
Or, you know, not. It's ridiculous to suggest that if you earn money abroad, American people and infrastructure are largely responsible for your success.
It's in Dutch, but feel free to translate:
http://nos.nl/nieuwsuur/artikel/2044332-amerikaanse-belastin...
Edit: Why so many downvotes? I'm not saying he's right, just that cr1895 is arguing against a totally different claim.
That article is talking about renouncing their US citizenship to avoid an administrative nightmare. The people mentioned in that article probably owed little to nothing, but just didn't realize or didn't handle the finer details of their dual-citizenship very well.
If you renounce your US citizenship you don't just get to erase all your existing tax obligations and if you're wealthy enough (i.e., the IRS assumes you're renouncing for tax purposes) you pay an exit tax. At what point is one's "duty" to the American public satisfied? Why are Americans so exceptional in this regard, where practically every other country in the developed world lacks taxation by citizenship?
https://travel.state.gov/content/travel/en/legal-considerati...
Just to put things in perspective:
Last year 4,279 people renounced their US citizenship. It's a big increase, up 20% from the year prior.
However, it's minuscule when you compare to the 8.7 million non-military Americans who live abroad. Less than 0.05%.
https://en.m.wikipedia.org/wiki/American_diaspora#Number_of_...
http://money.cnn.com/2016/02/08/news/americans-citizenship-r...
Furthermore, if you earn income as a freelancer, it's likely that you still have to pay self-employment tax.
Do you have a source for this? I've never heard about it.
All I know is they make sure your last N years of taxes are in order, charge you expatriation tax (if required), and ensure you have no unpaid federal student loans.
https://en.wikipedia.org/wiki/Expatriation_tax#United_States
"Under the new law, any individual who had a net worth of $2 million or an average income tax liability of $139,000 for the five previous years[10] who renounces his or her citizenship is automatically assumed to have done so for tax avoidance reasons and is subject to additional taxes. Furthermore, with certain exceptions covered expatriates who spend at least 31 days in the United States in any year during the 10-year period following expatriation were subject to US taxation as if they were U.S. citizens or resident aliens."
The key there is "assumed to have done so for tax avoidance reasons". I would note this is a guideline, and the IRS can make the same determination for other reasons. Basically if you pay nontrivial amounts of taxes before you expatriate the USG assumes you should keep paying.
Doesn't "covered" here mean people who had to pay expatriation tax? That seems to indicate it's an AND rather than an OR. Thanks for your input!
The thirty day part applies to you if you don't pay much in taxes.
Sure, for some things (national funding for roads, schools, etc...), ex-pats may receive no benefit.
But 53% of US discretionary spending is military spending. In what way does the US military provide more service to resident citizens than ex-pats? Now to my mind, all this military spending doesn't help anyone and just causes a bunch of problems, but that's not how our democracy works. I don't get to opt out of paying for the war in Iraq just because I didn't support it.
And what about programs like NASA, which I do support? They provide no less benefit to me than they do to resident citizens.
Given that large portions of the budget (Military, Veteran's Benefits, International Services together make up 63% of discretionary spending) serve residents and ex-pats, it seems like the most logical thing would be for ex-pats to get a tax discount (which they do), not to pay no taxes at all.
"Discretionary spending" is a term the left made up to lie about how much of the budget is things they want. Things they want are non-discretionary, other things are discretionary. It's political newspeak, not a comprehensible way to measure the government budget.
Where did you get the idea it was simply "political newspeak"? Perhaps you should reassess the value of your contributions to these types of discussions in light of your demonstrated ignorance here.
It's language designed to make a particular thought unthinkable, which is the defining characteristic of newspeak.
That simply isn't true. Things that are funded by an appropriations bill are considered discretionary because the level of funding they receive is up to the discretion of Congress. Things that are funded by a mandate are not considered discretionary because their funding is not up to the discretion of congress from year to year. The opinions of liberals or conservatives do not factor into which is considered which. There is a precise legal meaning here. It is not simply "a term the left made up".
In addition to there being a legal distinction, there is also an accounting distinction. Medicare and social security, the two biggest non-discretionary expenditures by the federal government, come out of entirely different piles of money than discretionary expenditures do. Were you not aware of that?
