Greed is good or useful when greedy people automatically serve the interests of their fellow humans; exchange on free markets is the paradigmatic case. Greed is bad when it works by exploiting or dominating others, including through political force or deceit. At least, that is the way an economist would think if he is willing to make a value judgment in favor of the consumer, which is what he generally does when evaluating a public policy or an economic system.
Assuming that a corporate income tax is justifiable, we can apply the same principle to the international corporate tax system and to the new minimum tax proposed by the G-7 governments (Paul Hannon, Richard Rubin and Sam Schechner, “G-7 Nations Agree on New Rules for Taxing Global Companies,” Wall Street Journal, June 5, 2021).
In the current system, national states may compete in attracting international corporations with lower taxes. The governments who thus compete are greedy: by attracting corporations from states that tax more, they gain more revenues. But the result is to provide incentives for governments not to tax their countries’ corporations at too high rates. This state greed through tax competition is beneficial to most people. The exceptions consist of tax exploiters, that is, those in governments or among the latter’s clienteles who live off other people’s taxes—who, after all the churning of government services and subsidies, are net tax consumers instead of net taxpayers.
The proposed new system would prevent tax competition by imposing a common minimum corporate tax rate, which amounts to creating an international tax cartel. A cartel acts like a monopoly by charging the maximum that the market will pay. Modeling the tax Leviathan as a monopolistic revenue maximizer has an honorable tradition in public-choice theory: see the 1980 book of Geoffrey Brennan and James Buchanan, The Power to Tax.
The sum total of the taxes collected by the cartel members would be higher than currently, which is precisely why some governments want a cartel. The Irish government, for example, would not be able to continue poaching foreign companies with a lower tax rate than the minimum. It would thus lose money and some sort of explicit or implicit compensation, in money or in kind, or else some threat, may be necessary to persuade it to join the cartel. Most taxpayers in the cartel would be worse off.
Note that this tax cartel is not a new idea related to the Covid-19 pandemic. It has been brewing for about a decade, notably at the OECD. Leviathan was hungry before the pandemic, during the pandemic, and he is still hungry. It was hungry before digitization (which made tax competition easier) and still is. Of course, the state is greedy because government actors like politicians, bureaucrats, and individuals in favored clientèles are greedy.
In this attempt to blunt tax competition, state greed is pretty obvious even if it remains opaque to the rationally ignorant taxpayer. For the typical taxpayer, the cost of gathering and understanding related information is not worth the benefit because of his infinitesimal influence on tax policy and the low or unknown effect of corporate taxes on his own revenue. But the net benefit is obvious for the statocrats:
Treasury Secretary Janet L. Yellen and other administration officials have said that getting other countries to go along with a base tax rate on overseas profits would minimize any disadvantage to American companies and make them less likely to move their operations to countries with lower taxes. …
“That global minimum tax would end the race to the bottom in corporate taxation…” she said in a statement. (Alan Rappeport, “Finance Leaders Reach Global Tax Deal Aimed at Ending Profit Shifting,” New York Times, June 5, 2021)
Tax competition pushing national states to levy lower taxes is apparently a “race to the bottom.” Like when your private suppliers compete to offer you a lower price? Ms. Yellen would have been closer to the truth by paraphrasing Willie Sutton: Why do you tax corporations? Because that’s where the money is. Moreover, who actually pay corporate income taxes—employees in lower wages, consumers in higher prices, or shareholders in lower returns, including household pension funds which hold perhaps 30% of American stocks—is opaque and largely unknowable. No taxpayer is easier to pluck than one who is invisible and unaware that he is being plucked. What is sure is that the estimated half-trillion dollars that the U.S. government expects to raise that way over the next decade will come from individuals, mostly Americans, who will have real resources grabbed away from them.
The losers in the new scheme would thus be the consumers and the net taxpayers. The losers would lose more than the winners gain because of the so-called “deadweight loss” of taxes, that is, the reduction in production caused by tax disincentives. Cartelized political greed not only transfers money from taxpayers to governments but it also misallocates resources in the process. The scheme would also increase the power and danger of governments.
READER COMMENTS
Craig
Jun 8 2021 at 2:24pm
The United States will now lead the world to less freedom.
