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Comment by beedogs | Hacker News Reader

So, let me see if I understand this: the US is going to bat for the big software companies who don't want to pay taxes in other countries, and yet I, an expat American, am expected to file an income tax return with the IRS every single year for my foreign earnings, which may be subject to dual-taxation if I make "too much."

What a crock of shit.

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Well I agree with you that the foreign earnings things completely crazy. Using one bad policy to argue against a good one is just as bad. This is a good move on the part of the US, what we also need is the ability to move corporate profit from foreign subsidiaries back into the US without facing tax.

The moment you're trading in another country you must honor their laws and taxes. If the costs become too high and the margins too low you can always leave, or skip said country in the first place.

The moment you're trading in another country

The difficulty is in defining what "trading in another country" actually means.

If you sell a physical product, there are some unambiguous facts that can be considered: where was the product made, where did its components come from, where was it delivered, that kind of thing.

If you're selling information, say an e-book or an MP3 download, things are slightly more ambiguous.

If you're providing services of some kind, things get much more complicated, as anyone who has to deal with VAT in Europe can testify. There is a concept of the "place of supply", and trying to come up with a standard way of determining that place of supply that is both practical and reasonably fair to all concerned is still a work in progress.

And that is just for sales taxes/VAT, where the parties involved tend to be obvious (someone paid money, and someone received it). With multinational business structures, where you might have revenues and expenses in many jurisdictions and somehow you have to decide how to balance everything up and declare profits, there's an entire extra layer of ambiguity to contend with.

For the US, IRS publications 515 and 519 clarify all that stuff. The IRS wants to tax "US Source Income", there are various criteria that define it. For goods sold from overseas and shipped to the US, it call comes down to "where it is sold", which is at the discretion of the seller. It can be at the customers end if that's convenient for you (but it rarely is).

I worked for a Canadian company that sold niche hardware primarily into the US market. We were based entirely in Canada and just shipped to the US using UPS.

We regularly had to convince US business buyers that they didn't need a W-9 from us, nor did they need to withhold taxes.

For the US, IRS publications 515 and 519 clarify all that stuff. The IRS wants to tax "US Source Income", there are various criteria that define it.

Are we back to talking about sales or other revenue-based tax here? The major dispute we were originally talking about in this HN discussion was to do with where profits are declared and corporation tax or the equivalent is paid; I only mentioned the sales/VAT angle as an example of how easily tax rules can get complicated when you have to decide where some intangible thing happened.

"This is a good move on the part of the US" - not in terms of foreign relations.

They don't seem to care much about that lately, though.

You're missing a step though - which is that these corporations do everything possible to avoid paying the due tax on those foreign profits. I'm all in favour of getting to repatriate profits then - but taking the profits through a tax haven needs to be stopped first.

Take Google in the UK for instance. They don't "sell" anything in the UK according to their tax returns, so claim every deal is actually finalised through Ireland and therefore subject to lower Irish taxes. So their UK tax is minimal despite making large profits from there.

It provides a massive competitive advantage to companies large enough to full off these kind of operations. Google have possibly been caught out actually selling in the UK, but in most cases their conduct is legal - which is why the law needs changing.

If you want to make money in France, the UK, Germany or wherever you should pay local taxes to those countries. It would be grand if those situations could be simplified and made accessible for digital goods (which are more likely to be sold cross border).

The problem with preventing the use of 'tax havens' is that there's no non-arbitrary way to decide if a company is truly using another country as a tax haven, or that they are actually using developers from another country. In the Google example, Google UK is clearly benefiting from the developers that work outside UK, therefore they should be able to pay 'brand fees' or whatnot to the 'main Google'.

Of course in this case most of the development is not happening in Ireland, but how can you decide if the fees are reasonable or not? You'll either end up with a very complex tax code with loopholes (which is non-desirable), or you'll give arbitrary power to tax bureaucrats to enforce arbitrary taxes to certain companies (and this will in practise create non-just tax decisions and corruption).

Google was possibly a poor example as they aren't just using the brand fees but claiming they don't actually "sell" anything in the UK at all. Despite having lots of people in their London officer with sales type titles on LinkedIn...

I think the issue is that companies are currently able to get away with murder in terms of structuring debt and those brand type fees to funnel profits away. Some kind of "reasonableness" test certainly wouldn't go amiss when it comes to judging measures taken by companies. There's already a movement against measures taken solely for the purpose of tax avoidance.

