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Comment by alkonaut | Hacker News Reader

The difference between avoidance and evasion is only relevant if you have tax law interpreted to the letter only.

Tax law should be interpreted by the lawmakers intention and companies should be ready to be fined or uptaxed if authorities find they pay less taxes than is reasonable given global profits and relative turnover within their jurisdiction.

Constructs such as paying “royalties” to parent companies, or taking very expensive internal loans to effectively move all profits to tax havens (using Dutch BV’s etc) should simply be outlawed. Countries simply shouldn’t recognize these as acceptable practices.

This obviously leads to what companies like to call a “hostile business climate” - so a country will need to be pretty attractive in other aspects to not scare off international business.

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That would be a nightmare.

First, tax laws don't have clear intentions to begin with -- if a tax law passes with 51 out of 100 votes in the legislature, all 51 representatives could be supporting the "letter" of the law for 51 different actual intentions, many of which might not be noble in the first place (e.g. give a particular local factory a tax break to win more votes next election).

Second, because of this, "intention" would be left open to completely different interpretation by different judges and result in completely arbitrary, non-predictable outcomes in different cases, which would be a nightmare for companies to even attempt to comply with. There's a reason that laws are interpreted by their letter -- it's the only fair way to do it.

Third, the tax laws are passed by different countries and are not harmonized, so even if they had clear intentions, their intentions can completely conflict, and there's no reason why they should be harmonized -- different countries are allowed to have legitimately different philosophies on taxation, there's no "right" answer.

The things you say should "simply be outlawed" -- how? How are you going to determine which internal loan is merely "expensive" (OK) versus "very expensive" (not OK)? How are you going to differentiate between legitimate payments and the "royalties" you put in quotes that you call a construct?

The usual solution is a "General anti-avoidance rule" (GAAR). This doesn't get into the intent of the tax law, only into the intent of the business action. If there would be a simpler, more natural, and otherwise cheaper way to do it, but it's been done a particular way to avoid tax, then it's unlawful.

This seems kind of like the "What is / isn't gerrymandering?" problem.

I am not an accountant, but couldn't most corporate structures be reimagined by taxing authorities as an idealized "single company"?

Then calculate the difference between taxes that would be owed by that company vs the actual structure?

If there's a statistically significant discrepancy, require the company to provide a rationale. Or pay some penalty.

I wonder how well that would work for intangibles like branding, patents, or copyright - all three are artificial and can essentially be charged for arbitrarily and the company value is what provides their worth.

I suspect it would be easier to have a subsidiary rate rule - they may charge percentage either net or gross but not expenses for any IP including required external salaries but even that probably has loopholes or inviabilities.

> The things you say should "simply be outlawed" -- how? How are you going to determine which internal loan is "expensive" versus "very expensive"? How are you going to differentiate between legitimate payments and the "royalties" you put in quotes that you call a construct?

Example for interest rates: Credit risk and intrabank/central bank rates are considered by courts when judging whether a rate is “too high”.

Swedish tax authority guidelines from past cases

https://www4.skatteverket.se/rattsligvagledning/edition/2019...

Summary - interest rates should be based on market conditions and credit risk

- internal loans should not use significantly higher (or lower) than loans between independent parties.

So: the authority already makes a judgment of e.g credit risk. If the tax authority thinks the interest rate was too high, they will say what would have been reasonable - and the company will be taxed for the increased profit as a result of the lower interest rate.

I don’t see anything controversial about this and I assume this is how tax law is interpreted and enforced globally.

It should be noted that such cases are usually lost by the authority - that is, the courts do usually not find the tax authority could prove that the interest rate wasn’t a normal rate based on market rates and risk. I don’t think that’s a problem, but I think it’s important that this is how it works.

It's more complicated than that.

A few percent here or there is all it takes to make a company unprofitable. Most companies don't have huge margins even when they're not trying to reduce them on purpose. You don't need the rate to be higher by a lot, only a little.

And then there is the principal. If you want profits in a jurisdiction, the entity there can get cash by e.g. selling its shares to the parent, which it then has without having to pay interest on. If you don't want profits there, the parent pays nothing (or some nominal amount) for shares and the subsidiary borrows all of its capital, which it then has to pay interest on at prevailing rates which may by itself exceed its profits indefinitely.