Your income taxes are not funding social security. Your social security taxes are not funding things that come out of the general budget. Cutting social security benefits would not free up more money to fund the things you think government should be doing.
So, although I get that you do not like the nomenclature, I don't get how it makes some particular thought unthinkable. They are two different things. They should have two different names. It seems far more Orwellian to pretend like there isn't a legal difference between the two, simply because it would make achieving political goals you happen to find favorable easier.
You seem to be under the impression we could take the money from social security or medicare and spend it on stuff you like better. Legally, that isn't true. So yes, in the sense that it would be totally freaking illegal, it is "unthinkable" to cut social security in order to lower income taxes.
You might as well refer to calling animals "lions" and "tigers" as newspeak, because they make the thought that they are actually the same species of animal unthinkable. Well, they aren't the same species of animal. So it ain't newspeak, it's just nomenclature that you don't like.
It is perfectly accurate to describe spending appropriated from the general fund as discretionary and social security as non-discretionary whether or not you like the terminology. They're two different things, one of which is up to the discretion of congress, one of which is not.
Come up with a new term if you'd like. But you've strongly implied you think the two types of spending aren't different. That's not Orwellian -- that's you simply not understanding freshman high school civics. You also claimed that "discretionary spending" is a term the left made up. Are you going to post a citation for that, or admit you were wrong?
Actually, they kind of are. Considering that SS invests (solely?) in treasury bonds, which are then used to pay for programs. Much of the national debt is owed to Social Security.
Medicare and social security are paid for through income taxes. The trust fund is entirely a work of accounting fiction. It contains only IOUs from the government to itself.
The system is built on a lie.
When the system was originally put into place, benefits were paid out to people who never paid the tax. From day one the money collected from taxpayers went to paying the previous generation's benefits. It wasn't saved in a trust fund, it was spent. The only reason there is any surplus money at all is that the population has been expanding, so they collected tax from more people than collected benefits. If we allowed people to opt out of social security and everybody below retirement age did so then the "trust fund" would run out of money long before it paid out as much as it ostensibly owes to people, because most of the money those people paid has already been spent on previous retirees.
But the remaining "trust fund" money was also spent. It's gone. They didn't invest it in real estate or shares of HP, they lent it to themselves and then spent it. The "trust fund" is a piece of paper that says the government owes itself money.
> Your income taxes are not funding social security.
My social security income taxes are funding social security for existing retirees. My federal withholding income taxes would fund social security in any year that the "trust fund" decreases in size, because that's where the rest of the money actually comes from.
> Your social security taxes are not funding things that come out of the general budget.
They do in any year that the "trust fund" increases in size.
> Legally, that isn't true.
The people who decide where the money goes are the people who make the law. A law can't be illegal. It could be unconstitutional, but I don't see any obvious reason why changing social security or medicare benefits would be unconstitutional.
> Cutting social security benefits would not free up more money to fund the things you think government should be doing.
It certainly would. Even if we keep the charade of separate accounting, reducing social security benefits would increase the size of the "trust fund" which serves as a long-term/perpetual debt sink for the rest of the government which allows the rest of the government to spend the money in present day and pay it back arbitrarily long in the future (or, as has historically been the case, never). Or if you prefer to look at it more directly, reducing both social security benefits and social security taxes would allow withholding taxes to be increased in the same amount without changing the total amount of money the government takes out of the taxpayer's paycheck.
You can't actually borrow money from yourself. You can do all the paperwork you like but at the end of the day the credit and the debit cancel out.
So, let me summarize your argument: You think that we should re-engineer the language to get rid of the distinction between discretionary and non-discretionary spending, in order to achieve a policy goal you find favorable. The situation is simple -- people like medicare and social security much better than the rest of government. In order to undermine support for popular social programs, you wish to change the language. I get that you believe there isn't really a distinction because of the way the government has borrowed from the SS trust fund. I don't entirely disagree with that. But you're still arguing for dumbing down the language to alter how people feel about government programs.
That sounds pretty Orwellian to me. It's a classic case of accusing one's opponent of the very thing you are doing.
So. Please refrain from these ludicrous, childish accusations about radical leftists and whatnot when you don't have proof and are in fact yourself engaging in Orwellian language games. Take 5 seconds to appreciate what an asshole that makes you look like, OK?
