Apple is a particularly difficult case, because they control every link in the chain of supply from manufacturing to retail and pay less than 1% effective corporate tax from their profits. From every step of the supply chain.
It is very difficult, if not impossible, to compete with Apple without having a similar end-to-end control of manufacturing to retail. If a company has to purchase their products from a manufacturer or sell their product to a 3rd party for retail, they are losing to Apple because that flow of money can't be hidden from the tax man.
Europe is currently facing major financial issues and a significant portion of this is that money gets funneled away to the US (or offshore accounts of US corps) without the fair share of taxes of their profits left here.
The corporate tax rate in the US is actually higher than in many EU countries. The reverse is actually true, US companies choosing to base their "head quarters" in Ireland and the Netherlands.
It's worse than that. The "HQ" is in Ireland, but pays "royalties" to an IP holding company in the Cayman Islands, which is where all the profits go, on which no tax is paid. This is the "double Irish" referred to in other comments.
A very important piece of information is left out of the article: what Facebook UK is paying in "license fees" to other parts of Facebook.
The accounts show £131m in "administrative expenses", of which I can account for £86m in staff costs from the same document. £35m of that is a "share based payments charge", which represents the accounting treatment of share options. Of course, the shares handed out are shares of the US parent and not the UK subsidiary.
As for Toyota, Japan has the second highest corporate tax rate in the first world, after the USA. And until two years ago, Japan had the highest rates.
So I don't think Toyota was running the same schemes we see in tax havens.
If (and I have no idea of this is true) Japan doesn't tax transfers from foreign subsidiaries to domestic parents, and the US allows transfers from domestic subsidiaries to foreign parents to be expensed, such an arrangement would avoid taxes entirely, making Japan's tax rates irrelevant.
So can some tax attorney (we used to have a few on here) or CPA/CA break down how exactly this happened and how other people with corporations can do similar things? If Apple isn't going to be paying their "fair share" (yeah, that's a contentious term I'm throwing around) might as well benefit from the money they spent on lobbying and do the same thing they're doing. I'm in that limbo region where Julius Baer won't approach me as a 25MM+ net-worth individual but I'd still like to minimize what I pay.
You need to have "intellectual property" of some sort (patents, brands for franchising, copyrighted software). You create a number of corporations - one that is tax resident in a tax haven like the Cayman Islands and domiciled in Ireland, one that is tax resident in Ireland, one in the Netherlands, and one in each country where you sell your goods or services.
You then go and hire a good tax accountant who has experience with the Double Irish tax dodge (look it up on Wikipedia), and Bob's your uncle. (Though a double irish is harder to create for new firms since 2015 - you might have to acquire a ready-made shell corporation.)
Of course all this only makes sense if you have profits in the tens or hundreds of millions, so that paying for the shell companies, your Irish headquarters, your tax accountants and your lawyers is cheaper than actually paying tax.
The part I don't understand is that the brand was developed in the US. Don't you have to transfer the IP at something approaching fair market value to the tax haven corporation? How could you possibly have the resources (in the haven, no less) to do this without loaning money (at interest?) backwards?
So if you sell something on the open market anywhere, you can't sell it to your foreign subsidiary or owner for too much more or less than the open market price. But things get dicey when you're talking IP: patents and trademarks don't trade on the open market but are absolutely vital for a subsidiary to be alive, right? Amazon isn't Amazon if it can't call itself "Amazon".
The other trick is to offer some kind of service that's difficult to precisely quantify like having an accounting or service center in one country that every foreign subsidiary is required to pay for. It might not be a reasonable price but the cost of auditing all the call center records to find out it's costing $3/minute (on average) for a particular US based company to outsource its support calls to somewhere instead of $0.10/minute is going to be very steep. Do this across a few different lines of corporate support and your profit hiding is accomplished.
It's certainly not a level playing field when competing against a multinational like Apple. It's also hard for countries to enforce competition rules (e.g. Anti-dumping)..