And loans are far from the only opportunity for this sort of thing. Pay slightly more for COGS to a sister company and you make significantly less profit, because a small percentage of gross is a large percentage of net.

One percent here, two percent there and soon a 10% margin is -0.1%.

What causes this is trying to tax something (profit) which is independent of any specific activity or jurisdiction. If a company makes phones and sells them, there is no principled reason why a certain percentage of the profit should go to the place where the phone is manufactured vs. designed vs. sold vs. the residence of the investor(s). If your jurisdiction is the one where they're sold but not manufactured or designed etc. and you want to tax that, the bleeding obvious way to do it is with VAT or some similar product/service tax. Trying to contort income tax into that shape is silly and just provides more opportunities for lawyers and accountants to find new loopholes.

Yours is a very well reasoned argument.

We already have rules requiring that! So what's the content of your proposal?

My parent post was a description of how we already have “arbitrary judgement” - so my previous suggestions to e.g tax income based on share of revenue in a jurisdiction would be arbitrary but no more arbitrary than what we already have.

I don't think it is unheard of to have a judge interpret the intention of a law.

I disagree. Tax laws should be simple and explicit. The people in charge change over time. I don't trust that the people later will interpret the laws the same way as the people today, or that either will interpret the laws the same way they were intended, or that the group of people that wrote the laws all had the same intent.

> I disagree. Tax laws should be simple and explicit. The people in charge change over time. I don't trust that the people later will interpret the laws the same way as the people today [...]

You can say the same about law in general, yet law isn't "simple and explicit". It is very complex, hard to grok, therefore only a small amount of people are able to, leading to expensive lawyers and a law system which the poor cannot afford (ie. class justice).

Yes, ideally I also want laws to be simple and explicit. I'd even argue that worked quite well before globalization. Now it doesn't anymore. We need to adapt.

Crimes much more serious than tax evasion have grey areas specifically to create room for judicial discretion. Words like “with malice aforethought” or “forcibly” are used in statutes because the law can’t preconceive of every possible way to commit a murder or rape.

And crimes much less serious, too. There's a LOT of US laws that are intentionally vague and/or grant far too much leeway for the justice system. The grants extraordinary power because of edge cases they want the law to be able to handle ("think of the children"). Yet time and time again, it's the average Joe that has the law abused against him. These overly vague laws are used incorrectly, and yet we keep creating them because we don't learn that the people in power cannot be trusted; most of them are good, but it only takes one bad apple to ruin the lives of many people.

It's unreasonable to expect judges to divine lawmakers' intent on subtle issues of tax policy. If lawmakers want a tax to work a certain way then they need to just write that down so that it's clear to everyone.

You liter ally put it in a preamble.

Like, if you say "this tax break is intended solely for people who sell second hand cars" then you don't have to spend 100 pages exactly specifying every nuance to 100% prevent people not selling second hand cars from taking advantage of it.

Ots called principles based tax code and it works.

I was initially high sceptical of the idea but, based on outcomes, it is a vastly superior system to rules based tax codes. It makes it far simpler and clearer to everyone.

If it is that simple, you can add a clause to the law that makes selling second hand cars a requirement.

Then you have to clarify how much of your expanses are eligable. Just those directly involved in the sale? Upkeep of your main facility? Upkeep of your satalite corporate offices? Your finance division?

What if you sell new and used cars? What if you are actually a battery manufacturer that makes and sells cars and also buys back and resales used cars?

What if you are a software engineer who sells your current car every 6 months?

But what if the people 'engaged' in the selling of the cars are only tenuously engaged in the activity and are simply trying to game the law and rack up paper losses?

All the car buying and selling is racked up by agents working on their behalf and they pay absolutely no heed to buying a selling cars?

http://www.mynewsdesk.com/uk/hm-revenue-customs-hmrc/pressre...

https://www.theguardian.com/media/2014/feb/21/chris-moyles-u...

Enforcement of tax law is based on the spirit of the law, not just the text. Things which are legal for a few years could become illegal the best without any change in the tax laws themselves, though this is only a real risk if you structure your activities within the letter of the law but not the intent of the law.

(I'm a tax lawyer.)

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