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Require UsTech to run their sales to their Ireland and German customers through their Ireland and German subsidiaries. Then tax them based upon the result of their (sales to Irish customers - Irish costs) and in Germany, the equavelent (sales to German customers - German costs).

It's quite possible in those two places, they would pay no tax because their costs are higher, but this is also an incentive to keep employing people in said countries.

To help enforce this, other companies in Ireland and Germany would only be able to reduce their taxes by purchasing from Irish and German registered companies (tax based on Irish costs - Irish sales) which would mean that they would be incentivised to buy from these rather than UsTech global corp.

A problem with this solution -- as a US company without a German subsidiary (but as with most online businesses, with German customers), do I now have to pay taxes in Germany?

If the former, the logical conclusion of that approach is that every startup has to pay taxes in all 195 countries of the world, as soon as they open for business. This could be on $0.01 of ad revenue.

If the latter, I'm strongly incentivized to move my labor from the high-tax countries to the low-tax ones, which will push business out of the former. (I.e. at the margin, if I have a small office in Germany, it's probably not worth my while to keep it open since it incurs a massive tax liability).

No, you wouldn't have to pay taxes in Germany. But, if you sell to German businesses, such as providing hosting services then they wouldn't be able to deduct that as costs when calculating their taxes.

They would only be able to deduct German costs, defined as the employment of someone with a NI number (or German equivalent) or another business with a tax number.

So you disincentivize using any services in countries other than the one your subsidiary is in? They would have to be significantly better than other options to be worth not being able to deduct those costs.

> (sales to Irish customers - Irish costs) and in Germany, the equavelent (sales to German customers - German costs).

The way companies deal with this is to create artificial costs. For instance have the German part pay big patent license fees (loan interest is another option) to the Irish part. Then German sales - German costs = 0.

If the German part pays big licence fees to the Irish part then that wouldn't be deductible. They would only be able to deduct German costs.

I should add that it would only be possible to require a company to have a local subsidiary if it has a physical presence in the country. Someone like Amazon will because they have warehouses.

Someone like Google could probably get away with doing business remotely, but then any business that buys from them would not be able to deduct that as a cost when calculating tax which would effectively mean that they pay the tax, making a local rival more competitive.

So unfair competitive advantage to the local companies? If it were so easy I wonder why they don't do this already.

Additionally what about services or products that don't exist or haven't had time to be replicated in one's country. Then that country cannot be on the cutting edge of new technology simply because they penalize buying from international companies.

It would be an advantage to local companies - yes! At the moment, local companies are often at a disadvantage because they're paying more tax than those companies who are legally based overseas.

If the product or service doesn't exist locally, then the purchasing company will indeed need to pay tax, if and only if it's local sales are greater than local costs. If buying this overseas service such as AWS hosting gives it an advantage such as cheaper and simpler scaling then it may well be worth them buying it to pay the tax.

At the moment, an outside company can come in and pay little to no tax by licensing IP from another subsidiary in a third country. A local company is then at a disadvantage and is effectively paying for the infrastructure through their own taxes to support a competitor.

This is one of those things that sounds great on paper but in practice basically kills any chance of a startup environment in the country. Why would a startup wish to grow in such a nation if there are other places where the ability to buy useful services from other international companies are so much cheaper?

Because a startup is likely to have greater local costs than local sales and so wouldn't pay any taxes.

When you start a company, you have many local costs (wages, rent, utilities) and yet you haven't made any sales. In the tech sector, when you do make sales they are likely to be at least in part overseas.

Therefore, it will be a while before you then have to pay any tax. When you get big enough that your local sales become larger than your local costs, then you will probably be able to afford the extra tax as you are now benefiting from the infrastructure provided by the state.

I thought that a necessary part of the "Double Irish with a Dutch Sandwich" was that a company in a tax haven can license IP to its subsidiary at an arbitrary price. Therefore, that company can offset any profit its own subsidiary might make.

To do this requires two things:

1. That the license arrangement with the subsidiary is unique to that subsidiary.

2. That the license fee can be set to any value at any time.

For more concrete assets, for example a bag of coffee beans, it's easier to see when a parent company charges a subsidiary a different amount than the market rate. However, there is no comparable market for IP, so it's harder to see what a "fair" price for a copyright, trademark or patent might be.

