
Facebook Tax Bill Over Ireland Move Could Cost $5B - s_dev
https://www.bloomberg.com/news/articles/2016-07-28/facebook-gets-3-5-billion-irs-tax-notice-over-ireland-move
======
rm999
>The IRS claims Facebook’s tax adviser Ernst & Young LLP undervalued the
company’s property as it was transferred to Facebook Ireland Holdings Ltd. by
evaluating pieces of the online platform separately, according to court
filings ... “I don’t think Facebook is necessarily hiding anything, but it’s a
fight over pricing,” said Stephen Hamilton, a tax lawyer in Philadelphia.
“This is what companies do when they transfer their own assets; they try to
value them as low as possible and when the issue is litigated, they usually
end up somewhere in the middle."

It's kind of sad that a team of E&Y accountants and lawyers have probably
added more "value" to Facebook by playing this legal tax evasion game with the
IRS than an entire team of developers and product managers adding a big new
feature.

~~~
tn13
Accountants and Lawyers end up doing value addition because government
regulations are far too complex.

~~~
hiou
Nope. Accountants and Lawyers end up doing value addition because corporations
like Facebook take things to the legal gray border of the regulations. The
whole double irish is barely useful if you give your assets fair market value.
Don't be so gullible to believe this needed to be complex.

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thisisbad
Corporate income taxes should be eliminated. Instead of focusing on building a
company and good products, companies have to dedicate resources to figure out
how to escape the taxation.

Taxation should be done when profit is distributed to shareholders (similar to
Estonia). There is also unfair double taxation - paying taxes after company
pays them.

~~~
throwaway729
Wow.

I mean, if you're going to argue that corporate tax rates should be lower,
_just make that argument_.

But the argument that corporations should be able to pay fewer taxes _because
they (and /or other corporations) lobbied to create a byzantine tax law that
they then exploited_ is... a special kind of argument.

~~~
bluecalm
The argument is that income tax for companies is a terrible idea and it's
better to move taxation to different places. Places where you can be both more
efficient and more fair at collecting.

It's impossible to make income tax fair. The simplest example is selling
rights to trademark or some licensing to friendly company located in tax
heaven. You will never be able to assess fair value of a trademark and you
will always be left with litigation hell. It's just the worst possible tax.

~~~
koralatov
Out of curiosity, what's a better idea than income tax for corporations?
Assuming we do away with it, what's the more efficient and fairer way you'd
propose?

~~~
sib
Taxing the owners (as in a subchapter S corporation in the US). It's a pass-
through. Then you don't have the incentive to do things like the double-Irish
or similar unnatural acts.

~~~
koralatov
That's one way of doing it, but means that if the majority of your stock is
held by foreign nationals residing abroad, the U.S. gets much less income,
even though the majority of the value is being generated in the U.S. using
U.S. infrastructure and services.

~~~
derefr
Suggestion: create "proxy individuals"—paper people that legally own all of a
foreign national's U.S. assets, including their bank accounts and their
corporate interests. Then tax those proxies at all the points you'd tax
regular citizens, including capital-gains time. Disallow foreign capital
ownership without proper "taxability insurance backing"—i.e. seizable
assets—existing in the proxy bank accounts.

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bluecalm
My view is that corporate income tax is just a very bad idea. It will always
introduce a lot of judgement problems and you will always need to assess every
single transaction. Is it "fair price" or is it done to funnel money
somewhere?

Those questions are impossible to answer objectively and we shouldn't really
care. Tax owners of the corporation. Tax people for living in a nice place
(land tax, real estate tax, all kinds of consumption taxes). If you really
want you can tax companies' revenue (not profits). Some taxes for polluting
the environment, using the infrastructure would be great as well. Try to
understand what makes your country an attractive place to operate from and
charge for those things.