Of course in this case most of the development is not happening in Ireland

I'd say that very little (probably zero) development is done in Ireland, but I get the impression you think that development is the taxable activity (I don't know if it is or not). However, there are 1,700 people doing something in Ireland (from http://www.idaireland.com/google/index.xml, 1/2 way down):

A site reliability/engineering team supporting Google’s European hosting and search activities; Multilingual customer support for Google’s AdWords advertising product; On-line relevancy testing and Google product support; Shared Services to support Google’s EMEA operations.

As an Irish person, I'm getting a little weary of the constant references on HN implying that Ireland is little more than a tax haven. There is a significant number of jobs attached to the US multinational presence here, viz:

- Apple: 4000 employees (http://venturebeat.com/2013/05/22/ireland-were-no-tax-haven-...)

- eBay: 3000 (http://www.irishtimes.com/business/sectors/retail-and-servic...)

- Google: 1700 (see above)

- Facebook: 500 (http://www.irishtimes.com/business/sectors/technology/facebo...)

I could go on, but I have stuff to do, and I feel like I've already done more research than most journalists commenting on this area. For those interested, there's a list of foreign ICT companies operating in Ireland at http://www.idaireland.com/business-in-ireland/information-co...

Edit: Removed woe-is-me comment following a trigger-happy downvoter.

Google does not pay tax in Ireland either, even at low Irish rates. So while it is great that it employs people there and it might anyway, Ireland is integral to its tax evasion strategy, as is the Netherlands.

It doesn't pay very much (corporation tax), but it does pay: http://www.irishtimes.com/business/economy/ireland/google-de... - it took me 3 seconds to find this.

Sorry I didn't mean none but nowhere near what you would expect given this is the entire revenue from Europe.

> "The problem with preventing the use of 'tax havens' is that there's no non-arbitrary way to decide if a company is truly using another country as a tax haven..."

It doesn't matter whether a specific company uses tax havens or not. The problem is that tax havens exist (and there are reasonably good definitions of how to recognise one).

Companies, who's role is to maximise shareholder value/profits etc, will use them within the extent of the law. That means it's the laws that need to change.

> It doesn't matter whether a specific company uses tax havens or not.

The only reasons there are tax havens is because there are tax hells.

No. Tax havens exist because people (and companies) want to hide assets. That's independent of the existence of any tax 'hell'. Unless you're of the opinion that all taxation is bad (an opinion I disagree with).

No, if taxation was low enough, the hasle of putting your money in a tax havens wouldn't be worth the time, money and trouble. Tax havens and the accountants needed to set them up are far from being free. If companies could spend the millions they spend on setting up these schemes on a low flat tax rate instead it would be worth it for them even if they ended up paying a bit more than by putting the money in a tax haven because of the time being saved and the good publicity + the positive effect that reasonable low taxes have on the economy.

>> No, if taxation was low enough, the hasle of putting your money in a tax havens wouldn't be worth the time, money and trouble.

You can't practically lower taxes enough to compete with tax havens.

In general they have low populations and the companies don't actually do any major activity there (there are few societal costs), so the country can survive and thrive with a very low percentage tax take from many effectively non-resident companies.

Contrast this with countries that have much larger populations. The number of profitable corporations per capita is going to be lower than a country that attracts corporations in simply on the basis of their low tax rate.

You'll notice where countries like Ireland are involved, that do have a population to support, they seem to eventually regret the tax haven arrangements they agreed to in the good times.

>> If companies could spend the millions they spend on setting up these schemes on a low flat tax rate instead it would be worth it for them even if they ended up paying a bit more than by putting the money in a tax haven because of the time being saved and the good publicity + the positive effect that reasonable low taxes have on the economy.

You can't really believe this?

You are making a lot of assumptions in your post. Have you questioned any of them? How much it costs to set up a system to avoid tax? How tax havens actually came about? How corporates actually use them? The information is out there and there's at least one good book on the subject (Treasure Islands by Nick Shaxon).

Yes, Google has to pay an army of both lawyers and accountants to take care of all the crazy complex tax scheme internationally. I know several people who run startups with such schemes and they give 1% of their revenue to their accountant. If we got rid of the IRS and equivalent and just used a flat tax on the total amount of revenue, well, let's say the CPA industry would take a plunge and regular folks and companies like Google would save billions.

It's not as simple as that. Suppose I run a company based in France employing 100 people and selling goods by mail order. All my operations are in France, so clearly I should pay my taxes in France. The only economic activity that occurs when I sell to someone in the UK is the postage delivery at the UK end. Your proposition is that I should pay UK taxes, but clearly I should definitely pay French taxes. So which do I pay, both? That's not a viable tax regime.

Trust me, if there was a simple way to fix this, it would be fixed.