“We’re not this shining city on a hill that Ronald Reagan spoke of. We are not really the leader of the free world. What we’re trying to do is lead the world into diminishing freedom, into being less free because taxes equate to freedom. The more taxes you pay, the less freedom you have. The government takes your money and then you have less. And so what we want is for there to be less freedom and more taxation throughout the world.” — Peter Schiff
Thomas Lee Hutcheson
Jun 9 2021 at 6:21am
It’s hard to believe this is not a parody, or what some simple-minded “Progressive” thinks Libertarians believe.
Frank
Jun 8 2021 at 2:32pm
After World War II the United States led the western world in lowering tariffs. Today, the United States facilitates higher corporate income taxes world-wide.
How times have changed.
Vivian Darkbloom
Jun 8 2021 at 4:01pm
I’ve already made the connection with “cartel” a few days ago here:
https://marginalrevolution.com/marginalrevolution/2021/06/some-points-about-corporate-tax.html#comments
Let me just add another aspect to this process that I find highly disturbing. The proposed rules, as briefly outlined by the G7, would affect only very large corporations (the top 100). The second “pilar” of those rules would re-allocate 20 percent of the excess of income over a threshold profit margin of 10 percent to countries according to the sales in those countries (regardless of the extent of any operations on the ground there). Per this expressed proposed rule, Amazon would be currently exempt because their profit margin is less than 10 percent (for the reason that they currently re-invest a large percent of their revenues and profits. When asked if Amazon would be covered, Yellen recently stated “yes”; in essence, that they would find a way to cover them.
These proposals are already much too arbitrary. I find it very troubling that our political leaders would try to find a way to single out a corporation in such a non-objective manner. This is not only a cartel, I would go so far as to say it is thuggery. I had high hopes for Yellen as Treasury Secretary. I’m re-evaluating my opinion of her now.
Pierre Lemieux
Jun 8 2021 at 5:00pm
Vivian: Thanks for the link and the useful addendum. As for Yellen, she is indeed very disappointing. People who work for Leviathan generally espouse its interests because it is in their own interest to do so.
David Seltzer
Jun 8 2021 at 6:15pm
People are incredibly innovative when when minimizing losses and risk. I suspect, in the face of these proposals, we’ll see new uses of creative accounting to keep profits below the 10% threshold. It seems to me returns in excess of 10% reflect compensation for increased risk. To wit. Beta’s in excess of market risk, per CAPM. The proposed taxes force less risk adjusted returns for increased risk to investors as well as inefficient portfolio allocation.
Pierre Lemieux
Jun 8 2021 at 8:57pm
David: Good points but with two caveats. First (and as your last sentence may reflect), new means of “minimizing losses and risk” with “creative accounting” impose new costs; otherwise, they would have already been used before the new rules. Second, realized returns over 10% may reflect not only past perceptions of increased risk but instead, it seems to me, better past investments, entrepreneurial vision, or plain luck.
David Seltzer
Jun 8 2021 at 10:50pm
Thank you Pierre.
Craig
Jun 8 2021 at 11:10pm
“creative accounting” impose new costs; otherwise, they would have already been used before the new rules. Second, realized returns over 10%”
Just for purposes of clarity here, I believe the term they used was a ‘net margin’ of 10%, no?
Now with respect to “creative accounting” if the the issue is one of ‘net margin’ and they are definitely using ‘net margin’ and not gross margin or operating margin, then it doesn’t even need to be ‘creative accounting’ — if that is the case, if an efficient Fortune 500 Company is operating at a net margin > 10% (at the moment the median is apparently slightly above 10% net margin for all F500 companies, but it has been markedly lower for many years).
Would you make your business less efficient and purposefully incur opex above the EBITDA line? Why? Why do that? Unlikely, but in EBITDA you see your solution, and that is ‘INTEREST’
So, yes, the business COULD borrow money today and recapitalize. They can leverage up, increase the return on equity, decrease the margin and you could return the borrowed money to shareholders thru a stock buyback or a dividend.
This would absolutely incentivize the business to avoid the tax by leveraging their businesses more than they would absent the tax.
Pierre Lemieux
Jun 9 2021 at 9:42am
Craig: Good point about leverage. It is still true, though, that this would have a cost for the company doing it (and perhaps for the economy at the next recession): otherwise, the company would already have done it.
Craig
Jun 9 2021 at 11:24am
Very true, the leveraged business becomes inherently riskier.
David Seltzer
Jun 9 2021 at 11:40am
Pierre, certainly there are costs but rational corporations do their best to minimize those costs. In 2013, Apple engaged in tax arbitrage. Apple’s cash position offshore was 7 billion dollars because they didn’t want to pay corporate taxes of 35%. To payoff investors, Apple borrowed about 30 billion at about 3.5% to pay dividends and buy back stock. The interest was deductible.
