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France Plans 5% Digital Tax as Governments Chase Internet Giants (bloomberg.com)
197 points by petethomas 52 days ago | hide | past | web | favorite | 295 comments



Can anyone comment on how this interacts with the idea of the single market? Why can Google Ireland Ltd. be charged a special tax for doing business in France?

In my (limited) understanding I thought this was not supposed to happen, and that most goods and services could automatically be sold EU-wide. France could not charge import duties on Guinness trucks, nor demand that beer good enough to be sold in Ireland is not good enough to be sold in France.

(This does not sound at all like the usual discussion of the tax on multination's profits, and whether declaring that your business unit in the Bahamas actually made the profit is avoidance or evasion. It seems to be a brand new tax on some kinds of business-to-business sales.)


On reflection, maybe I can answer my own question (but tell me if I'm wrong):

The EU rules demands that, in the market for beer (or trains or spyware) sold in France, the French govt. cannot favor French companies over Irish companies. The buyer must be free to buy from any of them on equal terms.

But it does not demand that the market for goods sold in Dublin is identical to the market for goods sold in Paris. Hence the VAT rates may differ, as may other more narrowly focused taxes, like on alcohol, or hotels. This tax is one more like that. A sin tax on spyware.

Edit: There remains the issue of deciding where a sale took place. Alcohol to be drunk in Paris has to be physically in Paris (even if the sin tax is collected long before the final sale), but an advertisement shown in Paris could have been bought by a company elsewhere. Why can't every French ad agency open a one-man office in Dublin to avoid this?


There is already a difference in tax (VAT) rates based on the consumer's location. This move would be distinct from import duties or product standards in that it's not really creating a clear barrier to sales across the single market.

On the other hand, the really quite high threshold might well be subject to complaints on the basis of distorting the single market. All the large multinationals that would hit the threshold reside in Ireland / Luxembourg, whilst lots of French firms don't hit the threshold and thus gain a competitive advantage.

I'm neither a lawyer nor a tax advisor.


Wouldn’t it be more accurate to say that it’s correcting an imbalance?

Google operates in France but is able to undercut France businesses for digital content sold to French people ( merchandise is traceable ) because it happens to have an Ireland operation?


IIRC, under EU VAT regs Google Ireland will charge and remit French VAT rates to the French treasury for digital content sold to consumers in France, so there's no imbalance there.

The big issue is that digital services, particularly advertising, are so insanely profitable that most governments would also like to get their hands on a proportion of the profits accruing from sales of digital services in their country. They see the fact that Ireland / Luxembourg are able to book all the profit in one jurisdiction as unfair. There's probably not a huge likelihood of that happening any time soon at an EU level, so France has gone with the next best option from their POV.

(Tax avoidance strategies that allow a large multinational to not pay much tax to their host country is a different kettle of fish, since most of the benefit of tackling those would probably accrue to the country of incorporation not France - e.g. the Apple settlement)


IOW, they see some loot to grab.


If the imbalance is that an Irish company is more competitive than a French one, then no, not really.


In this case, this will be the race to the bottom and smallest countries will be able to charge 0% tax just for the sake of office space rented since their domestic market is small enough to not bring much of income tax (Luxembourg for example).

The issue here is with omitting responsibilities. If a company makes hundreds of millions of income in a country, it should pay some taxes there.

There is a huge push in Poland now, to introduce non-refundable revenue tax (of 1.5%) on larger companies in place of income tax. This would solve the issue entirely.


There would be no race to the bottom if there was a real, tangible benefit to being established in a high tax country - ie, better public services, a more educated workforce, more business friendly environment, etc. As it is right now, very few countries justify their tax rates and that prompts people and businesses to do the rational thing and go where they pay less for the same thing.

I think it's very concerning that European countries are so focused on taxing access to their market rather than asking themselves the question of what they can offer to businesses and individual to make them more interesting as places to settle down or establish a company.


I think you are completely missing what's going on...

Google generates revenue in Poland. They have operations in Poland and all (so they use all the public goods like employees, infrastructure, safety etc.). They should pay taxes in tens of millions of Euros for this. But instead, they generate fake expense in Ireland, send an invoice to the Polish office, call it "branding" or something else, the invoice is big enough to generate a loss. They do not need to pay taxes in Poland since they are at "loss".

That's the issue. Not that Ireland has a different tax system. The issue is that companies are allowed to avoid taxes by generating fake expenses and the EU prohibits other countries from doing anything with it really.

IMO 1,5% fixed tax is very attractive rate.