It's definitively not as simple as your example. Both Amazon and Google have staff and infrastructure in UK and other European countries. Yet they channel all their profit to lower tax countries (Luxembourg for Amazon and Ireland for Google).

In the case of Amazon, when some sales staff is in the UK (evidence coming from whistleblowers, for instance http://www.guardian.co.uk/technology/2013/may/16/amazon-whis...), when warehouses are in the UK, and Luxembourg seems to be used only for signing the official contract, how is that not tax avoidance?

Of course what they're doing isn't as simple as my example. The point is you have to construct robust, enforceable and fair rules on an international basis that catch out Google et al on the one hand BUT also don't affect companies like the one I describe. The handwavey comments along the lines of "Just make them pay tax where they sell their stuff" like the one I relied to are less than helpful in this regard.

Suppose I run a company based in France employing 100 people and selling goods by mail order. All my operations are in France, so clearly I should pay my taxes in France.

I don't think anyone would have a problem with that. The problem is running your operations in France, supplying to customers in the UK, but declaring all of your profits in The Democratic People's Republic of South West Nowhere (corporation tax rate: 0.075%) where your corporate headquarters (head count: 1 lawyer (PT), 1 accountant, 3 board members who also sit on the board of 97 other businesses run by that lawyer and that accountant) is based.

For those who'd like to know more about Tax Havens, how corporations use them and the effect they have, I can thoroughly recommend Nicholas Shaxon's book, Treasure Islands [1]. For example, I never really considered why all my Amazon purchases mention Luxembourg.

[1] http://www.amazon.com/Treasure-Islands-Uncovering-Offshore-B...

(Disclaimer: That's an affiliate link via my college library. Feel free to strip it if you don't like such things)

It's not dual taxation. The IRS deducts the foreign tax paid. So if the foreign country has a higher tax rate, you will never pay US tax. I'm not saying it's a great policy, but it isn't as bad as it sounds. You can always renounce your US citizenship - think of it as a maintenance fee. Yes, draconian.

That's not true. In Switzerland there's a two year line of people waiting to renounce their US citizenships, because they get double taxed.

> There is a treaty between the United States and Switzerland to avoid double taxation on income, which means that taxes paid to Switzerland by a resident of this country must not necessarily be paid to the United States. In general, an American employed in Switzerland can expect to pay at least as much tax to the various Swiss government levels as he would have to if he were paying tax in the United States.

http://bern.usembassy.gov/general_information.html

There are also different treatments of capital gains, and phantom gains which arise only from shifts in exchange rates. For anyone of any means beyond their salary alone these both can lead to paying more combined tax to both countries than either would require individually. Thats dual taxation in my book.

Phantom gains have been particularly bad in the last decade with the falling US dollar. In Australia, house prices in my area about doubled between 2002 and 2012, but with the change in exchange rates, the IRS calculates the gain as if the price had more than quadrupled!

I didn't realize this part, thanks.

>So if the foreign country has a higher tax rate, you will never pay US tax.

If I live and work completely in a foreign country why would I ever pay US income tax under any circumstances at all? The US is one of two countries on this planet that expect people who's only tie is being a citizen (perhaps never having set foot there and not speaking the language) to file income tax and potentially pay a portion of their income.

Even worse, the US expects you to file with them the way you file in your country of residence. File join in the country you live in? You're expected to file joint with the US then. Which means your foreign spouse who has no ties to the US of any kind (outside of being married to a citizen) will potentially have to pay US tax on their income.

And worst of all, the tax is mostly an annoyance. The true problem is that you have to report every account you have signing power over. That includes pension fund. That includes your companies bank accounts that you manage (which is why an American will never hold such a position in e.g. Switzerland). Lots of banks also won't take Americans on as customers. They don't get enough to warrant dealing with US bureaucracy to report information on these accounts.

>You can always renounce your US citizenship

Which is what many people are doing. The US is one of the few nations on earth that people give up citizenship from.

Yeah, I was only challenging the dual taxation claim. I agree that the rest is draconian.

Out of curiosity, what is the other country?

I can never remember. I thought it was North Korea but lately I heard it was somewhere in Africa. I only know the US is one of two places and the other isn't part of the developed world so it's not the best company to be keeping.

Eritrea.

"too much" being $80k last I checked, where you have to pay US taxes on any amount exceeding the $80k. (or wait, it might be that you pay the difference between your US tax rate and the foreign tax rate...)

You're correct. If you're married and file joint I think that number is $130k. So if a dual income family makes $180 that means paying tax, a portion of which was made by someone who isn't and was never American.

Even the Mafia was never so cheeky.

"too much" being $80k

The foreign tax exclusion for a single person is $97,600 in 2013.

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