One option might be to tax all IP licenses at the corporate tax rate. Another would be to adopt a "most favoured licensee" rule, requiring all licensees to pay whatever the cheapest rate was (or taxing the difference).

The Double Irish + Dutch is merely the most extreme example of the transfer pricing morass (and will go away in a few years). There are a bunch of other funky methods described in the wikipedia article I posted on the topic; defining and proving in court that a particular method of determining "market rate" was unreasonably chosen and incorrect enough to be worth the trouble is quite involved and, in normative terms, a big waste of economic potential (brain power on both sides is devoted to … that, rather than something useful).

As for "taxing IP licenses at the corporate tax rate", that seems nonsensical given that it's profit (aka value added) that is subject to tax, not revenue.

I wasn't suggesting that anyone define or prove a "market rate" for intangibles. I agree that would be a waste of time. The reason I mentioned it was as a contrast to IP licenses, for which no market exists.

Profits are subject to tax, as are people's incomes, consumer sales, assets such as cars, TVs and homes, and goods which cross customs borders. I was suggesting that another tax (or duty) be created to discourage the offsetting of profits using IP licenses.

What you are describing is exactly the issue with the current system, correct? That is, taxation based on physical presence only, and the arbitrary ways corporationsn can do intra-subsidiary transfers.

A tax for megacorps based on revenue seems a lot simpler.

Taxing on revenue is simpler but utterly non-sensical.

If selling a phone that cost $800 to make for $805 incurs an 80x tax liability compared to selling hammer that cost $5 to make for $10, then the modern economy of long supply chains and specialization grinds to a halt.

Another way to think about it: a single year in which the tax on revenue is higher than profit would require the business to be go into debt or be sold to pay the tax man; except then what's the value of that business to a creditor / acquirer if it has that threat hanging over its head?

Perhaps I was unclear: The suggestion is not to tax the revenue, but to tax based on revenue - that is: the tax would still be on $5 profit but where that tax is extracted is decided by where the company was doing business, rather than where it is incorporated.

Hmm thats effectively consumption tax of very significant rate (eg 33%).

How is that? The same corporation could be paying exactly the same corporate tax rate on exactly the same base, under such a scheme.

In my understanding what you are saying is, a country will tax profit on revenue generating from its own territory by its own tax rate.

For the sake of simplicity, assume 100% profit margin. Let R and R' be revenue generating without and with such tax law. Let T be tax rate.

So a company was hoping R into its bank account. But with the new taxes it would be (R - RT). Naturally the company would just increase the revenue to R' (by increasing prices) where it would give R'T to Govt and keep (R' - R'T).

R'(1 - T) = R

R' = R/(1-T)

Actually I underestimated new tax, for T=33% it would be 49.25%.

I think the key thing here is "based on" does not have to be "equal to".

One option, which I've not thought through, would be something like the following:

You make £500 profit.

You pay 20% corporation tax, so that's £100. The question is who does that get paid to?

If 15% of your revenue comes from the UK and 50% comes from France, then £15 of the corp. tax goes to the UK and £50 goes to France.

More complicated with different company structures and corp. tax differences between countries, etc, but I think this may be what they're getting at.

Thats easy to avoid. US Co will sell to Ireland Co which in turn will sell in UK/France. Since Ireland legally allows to go profit as low as 0.05%. UK/France is not getting much.

Also when US says 20%. It means US gets £100. US aint the sharing type :p.

How would this even work with territorial taxation countries such as Singapore/Hong Kong ?

The US->Ireland->EU thing is exactly what's going on now, and exactly what proposals like this are trying to address.

This kind of system will only work within a group of nations that agree that this is a good idea, such as the EU. Ireland and the Netherlands probably don't agree - but can hopefully be forced.

Obviously no countries in the EU have territorial taxation.

The US->Ireland->EU thing is exactly what's going on now, and exactly what proposals like this are trying to address.

Thats why gave this example to show that it does not work as profit remains the same.

Lets assume there is no US Co. Ireland Co is parent company and its only doing business in EU. Then either Ireland [1] allows low tax rates to attract business in which case profit is low and thus UK/France share is low. Or Ireland is high-tax, then business move to another low-tax in EU.