I'm genuinely curious - what operations does Google have in Poland? I was under the impression that all the "valuable" stuff was being made in the US and that their subsidiaries just handle localization, support and local sales. Is that incorrect?

If that is correct, then it makes perfect sense to shift profits - after all, it's not like Google Poland just came up with their new foobuz algorithm that is providing value. They're just selling it there.


> local sales

> They're just selling it there.

This is literally the money generating part, the rest are cost centers.


A country does not have to justify its tax rates before Facebook. A country should focus on serving its citizens, not multinationals.


It most certainly does - both to its citizens and the companies that do business there. Otherwise, the implicit idea that your taxes pay for public services is chucked out of the window and we're left with taxation as just another expense to be avoided if possible.


Only to its citizens. Not to companies. The idea behind taxes is not to pay for public services, but for whatever the citizens want to use them for (which happens to include public services of course).

Companies aren't allowed to vote for a reason.


Keep in mind that companies are not just large multinationals but also small mom and pop stores, freelancers and everything in between. I hope you understand how deeply hypocritical it is to tout paying taxes as a moral obligation while at the same time refusing to be held accountable for how that money is being spent or denying companies a voice.


And many companies are owned by citizens whose opinions actually matter just as much as those who don't own a company.

> I hope you understand how deeply hypocritical it is to tout paying taxes as a moral obligation while at the same time refusing to be held accountable for how that money is being spent or denying companies a voice.

There's nothing hypocritical about not wanting corporations to have even more power than they already have.


You seem to be labouring under the delusion that voting actually changes anything.


Not enough. In part, that's because companies have to much of a voice.


A company does not have to justify its business practices to anyone but its shareholders. A company should focus on serving its shareholders, not politicians.


You are pretty wrong. Taxes aren't about limiting market access, tariffs are.

Taxes are ways to keep the money in the country, reinvest it so it ripples back to the civilians.

Tech companies are avoiding this.


What is the difference between a tax, a tariff and a fine?


A fine = following the rules & earning money.

Ps. I hope your being sarcastic


I was not being sarcastic - the question was purely rhetorical. From the company's perspective - there is no difference because they all result in the same thing - transfer of money from the company to the government.


They are not the same thing.

You break the rules = fine

A political protection against something from other countries ( eg. Dumping and killing the internal market) = tariff

Taxes = helping the country/nation, based in money you earned from civilians/local businesses there

These are very different things.


That’s not really true. Tariffs are clearly a form of tax. Both taxes and fines are used to discourage undesirable behavior. One difference is businesses typically assess on their own how much they owe in taxes, whereas the government tells them how much they owe in fines.


> There is a huge push in Poland now, to introduce non-refundable revenue tax (of 1.5%) on larger companies in place of income tax. This would solve the issue entirely.

Well, only if you're content with a 1.5% tax rate and a tax that punishes smaller non-vertically integrated companies.

They would probably be better off with something like DBCFT using a normal tax rate instead.


The idea is to support small companies. I don't see how this would punish small companies at all. Those companies, due to the inability to avoid/reclaim taxes pay more than 10% now (even with an accountant). I know a lot of companies (a few people large) to pay that much.


> Those companies, due to the inability to avoid/reclaim taxes pay more than 10% now (even with an accountant). I know a lot of companies (a few people large) to pay that much.

And a 1.5% rate isn't enough to replace those taxes, so it would be paid on top of them.

Moreover, revenue taxes disproportionately impact non-vertically integrated smaller companies. Megacorp is vertically integrated, they pay 1.5%. A supply chain containing twelve smaller companies pay 1.5% each, which compounds into nearly 20%.


Actually, it is. The 1.5% tax rates will bring more than the current system. This is not something made up. This was well researched and whole armies of economists are behind it. More and more countries are considering it.

Now megacorps don't pay taxes at all, so what's better?


> The 1.5% tax rates will bring more than the current system.

Under your current economic structure, surely. But once you make it so that companies can reduce their supply chain's tax burden from ~20% to 1.5% by becoming vertically integrated, what do you expect to happen next?

> Now megacorps don't pay taxes at all, so what's better?

Option one is income tax at e.g. 20%, local companies pay 20% while megacorps pay ~0%.

Option two is revenue tax at e.g. 1.5%, non-vertically integrated companies cumulatively pay ~20% while megacorps pay 1.5%.

Option three is something like 20% DBCFT, so that everyone who sells domestically pays 20%. This is the better option.

Arguing that two is better than one is a false dichotomy that preserves most of the bad consequences of existing system (multinational megacorps pay less than others) while introducing some new ones (highly advantageous to become a vertically integrated conglomerate).


