Comment by cemerick | Hacker News Reader

Comment by cemerick | Hacker News Reader

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I continue to have difficulty understanding the gnashing of teeth around various "tax minimization" strategies, e.g. being "immoral" and all that.

Setting aside those companies that deal in 'hard goods' (e.g. Amazon-the-store, Starbucks, etc), could someone explain the rationale of taxation w.r.t. corporate domicile?

Say I offer a software-based service in the U.S. (i.e. all the servers, billing, admin, dev, etc are done there), and by dint of luck/happenstance, a majority of the userbase ends up being in the EU. I (or my ISP) or my customers (or their ISP) are paying for the pipe between us (which is presumably taxed however the relevant localities have chosen); beyond that, I am not benefiting from any government services in the EU.

Should I nevertheless pay taxes in the EU (perhaps proportionately to each member nation based on the mix of nationalities of my userbase)? When I set up a European office, shall I be shamed into setting up HQ in whatever country houses the majority of my customers that year? What happens when that mix changes such that the majority of my customers are in a different nation?

All of this sounds absurd, but it sounds like the standard (or something similar to it) being applied to Dropbox in this case.

I think the argument is that if you're making a profit off a country's citizens, you should also be paying taxes to that country's government, otherwise there'll be a large net flux of money out of that country (e.g. with Amazon, Starbucks in the UK).

Let me put it another way, you say that:

>beyond that, I am not benefiting from any government services in the EU.

but you are benefiting from the government. Without a stable and moderately successful government, your customers wouldn't be in a position to be able to pay for your services. And that's exactly why most of your customers could, conceivably, come from the EU, but are unlikely to come from a developing country.

I'm not saying I agree with this; I don't know enough about how this sort of taxation affects the system as a whole, but I believe that's the logic.

The problem with corporate tax is that it's not a tax on a specific, quantifiable activity, like "income", "capital gain" or "sale". These are pretty difficult to fudge.

Rather, corporate tax is a tax on making a profit. Consider the battle between development and sales - who's making the profit? To the very untrained eye, sales, because they're the ones bring the cheques home, and, indeed, salaries and bonuses in that department seems to confirm that. But without a good product to sell, there would be no sales, so it's obvious that devs deserve a cut as well - but how much?

That's essentially the same discussion Mrs Hodge is trying to have with Starbucks. Are the profits generated by sales (the stores in the UK) or by devs and backoffice (marketing, branding, sourcing, supply chain, finance etc etc etc), conveniently, but legitimately, placed outside the UK?

I had honestly never considered such a notion. Considering hard goods for a moment: when I order something from a foreign merchant, I sometimes need to pay import duty. I suppose this line of thinking would have the U.S. collecting the same duty from me as well as levying a tax on the merchant for the privilege of having me delivered as an educated, well-heeled-enough customer?

There aren't (generally!) duties on "imports" of intangible products and services worldwide, but the hard good example makes the notion sound even more absurd. This all reminds me of the crazy "Amazon" rules U.S. states have been setting so as to define affiliates as nexuses for sales tax purposes.

The rule generally applied, which I think is a sensible one, is that you pay tax in a country on profits derived from it IF you have a permanent place of establishment there (branch office, sales office, retail outlets etc). This means a company that has no physical presence in a country but sells products digitally there has no taxes due (except sales tax/VAT in the EU in some cases if over a certain threshold).

The issue in the case of Amazon, Starbucks et all in the UK right now is that these companies DO have a local permanent establishment, but manage to minimize their corporate tax through a mechanism called "transfer pricing", whereby they pay their sister branches in lower tax jurisdictions license fees etc for using brand, IP, software systems etc, thus increasing their tax deductible expenses in the high tax jurisdiction (UK).

What's useful to note is that none of this would be possible without double taxation agreements and the EU, both which successive UK govts and tax authorities have painstakingly and explicitly negotiated and agreed to. If there are no double taxation treaties, taxes for cross-border payments would in fact be quite punitive (withholding taxes etc).

It seems to me the UK govt thought they would benefit from these agreements when they where originally negotiated, but it has not turned out to be the case. The whole "moral outrage" is just the government passing the buck on a ball they themselves dropped.

As a side note, I don't believe moral outrage is conducive to the rule of law. These multinationals follow the letter of the law and have no further obligations. If the government thinks otherwise, they should renegotiate their positions and stop pointing fingers at others for a ball they dropped.

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