This only work if there is single tax rate in EU. But if there is single tax rate, then why even go this complicated tax calculation route.

[1] Estonia (and in near future Latvia) does not tax untill profit distribution, reducing effective tax rate to 0%.

In your example if Ireland Co makes 30% of its sales in France, then it would have to pay taxes on 30% of its profit to France (at French rate). That limits the reason to go to Ireland in the first place, which is why Ireland is largely against it. In fact it would encourage corporations to move their costs to countries with large customer base and high taxation rates to reduce the profits there, so it would favor the like of France, Germany or Italy.

The "trick", if I understand, is to only care where the final service/product is actually delivered. So in your example the idea would be to ignore France SAS, or rather I imagine to assume Ireland Co and France SAS are one and the same, and tax them "together".

At first glance it sounds very hard to setup (and it certainly is), but that's what is being attempted here. On the other hand it's not particularly complicated to know whom Google is selling ads to, and where iPhones are sold, so there must exist a solution to this problem...

> In my understanding what you are saying is, a country will tax profit on revenue generating from its own territory by its own tax rate.

Say we have a hypothetical company that operates only in Sweden and Ireland, and has offices only in Ireland. It has a revenue of €10M and a profit of €1M.

This company had €4M (40%) of it's revenue in Sweden (tax rate 22%) and 60% of the revenue in Ireland (tax rate 12.5%). How should this corporation be taxed?

By proportion of revenue according to the normal tax rate in the country. So

In Sweden: Tax 40% (the proportion of revenue) of the profit

(€4M/10M) * €1M * 0.22 = €88k

In Ireland : Tax 60% of the profit

(€6M/10M) * €1M * 0.125 = €75k

So the total tax went from €125k to €163k, because the corporation was forced to pay taxes where it made business, rather than on Ireland alone.

Basically you just pretend that the corporation was in fact two corporations, where one €4M revenue corporation was in Sweden and the other was a €6M revenue corporation in Ireland. That's all.

So almost like an EU VATMOSS for profit?

Could be a few issues with it still, e.g. declaring that your in-house logistics operation requires €100 to transport your €200 widget to Sweden, rather than €10 to Ireland, no?

But you are not increasing prices. Taxes gets passed on to consumers because companies do not take hit on profit margin just because of different tax rates.

So lets assume €10M is the already inflated ammount to accommodate for Ireland/Sweden share. Then only (€3.12m, €5.25) was needed from (Sweden, Ireland) if taxes were zero. €3.12m + €5.25m = €8.37m. €163k (€10m - €8.37) went to Govts. Then consumption taxes would be (28.2%, 14.2%) for (Sweden, Ireland). Swedese are paying (.282-.142)/(1+.142) = 16.3% more than Irish for same product.

You can calculate all these from equation in my comment before. I write here again,

R'(1-T) = R

whereas T is tax rates. R' is inflated revenue. R is zerotax revenue.

Yes, all kinds of secondary effects may come of this. Such as price increases, (and from that then tertiary effects such as reduced consumption). A reasonable effect is also companies moving around somewhat to get closer to business rather than close to low taxes.

In this example Swedish consumers would potentially see price increases - but on the other hand they could see tax reductions if the increased tax revenue from corporations gives some reform space for income or consumption tax cuts. Potential for jobs moving in from Ireland has the same positive effect on the bottom line.

The losers in the above scenario is the Irish because they'd see increased prices, lost jobs, and potentially raised taxes to offset lost corporate tax revenue.

A reasonable effect is also companies moving around somewhat to get closer to business rather than close to low taxes.

Why ? The payroll will increase even if profit remains the same.

The losers in the above scenario is the Irish because they'd see increased prices, lost jobs, and potentially raised taxes to offset lost corporate tax revenue.

I doubt it. Consumption tax are never popular. Instead of businesses, the people at large might migrate to Ireland for significantly low cost of living.

Ok now I'm not sure what you are arguing: are you saying this is a bad idea because it is too hard to implement?

Or a bad idea because of how it would increase corporate taxes, which would land on consumers?

I can't see how it would be a net negative for those countries that would get a nonzero corporate tax from megacorps that today contribute around zero. Even with price increases, the net effect seems like it would be positive

Its very high consumption tax. Effective, implementable but harder to get public support for. Cost of living (CoL) would rise. High corporate tax means high CoL. Every percentage increase will make it worse than last percentage. Wages would have to rise significantly. This will discourage business from moving to high-tax countries. People will likely move to low-tax countries.