Pierre Lemieux
Jun 9 2021 at 11:36pm
David: Suppose an entity minimizes taxes and thus succeeds paying “only” $10. The tax is increased to $15. The entity pays $3 to reorganize its affairs and minimize the tax to, say, $11. In both cases, it minimizes taxes. If the $3 scheme could have reduced the original taxes by more than $3 (like, say, $4), it would have been already implemented before the tax increase.
David Seltzer
Jun 10 2021 at 8:06am
Pierre, I see your point. But, why didn’t Apple already do what you are positing before the tax arb? I suspect the reason for the payout came from shareholder pressure after a significant decline in APPL’s stock price. I believe there was pressure as well from hedge funds holding large long positions in the stock. Thanks.
Pierre Lemieux
Jun 10 2021 at 9:56am
David: That’s my point. Apple (its shareholders) did not take further tax avoidance measures before the possible tax increase because the cost would have been higher than the benefits (the benefits of avoiding taxes), which is not the case after the tax increase. The proof will be that it takes tax avoidance measures after the tax increase (you presumed) that it wouldn’t have taken before. Higher taxes justify tax avoidance measures that are not profitable at lower taxes: in both cases, Apple is maximizing profits.
Vivian Darkbloom
Jun 10 2021 at 10:35am
“In 2013, Apple engaged in tax arbitrage. Apple’s cash position offshore was 7 billion dollars because they didn’t want to pay corporate taxes of 35%.”
Sorry to butt in on this conversation, but based on the responses, I get the strong impression that Pierre did not fully understand why you wrote that. The reason, and David will correct me if necessary, is that if Apple had repatriated that cash to pay a dividend it would have been subject to 35 percent US corporate income tax on that dividend received (somewhat less given that they get an “indirect tax credit” for the underlying foreign taxes they paid). By borrowing the money that tax would have been avoided (or delayed, at least, for another day). Note that the lending party has to be unrelated to Apple.
The “reason Apple didn’t do this before” is simply because they didn’t need the cash before for this specific purpose. Whether or not Apple could have reduced its corporate income tax on normal operations by increasing leverage is not, I think, the point here.
Jose Pablo
Jun 13 2021 at 8:44am
With almost no net debt and 70 b of operating income, incurring more debt make total sense to Apple no matter what the tax code says.
Giving money back to shareholders makes total sense. Instead of, as in the Apple case, having more than 100 b in “marketable securities” not required, at all, to operate your business. Berkshire hoarding an incredible amount of money they don’t know what to do with, mainly because of the tax “penalty” they will incur if disbursed to shareholders, is but one example of the inefficiencies introduced by any corporate tax scheme (local, international, or interplanetary).
What’s the point of having very low interest rates to induce companies to invest while, at the same time, reducing the incentive to invest by taking away part of the profits and reducing the after-tax returns?
It is all “virtue signaling” (politicians have a huge incentive to engage in it). You can bet that the announcements regarding this international tax will be packed together with rosy statements on how to fight climate change.
Buchanan, De Jasay and Pierre are essentially right, politicians’ irrationalities that damage growth and well being, are easy to predict.
Jose Pablo
Jun 12 2021 at 8:07pm
Taxing corporations base on its profit margin is a “total nonsense within a total nonsense” (the latter nonsense being taxing corporations … which, as you mention, is equivalent to taxing “I don’t know who”)
A company can have an extremely low return on equity (or assets) and a very high margin. The only thing you need to get this two at the same time is low “rotation” (sales / assets).
Why should we taxing companies for the fact that they need a lot of assets to operate, even if they get a very low return on these assets, is a mystery to me.
Matthias
Jun 8 2021 at 8:56pm
It’s appealing to model governments as tax maximisers.
But reality is slightly more complicated: how do we explain the widespread absence of land value taxes?
They are basically impossible to evade, and would provide lots and lots of extra revenue in places that currently have high land prices. Like eg the coastal metropolitan regions in the US.
(It’s relatively easy to explain the absence of land value taxes in ad hoc terms, but I would be interested in embedding those explanations in the tax maximisation framework suggested here.)