Apple sells a huge number of physical devices - phones and tablets. They created a new market, and now governments are able to collect VAT and sometimes customs tariffs on all those smartphones. Why not let Apple have what's left?
Not trying to deny what you say is true, but just out of curiosity, is there any proof that Apple is doing this and how do implementations of this lobbyism look like? Just trying to understand how all this works.
Maybe it's because of coming from a European background, but this kind of questions are quite baffling for me. I know you mean well, but I find that the idea that corporations do this kind of thing doesn't need any more proof than the fact that the earth is round.
If one follows the news, there are constant reminders of this kind of lobbying going on (corporations asking for special treatment, especially when it comes to taxes) for a whole century. Besides a lot of this is done right out in the open. I mean coorporate lobbying was invented exactly for that -- to push governments for favorable laws, special treatment, laxer environmental and other protections, etc. On top of that, there are all kinds of under-the-table deals (with lots of them exposed frequently) with politicians and corporations.
That said, here are some pointers to the issue. First the general Wikipedia article:
A number of published studies showed lobbying expenditures can yield great financial returns. For example, a study of the 50 firms that spent the most on lobbying relative to their assets compared their financial performance against that of the S&P 500 in the stock market concluded that spending on lobbying was a "spectacular investment" yielding "blistering" returns comparable to a high-flying hedge fund, even despite the financial downturn of the past few years. A 2011 meta-analysis of previous research findings found a positive correlation between corporate political activity and firm performance. Finally, a 2009 study found that lobbying brought a substantial return on investment, as much as 22,000% in some cases.
https://en.wikipedia.org/wiki/Lobbying#United_States
One possible solution is making corporate lobbying illegal, with severe penalties, i.e. long prison sentences for those involved. Corporate lobbying corrupts democracy, so why should it be allowed to exist?
Then, simplify the tax system. The more complex a system is, the easier it is to game. If necessary, tax revenue instead of profits: if a widget is sold here, the company which sold it should be taxed here.
I agree with both ideas. Unfortunately for the thing to be fixed those passing laws should benefit from it being fixed -- but on the contrary they benefit for it being broken.
So, the first thing that should probably be fixed is: no campaign donations, at all.
Campain donations just let the politicians catering to the richer population get more advertising and marketing power.
I'd go as far as forbid all political / campaign advertising. If they want to convince, let them organically convince their local voters, then their state, and up to the whole party etc. Not with costly marketing, videos and large, costly, speaking appearances.
100% Right fix the laws. This is horrible and the Rich pay round 10% tax rate (They argue they pay so much? They pay a ton in taxes but in terms of percentage they pay less than most people)
The fact that companies are able to create loopholes via lobbying is the problem. When you accept corrupt government as an unchangeable fact of nature, you've already conceded defeat.
or... you might become a realist, and maybe try to come up with solutions applicable in real world, on real people and real situations.
I'm not claiming I know what the solutions are. But I am damn sure theoretical solutions for theoretical situations tend to fail spectacularly in reality, no matter what topic they are about.
100% agree, and this has been very frustrating for me over the last decade or so. Elected reps (in the US, at least) are barely going through the motions of obscuring the quid pro quo any more, and it seems like nobody really cares.
How can this loophole get fixed? My (admittedly minimal) understanding is that these companies don't have to pay taxes on the money until they repatriate it. From the perspective of countries like the US or UK, Apple earns very little in "profits" because they have expenses in licensing fees between their own companies that effectively pushes the profit to countries with very low corporate tax rates.
This all sounds sinister and it certainly is clever. But I don't see an easy way to fix it. I don't think a tax system where countries can tax profit that never enters its borders is viable. How would the UK feel if the Cayman Islands levied a tax on profit earned by UK companies?
a very heavy handed approach that will almost certainly fail in the real world would be to tax corporate revenue, not profit. This is VERY invasive and I would not recommend it at all but I don't see an approach that is simple enough like this that does not require international co-operation.
