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Comment by timje1 | Hacker News Reader

As far as I can tell, they shift profits overseas by shifting extra, semi-fictional 'costs' to the UK subsidiary - for example, if the UK subsidiary of Starbucks makes $100m profit, but has to pay the Canary Isles subsidiary $100m in licensing costs, suddenly the UK subsidiary owes no tax.

Given this structure, how does the HMRC plan on distinguishing between legitimate costs and semi-fictional ones? I imagine as soon as the law is changed, the companies will alter their books so that they shift all their 'legitimate costs' to the UK subsidiary.

I suspect that this shift will end up benefitting tax accountants and lawyers.

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Some of the arrangements can get pretty complex.

http://en.wikipedia.org/wiki/Double_Irish_arrangement

Basically, sending the money from Germany (or wherever) -> Ireland -> Netherlands -> Ireland -> Cayman Islands results in no taxes being paid (or legally due).

Exactly. In the case of Apple:

The Irish company licenses intellectual property from an Apple registered company in the Cayman Islands, and of course the Royalties are so high that the Irish company makes no profit.

So all this money accumulates offshore and can't come back to the US unless some taxes are paid, which is why Tim Cook meets with Congress to try and lobby for a tax repatriation holiday.

Which is also why Tim Cook is raising money in the debt markets to pay shareholders dividends - it's cheaper to pay a tiny bit of interest than pay tax. Absurd that such a rich company is doing this.

Ironically, the money is already back in US - the Caymans entity invests the money in the US stock market via Braeburn Capital, a hedge fund based in Nevada and owned by Apple Inc!

>So all this money accumulates offshore and can't come back to the US unless some taxes are paid, which is why Tim Cook meets with Congress to try and lobby for a tax repatriation holiday.

Ironically a lot of this money would probably be repatriated tomorrow (with taxes fully paid) if Congress ruled out a tax holiday and committed itself to gradually raising rates.

It's just the tantalizing hope of a tax holiday that keeps it abroad.

Or if they just made taxes low enough that it's not profitable to do crazy things like the double-Irish. If we had a permanent lowish tax rate on corporations, they wouldn't save money doing the weird stuff, the money would move to the USA, it would be more liquid (not being tied up in the Cayman islands etc), and the government would get more tax revenue.

It's a race to the bottom. Corporate tax in Ireland is a mere 10% which is what you'd pay if you did a "single Irish", but these companies still find it worthwhile to avoid even that much tax through a more complicated scheme. I'll wager the only "low enough" would be zero.

Corporation tax in Ireland is 12.5% (although your analysis is still correct.)

How exactly do you plan on the US staying solvent charging companies a corporate tax rate of 0%? Because that's what their cost is doing the double-irish.

In 2013 US government receipts totalled $2.78tn of which corporation tax constituted $273bn (~9.9%)[1]

I imagine most of the boost in margins to be brought down increasing compensation or numbers employed so most of that gets brought in to tax coffers via personal income taxes.

[1]http://www.taxpolicycenter.org/taxfacts/displayafact.cfm?Doc...

The US is solvent either way because it is sovereign in its own currency. It cannot physically run out of dollars.

The low corporate tax rates do not hamper the government's ability to spend, but they are inflationary (in a limited sense). The price of investment goods (property, shares, etc.) is driven way, way way way way up because most of the dividends are simply reinvested.

It drives up wealth inequality as well.

They waste a lot of money setting this all up, changing it all around when policy changes, paying armies of lawyers, not to mention the liquidity problems I mentioned. Sure they "own" the money but it's stuck outside of the USA.

Edit: how do they stay solvent now, when the money is periodically re-imported during tax holidays?

Luckily most of the growth opportunities are outside of the US.

Put a small import tax on to pay for the court system & a reasonable amount of police / military. Then fold the rest of the business up.

I think the taxes that predominantly fall on the wealthy are quite low enough. I think perhaps they are a little too low, actually.

How low would the tax rate have to be for that to work?

the end play is for non-us countries to be shafted off their tax receipts while US gets its cut.

I am very surprised that other countries have left this situation to get this far..

We have mining companies in Australia playing this game essentially depriving the Australian public of their tax receipts. Some day these tax receipts will be enjoyed by US public.

This works because under Irish tax law (until 2015) it is possible for a company to be incorporated in Ireland but tax-resident in Bermuda.

An example of how this might work: A US tech company A, wants to sell to customers in the UK. They transfer the rights to their patents to a Bermuda "headquartered" but Irish incorporated company B. They set up a sales company in Ireland C (this one is Irish tax resident). They set up an IP company D in the Netherlands which has favourable tax treatment for income from intellectual property - the same reason that U2 transferred the rights to their music catalogue to a holding company there. They (may) set up a company E in the UK for doing support.

Now if you're in the UK and spend £1000 to buy a product from the company: 1) You buy from C which records revenue of £1000 2) C pays £990 in IP licensing fees to D in the Netherlands. 2b) After covering its sales costs from the remaining £10, C makes barely any profit so pays little tax at Ireland's low 12.5% corporate tax rate. 3) D transfers the money to B after paying a very small amount in Dutch taxes 4) B is incorporated in Ireland but tax resident in Bermuda. Since the money has come in as a transfer from a group company within the EU, there is no withholding tax to be paid. 5) Money is safely in Bermuda.