Pierre Lemieux
Jun 8 2021 at 9:09pm
Matthias: Good question. But just as producers maximize profits within their economic constraints, governments maximize tax receipts within their political constraints. One political constraint is that people are fearful of real estate taxes (and capital taxes in general), especially in the United States (think Proposition 13). In light of Brennan and Buchanan’s The Power to Tax, it is easy to understand why people would fear capital taxes more than income taxes or taxes on the return on capital: the reason is that capital taxes open the whole value of capital to one-shot expropriation by Leviathan. (Granted that a tax of 100% on the returns of capital is, if expected to last, equivalent to a tax of 100% on the value of capital.)
Thomas Lee Hutcheson
Jun 8 2021 at 10:23pm
Applying taxes on business income internationally. If all business were wholly owned by resident taxpayers, the ideal system would be not to tax business at all, but rater the incomes of owners. If some owners are not resident taxpayers, however it will be necessary to tax their share of income at the business level before it is distributed. And getting the information on income generated by foreign businesses partially owned by resident taxpayers in order to tax them fairly is difficult. The minimum tax seems to be small step to deal with these later problem.
Pierre Lemieux
Jun 9 2021 at 12:40pm
Thomas: What’s special about big business owners that makes them subject to special taxation (not to speak of the incidence of the tax on their employees and customers)? Consider the following. An American computer programmer sells his online services to a client in Ruritania. The American programmer is taxed by the US government (plus probably his state). It is very difficult to find an economic or moral justification for the government of Ruritania to have a claim on the American programmer’s profits.
Craig
Jun 9 2021 at 3:37pm
Well, essentially what is happening in many circumstances is that tech companies are engaging in the information age version of transfer pricing. The law might be contemplated to ensnare high margin businesses, but there does seem to be a ‘tax tech’ thought behind the initiative.
You’re citing the basic concept surrounding territoriality of taxation, ie that people pay income taxes based on where they earn that income. In the information age, well, that can get murky, can’t it?
Vivian Darkbloom
Jun 10 2021 at 9:56am
“You’re citing the basic concept surrounding territoriality of taxation, ie that people pay income taxes based on where they earn that income. In the information age, well, that can get murky, can’t it?”
Why is that basic concept now suddenly “getting murky”? The concept of who gets to tax what was developed centuries ago when cross border trade first began. Companies and individuals are taxed where they live and work, where they invest their capital in plant, equipment and personnel and where they also have the risk of loss. Why is that principle changed merely because goods are ordered by internet rather than, say, sending an envoi, ordering by mail, telegraph, telex or telephone? Or that they are delivered over the wires rather than on trains, planes or automobiles?
Is there any logical symmetry to these proposed changes? Are those countries that now demand to tax profits of sellers solely on the basis that their own residents are buying goods and services imported into that country going to allow a pro-rata share of losses to be deducted if the foreign provider has an overall loss? It seems to me that the basic logic underlying these rules hasn’t changed much, if at all. Something else here is at play in these proposals.
The only reason thse concepts are now “getting murky” is because of the murky rhetoric being used by politicians and the MSM to justify these proposed changes.
Craig
Jun 10 2021 at 6:10pm
“Companies and individuals are taxed where they live and work, where they invest their capital in plant, equipment and personnel and where they also have the risk of loss. Why is that principle changed merely because goods are ordered by internet”
But they are moving profits to locations where they have no presence at all. None.
“Google has no office, no staff and little more than a plain PO Box numbered 666 on the sunny Caribbean Island of Bermuda. But it still sends £8billion in profits a year to the island – which happens to have a 0 per cent corporation tax rate”
In reality its not because the services can be ordered on the internet though obviously the internet has a fair amount to do with Google/Alphabet’s business model. The issue is one really perhaps unique to licensed IP.
In theory Google can produce the IP in one jurisidction, let’s say the US, sell it to the Bermuda IP at a loss to help offset advertising profit earned in the US, and then the European subsidiary pays a royalty to the Bermuda company and then that royalty payment is a deductible expense to the subsidiary and of course they will have some incentive to make that royalty payment high.
Vivian Darkbloom
Jun 9 2021 at 3:31am
” I suspect, in the face of these proposals, we’ll see new uses of creative accounting to keep profits below the 10% threshold.”
I believe that “net margin” is the measure they intend even if not yet expressly stated (Amazon would be covered if it were gross margin). It remains to be seen how “net margin” will be defined and who will calculate it.
While “net profit margin” is a rough proxy for “profits”, I think it was proposed this way in order to have the blunderbuss hit big tech rather than big auto. Why not big banking? Countries are already imposing rules intended to ring fence the domestic banking industry and reduce global financial competition.