I can't see how it would be a net negative for those countries that would get a nonzero corporate tax from megacorps that today contribute around zero. Even with price increases, the net effect seems like it would be positive

Because countries are not getting new money. Old money is just cycling between govt and people.

> Its very high consumption tax

You keep saying that, and I keep not understanding it. I realize higher prices (Companies shifting the tax to consumers) is a burden for consumers. But at the same time, if government tax revenue increases, then taxes could be cut (of all kinds: income, VAT, and corporate).

E.g. IKEA in Sweden ships 3% of their revenue as "royalties" to a dutch company, thereby reducing their swedish tax amount by over €100M/yr. If that money and money from similar companies was actually paid in Sweden, then Sweden could have a lower tax rate (e.g. 20%) and still have the same revenue. Or the VAT could be slightly lowered from 25%, to offset the fact that for a few products from multinational corporations, the products would be slightly more expensive.

Also: the argument that higher corporate tax rate = Higher CoL = bad, could be extended too. But how far? If the rest of the EU adopted Irelands low corporate tax rate, what would happen then?

Majority of revenue is coming from ads.

If Google were taxed for each ad income based on the country of where the ad buyer is located, they couldn't manipulate it as easily. Also clients wouldn't be inclined to set up shop in tax havens, because why would they? It's not their problem.

I'm not sure this is a good solution, it might also be possible to game it, but at least that would make sense from the perspective of assigning benefit to a territory: if a myriad small businesses in, say, France, need Google ads, why not tax Google in France for that amount? It is in a sense Google's access to French market that we are taxing.

Could that work?

What? In EU, Google is taxed for each ad income, as well as app sales, based on the country of where the sale takes place. It's called Value Added Tax. Countries can set the rate. Mostly the rates are in the order of 20 %.

I am not sure if it's still ongoing but any immaterial good you buy on a major website used to be taxed at the Luxembourg rate, which is the smallest in Europe. It's a pretty clear sign that sales are not attached to the country of the customer.

That has changed. Companies are now required to charge the VAT rate of the customer's country for digital goods (and have to store some data to prove that they picked the correct country).

This changed long (10-15 years) ago.

When I (resident in Finland) buy stuff from web shops in Germany, I pay tax at the higher Finnish rates, and it is withheld by the seller.

(When I buy from e.g. China, I pay VAT at the customs, including VAT on freight.)

Google's customers are almost all VAT collecting companies. That means that not Google but their customer is responsible for paying the tax. It can be deducted from their tax burden they have because they sell to end-consumers.

The point of this discussion is not the tax on the sale itself (which is indeed already there) but on the profit at Google that results of this sale.

Google has plenty of non-VAT-collecting consumers as customers. For instance, anyone who purchases apps or makes in-app purchases.

Looking at their income statement (although not as detailed as one would like) reveals that this amount is minuscule compared to their ad revenue.

VAT is not a tax on companies, it is a tax on consumer spending. VAT is merely collected by the companies on behalf of the tax authorities. What's the difference? Well, for one, the company cannot deduct VAT since it is zero-sum; they are only transferring it. Secondly VAT is exactly the same no matter which country the company operates in.

VAT is a tax paid by the "last" link in the chain, the user, not by the supplier.

Quick example, you are into the business of making - say - lemonade.

Set aside the machinery involved, you buy lemons, water and sugar.

The BOM for 100 glass or lemonade is:

- 100 lemons 15 € + 0.6 € (VAT is 4 % on lemons)

- 25 liters bottled mineral water 10 € + 2.2 € (VAT is 22% on mineral water)

- 0.5 Kg sugar 0.70 € + 0.07 (VAT is 10% on sugar)

So you have spent ( given to the supplier) 15+10+0.70=25.70 € + 0.6+2.2+0.07=2.87 VAT

Then you sell the 100 glasses of lemonade and get at 1 € each 100 € (included VAT).

The rate is 22% so you are actually getting 81.97 € + 18.03 VAT.

Since you already spent 2.87 € VAT when you bought the ingredients, you owe the government 18.03-2.87=15.16 € for VAT.