What are you actually asking for?
Even if the first person to ever use the term was William F. Buckley (which I rather doubt), what matters is who popularized it into common usage, which requires a population of people who would then have to be categorized as left or right. But even that wouldn't work because people don't fit into boxes. A Republican who supports expanding Medicare is on the left of that issue regardless of their party affiliation. Are you asking me to write that PhD thesis?
Both sides do this. "Intelligence community" instead of "spy agencies" is one of the right's. You know which side invented it because of who benefits from it. The proof is cui bono.
And I never said it was invented by Karl Marx or Leon Trotsky. The left comprises the likes of Nancy Pelosi or Hillary Clinton. Do you want citations to such people using that term or taking advantage of it? Here:
http://www.politifact.com/truth-o-meter/statements/2010/feb/... http://www.democraticleader.gov/newsroom/pelosi-floor-speech...
The right has come up with their own version of the lie, because the left generally uses "discretionary spending" to make the military budget look bigger (as with the OP), so the right now talks about "non-military (or non-defense) discretionary spending." That one is even worse. It cuts nearly the entire budget out of the budget. But it's a convenient lie whenever you want to cut "non-military discretionary spending" because it makes it look like five times as high a percentage of the budget than it really is.
> The situation is simple -- people like medicare and social security much better than the rest of government.
In no small part because their advocates have structured the language around them in order to make them immune from criticism.
For example, social security writes a bigger check to people who made more money while they were working. It might make more sense to make payments more uniform by reducing payments at the high end by a small percentage. And a small percentage of social security is an enormous amount of money. As in, 1% of social security is larger than the entire NSF budget. But if we consider only "discretionary spending" then we can't even consider that. It becomes unthinkable.
> But you're still arguing for dumbing down the language to alter how people feel about government programs.
Removing biased terms is quite the opposite of dumbing down. It's not even like they're using "discretionary" in the same sense as it's used in economics and personal finance -- in that sense the only non-discretionary part of the government budget would be the small subset of the military necessary for the government's survival and not one penny of social security.
I would love to see some proof of your position that undoing an Orwellian language change is an Orwellian language change. That's one heck of a status quo bias.
> Please refrain from these ludicrous, childish accusations about radical leftists and whatnot when you don't have proof and are in fact yourself engaging in Orwellian language games. Take 5 seconds to appreciate what an asshole that makes you look like, OK?
You're the first person in this thread to use the term "radical leftists" and ending your posts with ad hom attacks says more about you than the person you're describing.
This is not quite so clear cut. Yes, as an American working and living abroad you've got the privelege of forever dealing with the IRS/FBAR, some banks who simply won't talk to you because you're American, and probably an expensive tax professional to sort it all out for you so you avoid the devastating penalties for screwing it up.
But, most people won't actually be paying anything to the US government. I'm strongly opposed to taxation by citizenship, but let's not give the impression that everyone who lives abroad is paying twice.
The tax code has provisions to avoid "double taxes" on foreign income. You file Form 1116 to claim credit for taxes you paid to a foreign country as an offset against your U.S. tax liability.[1] That tax credit is separate from the income exclusion, which excludes the first ~$100k of foreign income from U.S. taxation.
Generally, your total tax liability will be your foreign liability on the first $100k, plus the greater of your U.S. liability or your foreign liability on the remainder. I don't see the big injustice, honestly. It's very similar to how state income taxes work in the U.S. where people are citizens of one state but work in another.
[1] Corporations file Form 1118 to claim similar credits.
Just jumping in here to voice my appreciation for you & @kspaans correcting a highly voted comment but very incorrect assertion, which is a dangerous combination because some people only read the first few comments and leave with that falsehood impressioned as fact.
Responding with a factual source and doing so in a graceful manner (i.e. not disrespecting the poster, but gently correcting them) is what makes HN great.
Meta-meta-comment: I've seen your posts for well over half a decade and you remark consistently with the quality of StravosK, patio11, grellas, pjmlp, et al. Never clicked on your profile but you're an engineer-turned-attorney, so that's from where the rigor and @grellas vibe originates. Anyways, thought I'd take the moment to say "hey, insightful stuff, keep it up.")