A difficult question is which accounting method is one going to use to re-allocate “profits” due to “excess net margins”. Consolidated financial accounting at parent level? Even these accounting standards vary. The accounting for *taxable income* is often very different and varies considerably from country to country (primarily for the reason that the tax code has been used as a rudder for economic manoeuvring). Confusing the two on a consolidated global basis is a recipe for enormous complexities and incongruities.
I think the comments on additional global leverage to reduce net margins (while maintaining the same level of return on shareholder equity) is probably correct. As far as leverage is concerned, people should understand that this is a main tool of international tax planning; but, by that I mean *internal* leverage. The group companies in Country A that are subject to a high corporate tax rate will be financed by a group company in Country B that has a low corporate tax rate (this applies not only to financial leverage but licensing royalties). The US has existing rules to prevent such “base erosion” through “earnings stripping rules” (IRC section 163j), thin capitalization rules, anti-conduit financing rules, etc. *In theory* our economist colleagues are supposed to be ensuring that all these internal related transactions are “at arm’s length”. Tax lawyers don’t write valuation reports or do transfer pricing studies. If preventing tax avoidance were the main issue, it is well within the ability of individual countries to combat this through domestic legislation.
Another way to combat this sort of thing is to *reduce* corporate tax rates at the top. If there is a fear of “race to the bottom”, then convergence is something that would help reduce the arbitrage. But, the proposal does not do anything to promote convergence of rates because it says nothing about the maximum. When you see a lack of symmetry, this should be a sign that something is wrong.
All of this means to me that this proposal is not primarily meant to combat (legal) “tax avoidance”. The tax code is being used here to acheive other goals: reduce global competition, protect domestic markets and grab more money from highly successful and competitive tech companies in order to “re-fill the coffers because we need the money” as one EU parliament member succinctly put it. Politicians and economic central planners are using the tax code to try to acheive other goals and this has been with disastrous results.
And, please don’t tell me that “tax lawyers” are proposing these rules to enrich themselves. Janet Yellen and the rest of the G7 (and G20) are not tax lawyers. The need for complexity inevitably arises when naive theorists with no experience in business start out with proposals that begin with “why don’t we just simply…” or “in theory we could just”, oblivious to the unintended consequences. It’s like someone who unleashes an oil spill and then complains that those cleaning up the mess created it in order to fill their own pockets.
David Seltzer
Jun 10 2021 at 1:44pm
Vivian: Thank you for the clarification. You said it better than I did. BTW. Butt in anytime. I am still learning.
Pierre Lemieux
Jun 10 2021 at 9:43am
Craig: The benefits of tax competition and limitations on the state remain (and are probably even more urgent) in the information age.
Craig
Jun 10 2021 at 5:15pm
True but the virtual nature of the product is allowing these companies to really stretch the concept of territoriality. I am going to craft an exagerated example, but one which is close to the Double Dutch with an Irish sandwich.
Let’s say you own a software and you produce software. You are here in the US, you have developers here, we will assume exclusively here, all of your costs of producing the IP occur here.
Now you want to sell the software of course which is really some form of licensing. You sell the rights to sell this software to your German subsidiary. Ok, so you would make a profit in Germany and a profit in the US, but you find that paying taxes in both jurisdictions is inconvenient. So….what do you do?
You sell the IP to a Bermuda company or some kind of Carribean IBC where there is no tax at all. In fact, you have no people there either. The US company sells the IP to the Bermuda IBC (Intl Business Company). Now the German subsidiary is also selling the licenses in Germany, and they will pay some tax there, but they will also pay 50% of the sales price as a royalty to the Bermuda company or something like that.
What do you have in Bermuda? NOTHING.
Craig
Jun 10 2021 at 5:20pm
https://www.investopedia.com/terms/d/double-irish-with-a-dutch-sandwich.asp
Of course you can read that three times and still turn your brain into a pretzel!
Vivian Darkbloom
Jun 11 2021 at 2:32am
OK, Craig. This and the other comment above helps me understand where you are coming from. Let me answer by continuing your example.