Of course if A ever wants to bring money back from B it will then have to pay US corporate income tax on it.

Which is why tax law should be a judgement call by authorities rather than a mathematical operation. As long as you follow the spirit of the law you pay the mathematical tax. If you are found to evade tax by any scheme such as expensive international inter-company loans or excessive license fees, then the authorities step in and simply tax you for the amount you would have paid withiut using those schemes.

Sorry, I could not disagree more.

The authorities wrote the rules in the first place.

They shouldn't get to change them after the fact based on arbitrary whims, especially based on nebulous concepts like "spirit".

Laws are always interpteted, that doesn't make it arbitrary. Decisions can be appealed. I'm not saying change laws, I'm saying that when an it can be ruled that a loophole is used to circumvent a law, one should often rule as if the law was broken (and later close the loophole). For example, a company charging itself interest on loans to a parent company in a tax haven should simply not be able to deduce that interest. That was never the lawmakers intention.

Arbitrary judgement calls by authorities are, well, arbitrary. Not a good idea, rule of law is better even if the law is not perfect.

Judgement and law interpretation is used for all other areas of law. It's still "rule of law", still subject to appeal and so on. If laws can't be made that covers loopholes then just outlaw loopholes.

Look up "administrative court".

Of course that depends on trustworthy authorities.

> As far as I can tell, they shift profits overseas by shifting extra, semi-fictional 'costs' to the UK subsidiary - for example, if the UK subsidiary of Starbucks makes $100m profit, but has to pay the Canary Isles subsidiary $100m in licensing costs, suddenly the UK subsidiary owes no tax.

Canary Isles?? The Canary Islands are Spanish jurisdiction and hardly a tax haven. I guess you mean the Caymans or maybe the Channel Islands?

You should brush up on the status of the Channel Islands, Canary Islands and other various EU country administered islands used as havens. (Here's a starter from a simple google search : http://www.lowtax.net/information/spain/spain-canary-islands...)

It has become so complex that no-one can really keep on top of it other than the obvious fact that big companies seem to be able to avoid tax and suck whopping pay packets for their elites (again without any inconveniences such as tax).

I should know, I was raised there.

The Canary Islands have some special treatment with respect to mainland Spain in things like VAT and petrol tax, which are still in line with many European countries (and you don't go that far to buy retail petrol, it defeats the purpose). By the way the data on that site is outdated, the general IGIC (VAT) is up to 7% since 2012 and the maximum is 20%.

As for the other exemptions, they are hardly "tax haven" label worthy. Nothing compared to the Channel Islands, Luxemburg, etc and more in line with countries like the Netherlands.

I have yet to know of anyone not from Spain who'd choose the Canary Islands to dodge taxes, and I know plenty of people with offshore accounts (work in the other Canary - Canary Wharf, London).

Starbucks is not a good example for several reasons. First, they really do have global recognition through the American culture (movies, etc).

Second, this is a fairly simple scheme where a subsidiary pays for using the brand. Sure, it's hard to price and the company will tend towards price that optimizes their taxes rather than the one in line with real benefit but it's not fictional, there's a rational reason for the licensee to license.

Finally, Starbuck's business model makes it really easy to just tax the transactions with VAT. They churn out coffee, not sophisticated financial products, not ephemeral ads. They physically have to be where they operate. And they mostly sell to regular customers, not other businesses. (Well, I'm guessing here.)

It's not like having a chain of companies across Europe and Bermuda. Not even like serving the entire EU from Luxembourg.

> Finally, Starbuck's business model makes it really easy to just tax the transactions with VAT. They churn out coffee, not sophisticated financial products, not ephemeral ads. They physically have to be where they operate. And they mostly sell to regular customers, not other businesses. (Well, I'm guessing here.)

Starbucks' products are already VAT rated where appropriate. But VAT is paid by the customer, not the business. If more of the Starbucks product range was brought into VATable goods Starbucks would just push prices up with big signs saying "TAX INCREASE MEANS HIGHER PRICES".

Unless you're asking for a radical change to tax law to make companies pay VAT?

All taxes and all costs of any viable business are ultimately paid by the customer. You cover everything from their CIT to inventory shrinkage. Companies don't have any other source of income.

The only difference is that VAT is explicitly listed on the receipt. You can count on price stickiness for a while but eventually tax increases will lead to price increases.

Given the tax accountants and lawyers help draft these laws, there is every reason to be suspicious of that!

What you are describing is called Transfer pricing.

http://en.wikipedia.org/wiki/Transfer_pricing

Yes but if you make up the 'price' of licensing the various IP from the tax haven subsidiary each year, and the eventual profit equation for the UK subsidiary adds up to 0 every year over several years, it's clear that the IP licensing purchases are just being used to avoid taxes.

That's profit shifting.

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