Taxing income is just a recipe for problems and unfair treatment (companies
with access to top lawyers pay less, small companies pay more).

~~~
Lazare
I agree with your post and you list a number of good ideas. Except...

> If you really want you can tax companies' revenue (not profits).

That one doesn't really work.

Some industries are very low margin and capital intensive. There is,
realistically, no level of revenue based tax that a supermarket chain can pay.
Maaaaybe 1%. Max. Same goes for airlines, steel mills, and a thousand other
old-school bricks and mortar industries where a lot of money may come in the
door, but then in goes right back out again as a cost of doing business.

Other industries are very high margin, including a lot of tech businesses that
were all familiar with. A 1% revenue tax would represent a _massive_ decrease
in their total tax bill, but if you charge them a more realistic tax rate
you've bankrupted everything that's not a highly profitable tech company,
which is basically your entire economy.

(Yes, they'll try to pass it on, but a supermarket chain isn't going to be
able to pass on a 20% tax on revenue. They're already making no profits,
paying crap wages, and bargaining their supliers down to the wire; the only
thing they could do is raise prices 20%, and people who aren't working at the
aforementioned high-margin tech companies can't remotely afford a 20%
surcharge on their food bill with no offsetting changes to their tax or
benefits. Plus, if that's actually the policy result you wanted...maybe just
enact a 20% VAT?)

Of course, you could adjust the tax rate based on how capital intensive the
industry is and how high your margins are at which point...it's a tax on
profit again. :)

The more you dig into it, the more it becomes clear (in my view) that revenue
based taxation isn't the right lever to pull. Whatever policy outcome you want
can be more easily gained via other methods.

~~~
derefr
I've always wondered if you could combine corporate income taxes with a law
against "passing on" those taxes. As in—by law, the company would have to do
its accounting and business model analysis as if it _wasn 't_ paying that tax.
The individual _employees_ would be fully aware that the company is days away
from bankruptcy, but by law they wouldn't be allowed to charge more,
because—in the magical legal-fiction alternate reality that the board of
directors would, by charter, have to think in terms of—the company _wouldn 't
be_ days away from bankruptcy. (Even as it was going _into_ bankruptcy, and
purchased by a private-equity firm, that firm wouldn't be allowed to raise
prices to save it, because that would _still_ be acknowledging the effect of
the tax.)

~~~
Lazare
> could [you] combine corporate income taxes with a law against "passing on"
> those taxes.

Short answer: No. Tax incidence doesn't work that way.

Long answer: The concept doesn't even make sense; a company can pay taxes in
an accounting sense, but not in an economic one. Since a corporation is not a
real person, __every __dollar of tax is by definition passed on; all we can do
is try and figure out if it 's being passed on to customers (via higher
prices), employees (via lower wages), or investors (via lower returns). But,
obviously, every dollar going into the treasury is a dollar not going into
some real person's pocket. Unless we start letting companies cover their tax
bills by printing money. :)

Of course, what you probably meant was "a law against passing on those taxes
to specific groups"; you're looking for a way to force the tax to be passed on
to investors and not employees (or whatever). In which case the answer is...

...still no. Because tax incidence (which is the technical name for this)
isn't just a matter of deciding how to divy up a tax bill. If investors face
lower returns, they'll invest less money (both because they'll have less money
to invest, because they'll decide to invest in other areas where taxes are
lower, and because they'll decide to consume more and invest less).
Investment, at an industry level, is strongly correlated with productivity
(eg, build a new factory and your employees can make more widgets), and
productivity (again at an industry level) is strongly correlated with wages.
Or in other words: If you tax investment in an industry heavily, you'll end up
with decrepit plant and poorly paid workers. _That 's_ how taxes on investment
end up being born by workers, not by some sort of conscious decision to cut
wages to free up more money for dividends.

And no law is going to stop it either. Is a union supposed to bargain with a
company as if there were other employers in the industry paying high wages,
even though there aren't, because there's been industry-wide under-investment
for the past 10 years? Does your law force investors to invest _as if_ they
were receiving dividends, even though they're not? Does this law apply to
foreign investors? Are you going to try and order round some massive Middle
Eastern sovereign wealth fund and tell them how much they would have invested
without the tax, and send them an invoice for the balance?

In short: The issue has been well studied. It might work in a world without
trade, globalization, and the free-ish movement of labour, capital, and goods.
It doesn't work in our world.

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maaaats
How can countries avoid the spiral of death with taxing? I hate how google,
facebook etc. makes hundreds of millions in my country, but barely pay taxes.
While local companies do.