First, the primary advocates of changes to existing rules are European (primarily France but also Germany, etc). In your example, I think you gloss over the transfer to Bermuda. If the USCo sells those rights to BCo that price has to be at “arms length” (a contribution for shares would be an “outbound transfer” subject to tax under section 367) So, what is the NPV of those future royalties? Economists developed those standards under Section 482 and it is our Phd economist who would do a transfer pricing study not only to support the sales price to BCo but also the terms of the onward licensing agreement to GCo. There may or may not an “advanced pricing agreement” (APA) with the IRS or even a multi-party APA with the US and Germany (by the way, I remember well the first APA entered into by the IRS, which was with Apple). This reduces the risk the IRS (or Germany) will later dispute the “bona fides”. In these cases I always like to ask “whose ox is gored”? Is Germany’s position any different than if USCo had licensed directly? No. We’ve simplifed matters greatly, but in principle nobody would be if gored if all the valuations had been done properly. If not, the US is the loser, not Germany. (I’m ignoring the fact that the US has controlled foreign corporation rules and that under Subpart F of the Code, the income would not be deferred for US tax purposes or alternatively under our passive foreign investment company (PFIC) rules and that Germany would withold tax on those royalties because it has no treaty with Bermuda). So, we’d need to add some other country to the chain, but nevermind that for now.
What is being proposed is that the tax in Bermuda must be at least 15 percent (pillar 1) and/or that a percentage of the profits must be re-directed to Germany based on sales there (pillar 2). Again, from the Germany point of view, what has changed? At best, from the US perspective, US tax is deferred, albeit perhaps indefinitely. Economists tell me that there *is* presence in Bermuda based on the value of those assets, which implies not only a potential profit, but also risk of loss. If you respect the economic theory and those economic valuations, this *is* consistent with territoriality. It is more consistent than Germany getting an even bigger slice of the pie than they did under a direct licensing from the US.
I’ll be the first to admit that *in the real world* these valuations are most often wrong and that your economic theory often fails when it collides with reality. At the same time, I don’t really think that this is what is driving these proposed changes. France, Germany, Canada et al want more revenue from successful US tech companies because they are not competitive for reasons that have nothing to do with tax. Nothing in this story justifies that countries consuming US products and services have a greater share of the profits than does the US company that creates and sells them. What is also overlooked here is that for every Google or Facebook, there are literally hundreds of US start-ups that fail. The US absorbs those losses for tax purposes, not the countries that want to benefit only from the profits of those who the hit the home runs and not the losses of those who strike out. This last point has been particularly absent in the discussions of this issue.
Bottom line is that I agree that the importance of technology has made assets much easier to move around. I’m not sure that the current proposals have much to do with the concept of “territoriality” or even tax competition. I believe that the origin of the problem is that countries like France have not been competitive for reasons that have nothing to do with tax (education, labor laws, regulatory rules and even culture play a bigger role). The US has not been successful because of more favorable tax rules. In fact, on balance, the US corporate and international tax rules provide a bigger obstacle to those successful businesses than do the rules of almost any other European country I can think of.
Craig
Jun 11 2021 at 12:18pm
Just a quick note to Vivian because I think the global minimum tax is also designed to make it less attractive to move an organization’s activities. I’m not sure that they are so much concerned that Bermuda charges less than 15%, I think, and I could be wrong on this one of course, that they want this agreement to make sure the current G7 members tax at minimum 15% and I believe that is part and parcel to this issue because its these sorts of things that allow them to pay less tax in certain jurisdictions, in essence, it precludes them from taking the full amount of deductions available to them, or they take them but the 15% essentially creates a ceiling of sorts.
Personally I think it lacks nuance, I think the better way to do this would be to phase out/disallow the deduction from a foreign ‘related entity’ on a sliding basis based on the net margin of that related entity.
In other words, if they use Bermuda, they would have a gazillion in profit in Bermuda but de minimus expenses. In essence the Bermuda organization would have a near 100% net margin. So the taxing authority should look at that and say, “Well, your global margin which would have to include the Bermuda entities high net margin profits, is 15%, the Bermuda organization is 100%, so we are going to disallow, say, 85% of the royalty expense. Or perhaps begin phasing out for related entities with a net margin double the global average.
Vivian Darkbloom
Jun 11 2021 at 1:34pm
I don’t really understand your first paragraph but I’ll point out in regard to “they want this agreement to make sure the current G7 members tax at minimum 15%” that all G7 members currently have corporate income tax rates well in excess of 15 percent.
“I think the better way to do this would be to phase out/disallow the deduction from a foreign ‘related entity’”. It is certainly within the power of individual countries (such as France) to do exactly that. The United States does under so-called “earnings stripping” rules. See IRC section 163(j). You don’t need an international agreement.