The whole idea of the VAT (or Value Added Tax) is that it applies to the differential in value.

So you have 81.97 € remaining from which you subtract the 25.70 € you spent for the ingredients, and - say - 10.30 € for other (documented) expenses, electricity, depreciation of machinery, etc., local taxes for the stand, etc.

You remain with a net income of 81.97-25.70-10.30=45.97 for which you own the government income taxes at a marginal rate of (still say) 35% 16.09 €.

Now imagine that your lemon squeezing process is covered by a patent for which you have to pay a firm in Ireland (which is also yours) 0.35 € per produced glass. (to simplify, let's say that this is exempt from VAT).

Now your income is 81.97-25.70-10.30-35.00=10.97, thus you owe the government 35% of that 3.84 €.

Meanwhile in Ireland those 35 € (without expenses) are income taxed at a rate of (say) 10% so you give the Irish government 3.50 €.

Instead of the 16.09 € in taxes, you paid 3.84+3.50=7.84 €.

> VAT is a tax paid by the "last" link in the chain, the user, not by the supplier.

Not quite. As Wikipedia puts it, VAT is collected incrementally, based on the surplus value, added to the price on the work at each stage of production.

That is the actual tax incidence. That the tax payment is channeled via the last link in chain is just a technicality relevant for the most efficient implementation of this incremental scheme.

>Not quite.

The one that pays the actual tax is the one getting the last (most valued) item, i.e. the final user (consumer).

The way it is collected (incrementally) is not connected to WHO pays WHAT.

If an user pays 122 € (100+22 €) that is the total tax (and is payed integrally by the user).

The government gets in total 22 € (integrally paid by the customer at the end) but it receives that amount in (say) 3 steps by differnt actors:

1 - 10% of 30= 3 The manufacturer buys the raw material, pays the VAT to the supplier that (hypothetically) has no preceding VAT costs and thus must give to the government the whole 3 €

2 - 22% of 80= 17,60-3= 14,60 then he does something with it and resells the product for 80 (i.e. it adds value, reselling it for 80 + VAT to a shop) and has to give to the government the differnece

3- 22% of 100=22-17,60=4,40 the shop sells the item to a consumer and has to give to the government the difference

The government gets 3+14.60+4.40=22 € The final user has paid 22 €

The incremental collection method allows to have the tax largely paid in advance, but the amount at the end comes out of the final user pocket.

The Wikipedia has it very clear:

https://en.wikipedia.org/wiki/Value-added_tax

https://en.wikipedia.org/wiki/Value-added_tax#With_a_value-a...

https://upload.wikimedia.org/wikipedia/commons/2/28/VAT3b22....

Strictly speaking of ads - what happens when someone is using VPNs, let's say because the are contracted by an american company?

I like your idea, I'm just curious how this would work? Google might find themselves in violation of the law.

What do you think?

How about a yearly national tax proportional with the amount ad buyers pay for targeting a country - the argument here is that Google, Facebook, etc. are using a national infrastructure to do their business.

I don't understand the issue with VPN. The idea would be to tax the profit of an ad company based on the country of origin of the institution buying the service from them (not country of origin of the seller, which seems to easy to game). VPN can shadow users' location, but not corporate location of tens of millions of companies, at least that's my intuition.

I don't know anything about policy in general, but I'd rather reconsider existing taxes and their mechanisms before introducing even more taxes. Still, I'm guessing just shifting the taxation based on buyer's location would be groundbreaking, possibly not functional for many companies, and introduce a lot of extra work just to get some money from multinationals....

Yearly national tax probably reflects the instinct many people have, that other companies within these markets are taxed for similar activity, but multinationals aren't, and maybe they are getting too good a deal.

There is something similar going on in Poland and I'm guessing many other developing countries: foreign corporations open their shared services centers, recruit really well educated people but get significant tax benefits on this. Also supermarket chains are somehow exempt from some taxation. Supposedly this is to promote jobs locally, but in reality it seems more like a brutal scam: you get great, cheap workforce and do not have to pay as much for access to it in taxes.

Multinationals selling globally, but paying taxes where they like is similar. The sentiment among my friends is that the local corporations sucking in workforce, pulling it away from building our own products and services with international potential, AND getting tax deals is quite bad in the long term.