~~~
tn13
Why do you think paying taxes is a virtue ? Why does US government need 40% of
our hard earned money ?

May be American politicians should stop the war on drugs, wars in far off
countries and medicare and reduce tax levels to 20%.

Facebook, Google, Apple and push the frontiers of human knowledge at rapid
rate if they can spend that money themselves. In case of government it will be
used to by some junk airforce planes that dont fly.

~~~
lukateake
Serious question: who pays an effective rate of 40 percent? Many of these huge
corporate entities are in the single or negative digits.

~~~
refurb
That's because they are deferring the taxes on the ex-US money.

It's a 401k in the US. It's a tax deferment, not a tax break. If your
effective rate went from 35% to 25% due to your 401k contribution, you still
end up paying 35%, just not right now.

~~~
uiri
No, you don't end up paying 35%. Part of the advantages of a 401k come from
distributing dollars being taxed at a high marginal rate to another year when
they are taxed at a lower marginal rate.

~~~
refurb
It all depends. Sure, if you put almost nothing in a 401k, then when you pull
it out, you'd be in a lower margin tax bracket (and living on very little
money).

But if you put a lot in, the fact you HAVE to start taking money out at a
certain again AND it all gets taxed before you die means you pretty much end
up paying the taxes anyways (or more if rates have gone up).

~~~
zo1
It's slightly different here, but effectively the same. Individuals get sold
on the idea of "tax-back" from the taxation authority at the end of the
year... They get bombarded by financial consultants that tell them they have
to put up to 30% of their post-tax earnings into 401k-type accounts because
they are "maximizing" their "tax-benefits".

A lot of them even have no idea that they will be taxed anyways when they
withdraw.

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mentos
I often wonder about a tax system that just works on inflation. Why does a
govt go out of its way to collect taxes if it's also going to print money? To
me it's so that you can tax different entities at different rates. But if
we're willing to adopt a flat tax of X% I wonder if it could be collected
through inflating everyone's dollar?

~~~
raverbashing
This is a very good way of making the poor even more poor

~~~
ojno
Perhaps if you were to only use the created money for welfare etc?

(Not that I'm optimistic that such a system could come about in practice, or
that I'm an economist.)

------
rayiner
People should actually read up on the tax structure Facebook used:
[http://www.bloomberg.com/news/articles/2016-07-28/facebook-g...](http://www.bloomberg.com/news/articles/2016-07-28/facebook-
gets-3-5-billion-irs-tax-notice-over-ireland-move). It's not reliant on some
crazy lobbied-for loopholes in the tax code. It actually relies on some fairly
mundane provisions of various countries' tax laws.

Just getting rid of, say, transfer pricing rules wouldn't make tax avoidance
harder, it would make it easier. Say you do all your R&D in the U.S. But you
set up a subsidiary in a low-tax jurisdiction, and license the U.S.-made IP to
that subsidiary for $0. _Boom_ the U.S. company now has no profits to show and
all profits are in the low-tax jurisdiction.

~~~
koralatov

        > license the U.S.-made IP to that subsidiary for $0.
        > Boom the U.S. company now has no profits to show and
        > all profits are in the low-tax jurisdiction
    

That _seems_ simple, but the U.S. government are wise to that kind of thing.
At a previous job, the U.S. parent company used to supply our spare parts,
which we then sold to end-users in Europe. We operated under very strict
rules, derived somehow from Sarbanes-Oxley, about how much the U.S. parent had
to charge us for these parts to ensure that they weren't simply running up a
loss for tax reasons. IP worked the same way.