Pierre Lemieux
Jun 11 2021 at 9:04am
Craig: At best, you are making an argument against the income tax (corporate and personal). At worst, you are making an argument against the benefits of exchange, arguing that an American author (say) who sells a book to a French reader should be taxed by the French government, as an American programmer who builds websites for French companies, or as a generous American donor who gives money to a French woman; that is, making an argument for the provider A of benefits to B to be taxed by B’s government if A does not live in the same place as B. But how far? Ultimately, the government of California should tax its residents who export to Florida; the Los Angeles city government should tax Silicon Valley companies; and your neighbor’s homeowners’ association should also tax you if he receives a service from you (assuming the neighbor himself has not taxed you first!) And note that all these income taxes (contrary to, say, sales taxes) would specifically target people who provide benefits to people who reside in different places.
Craig
Jun 11 2021 at 11:28am
“American author (say) who sells a book to a French reader should be taxed by the French government”
If you sell a single book to a person in France, this is a situation where you are extremely unlikely to have what are called ‘minimum contacts’ where you would be subject to the jurisdiction of France for purposes of income taxation, right?
But we’re not discussing de minimum transactions, we’re discussing situations where, AS A GIVEN, you have minimum contacts with France. You’re selling millions of euros of books, you have a printing office in Paris, you’re shipping from Toulons all over France. That French subsidiary of your American company is unequivocally subject to taxation in France.
Of course you note the taxes in France are rather high, right? So, all I am pointing out is that your clever accountants figured out is that they can load up the French income statement (tax filing) with legitimately deductible business expenses and they are going attribute that to a territory that you have ABSOLUTELY NO CONTACT WITH AT ALL. None.
I’m not arguing that the people buying the book don’t benefit, I’m not arguing against the income tax either, though I personally don’t like the income tax, this alone isn’t an argument. Its an argument against a WRINKLE of the income tax which lets certain economic actors escape income tax by obfuscating the territory that they have a genuine nexus with.
Again, I’m not supporting the income tax, but if there is to be an income tax, that income tax should be imposed based on where you earn that income in my view. If there is to be an income tax it should be guided by the general concept of ‘territoriality’
In the case that we are discussing, specifically employing Bermuda as a jurisdiction solely for tax purposes, its essentially a form of tax strawman, right?
It starts to look like a ‘fraudulent conveyance’
Jose Pablo
Jun 13 2021 at 10:20am
Why? … “rationality” or “fairness” are the real “strawman” in any opinion about the tax code (including about its “intentional wrinkles”).
If you have a lot of people working in France (because you have a printing office and some store houses) you are already “paying” (like in “the government is getting thanks to your activity”) a lot of money.
Even if you manage, somehow, to minimize your income taxes in France. If this “intentional wrinkled” increase your activity by around 4% governments are better off leaving this “wrinkled” in the tax code (as far as “rationality” is concerned).
Regarding “fairness” I don’t really get why successful activities should send money to the government in order for this very same government sending this money to unprofitable enterprises. After all, companies earn money by engaging in the production of products and services that are more valuable to people that the supplies they need to produce them … which is a very relevant services to the world, by the way.
Tax code discussion should focus on the “effectiveness” of the tax (minimizing the negative impact on the activity). This argument seems to be missed among the fog of pretending “rationality” or “fairness” … a total waste of time. There is none now and none to be expected in the future.
Greedy politians just smile looking at “powerless rational people” bitting fouriously the strawmen they throw at them.
Jose Pablo
Jun 13 2021 at 9:01am
The whole discussion about how to tax corporations misses one relevant point: corporate taxes are but a tiny part of the taxes paid by the “company”.
P&Ls are designed to highlight how much money a corporation earns but if you reorder the data to answer the question of “where is the money paid by clients going?” (An, at least, equally legitimate question) you will realize that of every $100 paid by clients at least $30 are going to the government (once you take into account: sale tax, payroll taxes, employee’s income taxes, duties, etc… ), with around $4 going to shareholders, via dividends or share repurchase (using figures for the airline industry).
Corporate taxes represent $1.2 out of every $100 paid by clients … in other words, 4% of the total amount of money government is getting from corporations’ activity.
The fact that we pay so much political attention to this tiny part says more about our “pretense of values” and “political demons” that to any rational approach to the problem of how to finance our ever growing Leviathan.