In my simple mind, the failure is in defining profits. How do we define profit? The devil is probably in the details. *
If Wally's world buys widgets for $6B and sells them for $10B but then turns around and spends $5B on long term infrastructure, did they make a profit? Do they owe any taxes?
Something closer to home: Once we get into the details, it is very easy to get lost in there. When they spend $100 per hour to hire a consultant (programmer), does that count as capital expenditure? How?
I am not a lawyer and I am definitely not an accountant. I would imagine loopholes can be closed but it requires technical expertise that I lack.
* Perhaps only allow cross-border expenses to countries that honor a certain level of agreement?
PS: I am not so sure about taxing income in other countries. None of what I say applies to expatriating money from overseas. It only applies to monies a company makes in our country and tries to ship overseas. If Apple sells $100B worth of iPhones in the UK, should they pay corporate income tax on it in the US? Why not pay corporate tax on that in the UK?
I think he means invasive as in it would affect companies' bottom lines more. Imagine something that primarily runs on a razor thin margin and makes up in volume and has $100M revenue and $5M profit, versus a company that has high margin and has $50M revenue and $5M profit. The first would be taxed much higher even though they have the same amount of profit.
Let me ask you then, do you think it's right that the tax burden is on those locally-run frozen yogurt places, over the extremely well-off multinationals like Apple? Is that the way you want to see the world run?
Of course I don't think it's right. I was only making the point of what they do is not skip paying taxes, but effectively trick the financial system into paying as little as they can.
I don't think he is saying that at all. Of course Apple is going to use every loophole they find. They are a business and that business is making money. The only way to fix it is to remove the loopholes.
Well, yeah. Like, if your company is headquartered in Cupertino, maybe then act like it when tax time comes and pay your US and California taxes.
Setting up a nesting doll stack of shell corporations to dodge all that is, right now, legal, but is that the world I'd want to have a hand in building? Nope.
general principle was there before apple. but for sure they do cook a 'book' or two, as one of the most wealthy companies in the world, without any strong sense of morality (not saying lack of it, just usual corporation as many others).
If you can invest for example 500 millions USD in bribes to gain 5 billions per year in not paying taxes, that's a damn easy decision for some CEO. And those fictional 500 millions will get you quite far in these times, where lobbyists in capital cities in both EU and US are not even illegal (in my opinion should be shot in sight), but just part of daily life.
Because we have quadriplegics who need 24 hour care so they don't die. Just to choose one random example of why we choose to have a government that levies taxes and provides services.
You don't choose anything (apart from some semblance of choice through voting). Stop using voluntary language for something that is compulsory. This isn't an argument against gov, but your reasoning about choice is after the fact.
We do choose. We vote in a government that provides services for those people.
Do you think that if there were a society of people where a majority were callous enough to deny those extremely disabled their medical care, that they wouldn't just vote out the bums who gave them that care, and the new generation of politicians wouldn't then rewrite the laws?
> Why not finance helping quadriplegics from increased VAT?
Because VAT, beside being a very effective tax (it's the biggest source of income of most countries), is the most unfair one.
Say a country have a 20% VAT
Low income household need to use the entirety of their income to survive (food, housing, etc). So effectively 20% of their income is collected as VAT.
Now a upper class household, let's say they save 25% of their income each month as retirement plans etc, and spend the rest.
They've been effectively taxed at 20% of 75% of they income, so their effective VAT rate was 15%.
While you often see very high income people advocate for flat rate tax instead of progressive tax, none of them have the nerve to propose a reversed progressive tax like VAT is, where poor people pay proportionally more than rich people.