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nxzero
Just curious, but what would happen in a country where no one paid any taxes?

~~~
koralatov
Greece would be a pretty good example. Some people were paying taxes, of
course, but there was widespread corruption and underpayment of taxes.

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mtgx
Remember just a couple of days ago all the people praising Facebook over its
"profits"? Not paying taxes can get you that.

I just think it's terrible how Facebook wants to have its cake and eat it, too
- profit from low European taxes, but transfer all of Europe's data to the
U.S. for maximum amount of mining.

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mankash666
'Facebook said in the filing that the liability “could have a material adverse
impact” on its finances, results or cash flows.' \- that's a funny defense,
that forcing a company or person to pay taxes that they don't plan to pay,
affects their finances.

------
elgabogringo
And Facebook COO Just endorsed Hillary publicly on FB, the day after WSJ
reported that Hillary has taken $48.5 Million from hedgefunds/Wall Street vs
$19,000 for Donald Trump.

We know who is on the little people's side in this election.

~~~
civilian
Incase you're wondering, your comment is kinda tinfoily-hat and it's off-topic
from the main discussion of company valuation and tax strategies.

I'd also add the caveat-- are you sure who is buying who here? The next
President has some power to make Wall Street's life difficult. I suspect that
the donations that Wall Street gives is more of a Clinton-shake-down than it
is a bribe from Wall Street.

Additionally, these analyses simply group individual donations in with
whatever company the individual works at. Does this mean that the company I
work for is schemeing to make /R(?:on|and) Paul/ president? Hell no. It's the
individual's money to donate, and just because they have a successful career
in the finance industry their political donations come into question. Do you
have any idea how insulting you're being to the true Clinton supporters who
work in finance?

It just feels very conspiratorial and small-minded. With a dash of wealth
envy.

IDK. I could easily be accused of being a shill, but I've never heard a solid
argument presented from your camp. It's always "look at this coincidence!!
What else could it mean?!?!"

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drcross
I cannot understand the indignation, the system is working exactly as
designed- board members have responsibilities to the shareholders to maximise
profits, it would be imprudent if they didn't move to reduce tax burden. The
miles of column inches written on this topic is being tediuos.

Solutions are simple, anyone telling you otherwise are the same people who
hold economists in high regard-

1\. Reduce your local tax to compete with the lowest one. Or-

2\. Stop the company from trading in your country. Or-

3\. Tax profits derived from local business if they are earning them in your
country.

~~~
ryanhuff
Wouldn't #1 result in a race to the bottom? Why wouldn't a foreign country use
tax policy to lower their corp rates towards zero in order to attract foreign
tax revenue? After all, some tax is better than no tax.

~~~
refurb
You'd end up with a country like Singapore, where the taxes are lower, but
more wisely spent.

~~~
kuschku
In Singapore it only works because of so little expenses.

If Germany would, tomorrow, decide to not provide any services outside of the
cities, we could save a lot more taxes, too – and reduce them even further.

But there’s some running costs countries have, which you can’t go below.

If you want public schools and universities for free that can rival US private
elite unis, if you want first-class public transit everywhere, if you want a
social net, you end up with high taxes around 25% corporate and 30% private.

There’s not much of a way around that, except for going deeper and deeper into
debt.

Yet if you want a country with a minor tax surplus, and good services, you
need high tax rates.

~~~
refurb
I would argue Singapore has a significant safety net, good schools and
healthcare. Hell, most of the housing is gov't owned.

~~~
kuschku
Yes, but they don’t need to provide healthcare for people living 100km from
the next city within of 20 minutes – they don’t have the extreme cost of
suburban or rural areas. (which other nations might want to copy)