I easily lost out on a thousand dollars of lost wages, accounting fees, and general hassle and stress doing my US taxes in Italy last year.
"Well, you left so you don't get to complain"
Therefore judgments are enforced without the consent of the people.
Therefore taxation in the USA today is extortion.
All the quibbling about the ridiculous bureaucratic rules and forms just makes it even more clear just what a leviathan our tax system has become.
That's not true in the least.
"Therefore taxation in the USA today is extortion."
That's even less true.
It turns out I can get my wife a tax filing number so we can file jointly, and now I have to go back and revise a couple of years of taxes, and will ultimately wind up owing nothing (hopefully!). The IRS helpline really does help (I was incredibly distraught when I found out...getting a huge bill from the IRS for a tax filing 3 years ago is horrible), if you are an expat abroad, use it! But it is still a PITA!
I feel sorry for those in Switzerland, Hong Kong, or Singapore, where the exclusion only goes so far and you wind up paying tax beyond your credit, suffering high VAT and cost of living that those locales entail. You really need a professional accountant at that point to figure out how you can get relief (e.g. by using the Housing Exclusion). The big problem is that each country "works differently", and what is considered income tax in one country isn't the whole story (they might tax differently, like with a high VAT and usage fees, and what about taxes on health insurance and various social security fees you'll never be able to use?), you can still very well be exposed to double taxation.
Except they don't. You have an exemption for foreign income.
"It is even possible you have never set foot in the US yet are required to pay uncle sam's taxes."
I don't believe this for a second. You would be a US Citizen, therefore you would have stepped foot in US territory.
> Except they don't. You have an exemption for foreign income.
Because all the other 20 year olds working part-time at Starbucks employee the best accountant in town for a few hours per year to do their taxes.
> "It is even possible you have never set foot in the US yet are required to pay uncle sam's taxes."
> I don't believe this for a second. You would be a US Citizen, therefore you would have stepped foot in US territory.
Ever hear of a guy called Ted Cruz?
Your inability to do your taxes is no one's problem but your own.
"Ever hear of a guy called Ted Cruz?"
You mean the guy who's going all over the country right now?
Ted Cruz was born in Canada. HE was a US citizen at the moment of his birth without having set foot in the US. If his family hadn't moved back to the US then he could have grown up in Canada as a US citizen and he would have had to file US taxes once he started making money. All without ever having set foot in the US.
Consider the case where you are earning enough money to be above the thresholds and in a country with higher income taxes than the US. The IRS will say that you owe X in income taxes, but will also give you a tax credit of X+Y based on the taxes you've already paid (assuming a tax treaty). As X+Y>X, you will not owe anything in the US.
Double taxation has a specific meaning and doesn't mean "paying more than one tax".
We are talking about c).
Wikipedia:
Double taxation is the levying of tax by two or more jurisdictions on the same declared income (in the case of income taxes), asset (in the case of capital taxes), or financial transaction (in the case of sales taxes).
The real fix is tax reform, not going full on ballistic because companies and individuals are fleeing the taxation tyranny. The IRS long moved from taxation to a political weapon.
This has nothing to do with personal income tax, but rather the acquisition of other companies to move their headquarters outside of the US
The tax rates are pretty crazy in the US if you think about it. A single person small business just getting started still has to pay 33% of their profit even if their profit is $1,000 for the entire year.
I don't disagree that tax reform is necessary but taxes help pay for the infrastructure, safety, and public goods that we all tap into and take advantage of.
People say that, but with specifics to corporate taxation the tax revenues in question flow to US Treasury. US highways are funded by a combination of Highway Trust Fund, gasoline taxes and road tolls, public safety and other goods such as parks and libraries are funded by local property and business taxes.
The way the funds flow is set up currently, increase or decrease in corporate taxation would not result in change of funding for the local services you mentioned. Federal government is not sending a bonus check to Cupertino, CA or Redmond, WA because they managed to squeeze a few extra billions off Apple or Microsoft.
The term you're looking for is "effective tax." For US corporations it was 12.6% according to the GAO in 2010:
http://money.cnn.com/2013/07/01/news/economy/corporate-tax-r...
Put another way, the low effective rate doesn't disprove that 35% is too high--it demonstrates the effect of having such a high nominal rate.