I am surprised about you saying it would be 20% for small business. What (optimized) market requires for a raw source to change hands 13 times before it is a final product (mind that we are talking small business here). The revenue tax would force the market to optimize and become more competitive.

And even if megacorps would grow vertically - that's OK, since this would force them to grow locally, take parts of the market and optimize it. It's a win-win.

I also don't think DBCFT would work in an OPEN market like EU. Your opinion seems very US-oriented, while this thread is about EU. The EU rules and tax system is completely different to US and it cannot be compared.

DBCFT could work if the issue would be EU vs World, not EU within.


> What (optimized) market requires for a raw source to change hands 13 times before it is a final product (mind that we are talking small business here).

That is how many things work. One company sells saplings, another operates a tree farm, another logs the trees and transports them to the sawmill, another operates the sawmill, another distributes the bulk lumber to wholesalers in different cities, another operates warehouses and wholesales the lumber to local businesses, another shapes the lumber into custom forms, another assembles the custom lumber into unfinished furniture, another finishes and paints the furniture, another wholesales the finished furniture, another packages the furniture into prepackaged furniture sets, another retails the furniture sets, and then finally the end customer buys it.

This is not inefficiency, it's specialization. Operating a sawmill is not the same skill set as retailing prepackaged furniture sets.

> The revenue tax would force the market to optimize and become more competitive.

It would force the market to vertically integrate and become less competitive.

> And even if megacorps would grow vertically - that's OK, since this would force them to grow locally, take parts of the market and optimize it.

Megacorps don't have to grow vertically, they already are. It's why the tax gives them an advantage over local businesses that aren't.

And they wouldn't to do so locally. They could just show up with an imported finished product and retail it directly themselves.

> I also don't think DBCFT would work in an OPEN market like EU.

DBCFT is basically VAT. The primary difference is that local wages are deductible. It does not seem like a real problem to allow for "local wages" to mean anywhere within the EU rather than only in the sale destination country. Or to just use VAT instead if you like, though the wage deduction from VAT does seem like a good idea in general (since wages are already taxed to the employee and double taxing employment is undesirable).

> The EU rules and tax system is completely different to US and it cannot be compared.

If you're designing new tax rules, you can compare the new rules to whatever you want. The EU could implement the US system verbatim or vice versa if they wanted to and had the votes.


That's interesting. Are there large companies who would pay this 1.5%, who do not at present pay much Polish VAT? Or employ many people?

Otherwise, why not tweak existing large taxes? You could do it on the employer's social security contribution (i.e. the part paid before not after the nominal salary) to make it sound better.


Companies like Google, Facebook etc. don't pay taxes in Poland by claiming expenses in Ireland/Holland. Thus they are "at loss" in Poland. The revenue tax would allow no tax avoidance due to that.


I understand but disagree about the tax on profits, see https://news.ycombinator.com/item?id=19295683

But my question about what Google et. al. actually do in Poland. Is it a sales office for a product made elsewhere? (Few employees, large cash flow.) An engineering office for a product sold elsewhere? (Little VAT, lots of income tax.) Etc.


Sales for a product made elsewhere.

I know where you are going with this - the issue is that they don't pay pretty much any taxes due to avoidance, yet they drain the market from the revenue thus limiting the ability for local companies who cannot avoid taxes trying to develop in this space.


If a small country can afford a 0% tax, why shouldn’t they avail themselves to that competitive advantage? Unified tax rates amount to a tariff on more fiscally competitive countries.


They would have the right to do so. And other country might have the right to place a 150% tariff on this country goods. Or place those on the tax haven list. Other countries cannot stop them from applying a zero tax. But those same countries that provide all the markets, infrastructure, schools, manufacturing and support all the population to make it work can also choose not to trade with those.


It would be fair, but the EU prohibits it. So the company creates fake expenses in tax-flexible countries to avoid paying taxes in the country, where they generate revenue. That's the issue.


> can also choose not to trade with those.

No, the EU and other trade agreements prohibit this.


The very post you replied to answers your question: You get a race to the bottom. Competition pushes taxes lower than they would be if the democratic government of each country could set them freely as they believe is fair.


I don't think there's a single government that sets taxes based on fairness. Rather, I'd wager that most governments set taxes as high as they can without suffering consequences such as economic slowdowns or capital flight.


A democratic government does what its citizens want it to do. Presumably they want taxes to be fair. If setting taxes to a fair level would cause capital flight, then something's wrong about our economic system.


> A democratic government does what its citizens want it to do. Presumably they want taxes to be fair.

Both of these statements are based on very big presumptions indeed.


That sounds like a version of VAT that favours large integrated companies. What are the proposed benefits?