You can mitigate that effect by some kind of basic income or return of paid VAT (you collect receipts or something and get the money back up to certain amount or 100% up to certain amount, 50% up to another step etc.). You can make VAT progressive this way.
there is no enforceable way this would work. everybody would just pay some homeless/unemployed to buy him that expensive cool little thing, and give him 10 USD for the job. try to prevent that :)
at the end, poor people would become less poor, but only by screwing with system, and only very few of them. you can put some limits on who can buy what, but this will inevitably create a massive bureaucratic overhead, meaning another set of useless government jobs that create no added value, but draw cash steadily from treasury.
The best possible tax scheme for poor people would be a simple flat tax that is impossible for rich people to avoid.
I've always felt your definition of "most unfair" to be a great fallacy. Yes poor people pay a higher percentage of their income. They also receive more in benefits than they give and the flat tax ensures the rich pay their share. The more complicated you make the system the more it will benefit the rich.
VAT is a net benefit for the poor. Making the whole system work that way, particularly in the face of globalization, is the best course of action. To declare it unfair is to cut off your nose to spite your face. In my opinion.
>The best possible tax scheme for poor people would be a simple flat tax that is impossible for rich people to avoid.
You're looking at the wrong end of the telescope. It's really not that difficult to look at a tax table and cross-reference your income, so a flat tax is a very minor improvement.
Where every tax system gets tripped up is in determining what qualifies as income. People who manage to avoid taxes aren't somehow lowering their rates; they're getting inflows of money excluded from the "income" accounting box.
It's not an easy problem to deal with, either - states have been trying for centuries. Most of the write-offs individuals and corporations take are perfectly reasonable for some situations and very much abused in others. As you try to prevent abuse you end up with a tax code that's so complicated there are more ambiguous "gray areas" for people to take advantage.
The best possible tax scheme for poor people would be a wealth tax. Make it a flat wealth tax, and I'm with you: 10% (or whatever) of what you possess, into the community coffers every year. Don't muck around with income, it's too easy to game.
Some of us initially poor but nouveau-rich would like to retire before we're old, you know. A wealth tax makes that much harder than it already is. You would also kill property ownership by all but the ultra-rich who have enough assets elsewhere to make up the continuous drainage because home appreciation does not grow that fast.
Wealth tax is obviously (I think!) the best kind of tax but the problem with it is it's hard to collect (you would need to assess wealth of everyone and that is a problem).
So if I start my own company I have to give away 10% of that company every year? Because I own shares in my company. And those shares have value. Which contribute to my wealth. That seems terrible!
I don't see how a wealth tax is a good idea at all. If you could recommend a good article that argues why it's good and how it would work I'd love to read it.
Please consider what kind of behaviour you would encourage. If wealth erodes every year then this strongly disincentives long term thinking and rewards business ventures which give quick cash and then burn out, like strip mining, and punishes planning for the future like pensions.
You want your tax system to reward long term thinking, not punish it.
I don't understand why it would encourage what you are predicting. If you "quickly cash out and burn" then you pay a tax on it as well.
My argument for wealth tax is that people with most wealth are the ones with the strongest interest to keep the country stable and nice place to live in.
Treating everyone the same blindly is the very essence of fair. It is, however, unjust by your sense of justice. There's a vast difference between the concepts.
You're also assuming a specific sense of justice - you're assuming that the utility of money is linear. (That is, giving up $10 is the same to someone earning minimum wage and to someone earning $150k).
You can hold that view - but recognize that it is a specific view, not an essential definition of fairness.
Why not charity? Because then the people donating to charity will (at least try to) impose conditions. So only quadriplegics or a certain faith or with a certain set of circumstances with receive help. (See e.g. the concepts of the deserving/undeserving poor and moral judgements with charities helping the poor in the UK pre-1945.)
It is very difficult, if not impossible, to compete with Apple without having a similar end-to-end control of manufacturing to retail. If a company has to purchase their products from a manufacturer or sell their product to a 3rd party for retail, they are losing to Apple because that flow of money can't be hidden from the tax man.
Europe is currently facing major financial issues and a significant portion of this is that money gets funneled away to the US (or offshore accounts of US corps) without the fair share of taxes of their profits left here.