It would be better to have a competitive nominal rate. Then companies would move their capital based on business, not tax, reasons.
For example, the U.S. tax rate provides an incentive for overseas manufacturing. If Apple moves capital from Ireland to China to invest in a new Foxconn factory, they pay a lower tax rate than if they moved the same amount of capital from Ireland to Texas to invest in a new factory there. Even if all the business costs were same between China and Texas, China would win on the tax costs.
It's an impediment to bringing more manufacturing jobs back to the U.S., and a one-time tax holiday will not solve it. The rate needs to be permanently lowered. Unfortunately the people most upset about the decline of U.S. manufacturing jobs tend to see the corporate tax rate as a tool of justice, and therefore reject lowering the rate on principle.
That's simply not true; somebody is lying to you.
A sole proprietorship's profit is passed as regular income to the proprietor.
Moreover, the U.S. system generally does not double-tax income that is already taxed elsewhere. A U.S. company that pays taxes on German income will receive a credit for those taxes paid against its U.S. liability: http://www.cbpp.org/research/the-fiscal-and-economic-risks-o....
I think this makes sense. If I live in the US and make some product and sell it in Germany, then whatever profit I bring home from Germany (less German taxes) is still an income that was effectively earned in the US, since I am living and working here. The business transactions occurred in Germany, but the income was 'earned' by my labor in the US.
From this point of view, a territorial tax system is a subsidy designed to make goods more competitive in foreign markets. (Since I don't have to pay taxes on foreign profits, I can lower the price I charge overseas.)
Most BS system ever.
This is especially true if you expect most of your future customers to be outside the US.
In the long run this gives an operating advantage to foreign corporations -- again for tax efficiency only.
In the intermediate time frame all governments change their laws all the time, and there are going to be changes in tax rules coming that will make cross-border SaaS sales painful for tax load and administrative burdens, for instance.
Your choice is when to flip your business from US to foreign status. You can see the government attacking late-stage inversions because that is where the revenue and political brownie points are.
This tells you that early-stage migrations are still possible and may be cost-effective for you. At some level, for small companies, practical considerations can be used to offset unfavorable tax rules. (Translation - amounts are small enough to not matter, or be swamped by normal expenses so that they don't matter).
The US tax system is King Canute.
Source: I am an international tax lawyer in my real life.
Interesting, I had never heard this phrase before. Are you referring to this? https://en.wikipedia.org/wiki/King_Canute_and_the_waves
The pointless arrogance of the powerful is the lesson.
This is expressed in various ways, from the HN chortling about ignorant legislators attempting to define pi = 3, to the extremely correct observation that the bond market holds far more power than any central bank.
Politicians are mortal and fallible.
Many decisions you make today can be changed/fixed-up later. The company I'm at started as a WA LLC before re-incorporating as a Delaware C-corp and taking a $9.2M A-round. Bit of cost and hassle but not the end of the world. We've adjusted the structure of our engineering org several times both as our situation changed and as we learned what worked for us. Again, changeable.
However, if you choose to incorporate in the USA you may end up with a permanent, unfixable disadvantage relative to your international competitors. The political left seems hell-bent on both keeping world-wide taxation and bringing in Hotel California style rules.
This does not apply to just unicorns. Even a mid-size corp with a large international presence is impacted.
You can ignore all this if your goal is to stay both small and domestic. But an organization like Y-combinator which can spread the legal cost/overhead across its cohort? It would be something worth giving serious thought.
I would have loved to have more info about that. What other loopholes didn't this fix? What are they proposing Congress do in this overhaul?
http://blogs.wsj.com/washwire/2012/05/18/tax-history-why-u-s...
And [pdf file]:
http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=...
tldr; it's a century old patch-work remnant from the Civil War to WW1 era. The US Government at this point does not want to give it up, because it means giving up tax revenue (and thus has implications for how much they can spend), and there's nothing they hate more.
People who have left the United States and will never return, chose to renounce their citizenship because of it. ... Ok, so?
A flat corporate rate on income earned, in the US, minus income lost, in the US, equals taxable income, done and fair. If a corporation can't compete in the US without support of its international shell games, then it probably wasn't competitive enough to matter anyways.
Also it's not exactly easy to emigrate. People may be mobile, but they're not liquid.