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Comment by koolba | Hacker News Reader

> Once you set up a way to make it look like you owe the 2nd company tons of money, now your 1st company no longer is "profitable" and actually in debt losing money, which means it doesn't need to pay taxes on the massive profit it's making.

It’s called “transfer pricing” and it’s been going on for decades: https://en.wikipedia.org/wiki/Transfer_pricing

Short of a revenue (as opposed to income) corporate tax or VAT, it’s a very tricky problem to address. Maybe an excise tax on foreign remittances to match the highest corporate bracket.

Or you just scrap corporate tax entirely because it’s a terrible idea anyway.

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Incidentally, this is the real reason why "Western" states are so hung-up on copyright enforcement: nevermind the movie bullshit, IP is a door throughout which profits can be arbitrarily shuffled around by the rich and the powerful. It creates a parallel reality where imaginary goods can be transferred from jurisdiction to jurisdiction, creating infinite possibilities for transfer pricing. And if anyone objects? Ahh, they clearly want to starve artists and creatives!

It's genius, and we all go along with it because how can you hate art and imagination? It's such a fundamental side of human nature. By turning its output into pseudo-goods, we think we're moving up in the civilization scale, whereas we're just enabling a parasitical accumulation of capital.

Can you explain how that works for someone ignorant like myself?

In general, every country you do business in will charge taxes based on the profit you make within that country. So what you do is:

* Set up a company in the country where you'd like to pay taxes, and give it all of your intellectual property.

* Set up subsidiaries in the countries where you don't want to pay taxes. Have them pay licensing fees to the first company for the IP, making sure to set the licensing fee high enough that the subsidiaries don't make much profit.

* Now most of your profit lives in the first country, no matter how much business you do elsewhere.

>intellectual property

A concept invented by and for lawyers. Call it imaginary property.

I don't think that it's productive to make up snarky names for concepts I don't like.

In this particular thread that is exactly what it is. A fiction to transfer wealth nearly tax free.

Imagine that there are two opposing views of a subject and then a big middle ground of people who don't care.

If the middle ground uses a term to describe a thing, then the wings have to use it as well. Or there has to be a real push by someone spending a lot of money on advertising to recast the concept. If someone goes around at the individual level making a thing of talking about "imaginary property" they are just going to look like an isolated crank. It isn't helpful.

On the other hand, when the attention of the middleground people is on exactly the aspect of the concept that one wishes to highligt, then that seems like the right time to highligt.

Tax-evasion done by money-transfers based on fictional value attributions of something. Seems exactly like "imaginary property" to me.

You can try. But the likely outcome is you'll spend a lot of time defending picking emotive word choices and the conversation is going to get distracted from substantive arguments.

> to recast the concept

I agree with both of you. I think the concept has to be recast, and that's going to be a very hard thing to do. I think a lot of money and effort was spent to cast these things as "Intellectual Property" in the first place.

However, it was on HN that I first saw the term "Imaginary Property", and I've seen that more and more lately. So there's hope. If usage of the term grows exponentially, it might happen.

All property is imaginary. It's a human concept enforced by legal systems and force.

(Talking as someone who likes the concept of private property).

Physical property exists.

Physical things exist, the fact that they are attributed to certain humans as property is a social construct.

Genuine question: does this require IP though? What prevents the subsidiary from paying the parent for "consultancy" or any other amorphous but non-IP service instead?

Most activities can be quantified, at worst by looking at sector averages. There is already plenty of tax law around those, about what you can and cannot realistically expect tax authorities to believe. The IP field, though, has massive value swings, that make it fundamentally uncontrollable. How much is the word "Starbucks" worth? How much is "Nespresso" or "Linizio"...? These can move hundreds of millions in one go, whereas you would struggle to achieve it with murky consultancy contracts over several years.

You might be interested in the OECD's way to make blatant tax avoidance like the original comment a little harder.

[https://www.oecd.org/tax/beps/]

Groups where the ultimate parent is responsible for roughly over 1Bn in revenue are required to submit Country By Country Reports covering all cross border transactions their details and their transfer pricing methodology, and, in many cases, the underlying documentation of those transactions (contracts, loan agreements etc.). These are digitally submitted via your local jurisdictions Tax authority and shared with all member countries. Companies as part of that group are required to lodge more detailed information at a local level on just their cross border transactions with others in the group. This allows for some level of check that information being reported is globally consistent between tax authorities, who are then able to identify and place controls on unwanted behaviours.

It should be noted this is framework is all very new. IIRC Country By Country reporting became compulsory in the UK only last year.

> Or you just scrap corporate tax entirely because it’s a terrible idea anyway.

If you scrap corporate tax would rich people hold all their wealth in corporations so as not to pay any personal income tax?

The best way to "tax" the rich is to make them spend all their money. The more the rich consume, the more the less rich benefit. It's turtles all the way down after that.

So please order that custom yacht now, all you HN unicorns.

What if the point of taxes is not simply to redirect and redistribute funding, but also to reduce economic activity and, by extension, emissions and inflation?

Not at all!

It only redistributes work toward what rich people want.

Investing into something actually useful would be much better.

Scenario A: yacht is bought - economy is redirected toward luxurious yacht building, people get paid to work on building a yacht

Scenario B: investment into housing - economy is redirected toward house building, people get paid to build houses

scenario A can be a good one only when this people would be unemployed and seeking a work otherwise. Or if you think that building luxurious yachts is more important than alternatives.

> The best way to "tax" the rich is to make them spend all their money.

What a catastrophic idea. Do you want economy tuned to the tastes of the vain, wasteful, and capricious? In such economy there is no car, real estate, mobile phone, or clothes for you.

Here we see a trickle-down advocate in the wild, folks.

You tax it when they take the money out to spend it on themselves

That would require a progressive, rather than moralistic, sales tax.

Except they don't. They create corporations to do it for them.

As long as creating a legal fiction is a mere matter of having someone else do paperwork, you either need to extract tax from legal fictions, or kiss a big chunk of taxable activity goodbye.

I don't think that's accurate if we're talking about large publicly listed companies, the only way for shareholders to spend the money on themselves is to take it out via dividends or sell the stock for a capital gain.

Shareholders can take out a loan for spending money that uses the shares as collateral.

To pay back the loan they need to sell the stock which is a capital gains event.

The two main tax avoidance strategies would be people running and retiring overseas just before selling, or never selling and waiting for the cost basis to be reset upon their death.

This isn’t legal. A corporation that leases someone a car and a house is paying them a taxable income, regardless of it not being a cash income.

It is trivial to work around.

Spending would turn into various non-monetary and indirect compensations. It is going already but would get even more efficient.

Yes, Yes, they would.

> Short of a revenue (as opposed to income) corporate tax or VAT, it’s a very tricky problem to address

There's another post in this thread about changing IP law itself to disincentivize these arrangements. Seems like a good idea.

> Or you just scrap corporate tax entirely because it’s a terrible idea anyway.

Then the owners will just get less salary but will have the corporation pay for their housing, transport food etc.

How does that help in making the system fair?

In the US, at least, the IRS takes a very dim view of this. Nearly all of it would be considered imputed income and would be taxable.

Well the fix for this is to tax revenue, not profits.

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