No tax avoidance. Companies pay millions in taxes just to get them back in refunds. While this is not bad, it starts to look bad when they don't generate fake expenses locally, but they do that in a different country. It means that the money gets neither to the government, nor the local market. So the revenue tax guarantees, that at least government can get that money.

Other benefits are virtually no accounting (the money would be taken on a bank level), lower taxes for the majority of society (SMB's paying fraction of what they pay now), no tax-gray areas and limiting to long chains of "middle man".


The problem is not that Ireland is a country using its taxes more efficiently than another. The problem is that one country can offer a much lower rate that is only viable for them if companies make their entire EU business as if it was happening in this country.

Let say you are Luxembourg, and the average tax is 30% of your profit in the EU. Luxembourg is roughly .1% of the EU population. Assuming an ideal world, a company would them make .1% of its profit in Luxembourg. Now, let say Luxembourg offers a deal with a company so that they can artificially put all the profit from its EU operations in Luxembourg: in order for the country to keep the same taxes, it would only need to have a tax rate of 0.03%. From the Luxembourg point of view, they have the same tax amount as before. And from the company perspective, they are now paying taxes as if they were only paying taxes in Luxembourg, which is peanuts for them.

Now, the current situation is not as caricatural as this scenario, but that is what is happening. The end result is just lower taxes created artificially (but legally). And the big problem is that it is not easy to fix while being in a EU context: the easiest solution would be to have common tax rates, though that would create some other issues. At the very least, closer tax rates would help the matter as moving your profit from one country to another is not free for the companies.


"so that they can artificially put all the profit from its EU operations in Luxembourg" That is illegal because your accounting and document are not supported by reality. But it is difficult to prove it.


There are plenty of imbalances within the EU, Greece grows olives, Germany grows Volkswagens.


> On the other hand, the really quite high threshold might well be subject to complaints on the basis of distorting the single market.

It probably should, but this is certainly not the first time a EU member country has tried (and gotten away with!) protectionism. Some other examples are stricter safety/quality standards that only (surprise!) local businesses' meet and government guarantee of private company debt (I have no idea how this is legal).


The issue is that large multi national corporations do advanced tax planning so they pay little or no tax. Usually they move profit vs losses around different countries to zero out the tax plus tax loop holes.

French people need French tax so that they can build schools, roads and hospitals. Large corps later benefit from having public infrastructure in the form of advanced labor.


French guy here. I think a lot of comments miss the point of the new tax : Some US tech companies use fake transfer prices to avoid paying income taxes in France. Eg Irish facebook subsidary owns the Facebook brand for Europe and charges other subsidiaries for using it. The French Facebook subsididary was charged so much in past years that it didnt declare any benefits in France. This is fraud. But this is fraud at EU level and EU is not yet organized to face it. So French government is taking the lead and expects other countries to follow soon (very likely). You have to understand that French companies and French taxpayers a getting reasonnably upset for paying high taxes when some US companies dont.


French guy too. I have to add that’s not specific to US company : Total, Ikea, and even EDF (french electricity state owned company ) also use the same practices. I too would prefer that they fix the law. It has been decades we know this and nothing seems to be done. I hope that the fact that population is getting more and more upset by the situation will push the politics to move. Btw the way the same companies dont seem to pay taxes in the US either.


I think the key point here is that all global companies structure their tax in the most efficient fashion possible. They pay a bunch of money (millions) to save far more in tax globally. Forget morality. They are behaving optimally for their incentives.

The only way forward is to shut down the model of "redirecting profits to the place with the lowest tax". Kill it with fire.


A key feature in many obfuscated corporate structures designed to avoid tax is differing corporate structure declarations in different tax juristictions.

As companies are made up of many different sub companies by declaring your corporate structure as one way to the US tax authorities and another to the, say, Luxembourg tax authorities you can make intra group loans appear and disappear from different sets of accounts. And as a result the costs and, crucially, income from those 'loans' materialise wherever you want. Or not appear at all.


In France, taxes account for an ever increasing proportion of a stagnant GDP. Nobody stops to ask if a "Digital Tax" makes any sense: are they saying that digital properties make use of some public resource without taxation, or is this just basically a tariff?

[0]: https://data.oecd.org/tax/tax-revenue.htm


Couldn't we just ban tax evasion? What makes it so hard? (honest question)

A recent European study has shown that the more company win money, the less they pay in taxes (in percentage).

Is it because of bad laws? Corrupt politicians? Something else?


As others have said, it isn't evasion but avoidance. The issue is that there a lot of ways to put the money on the books wherever you want it. Let's say you want to sell mobile phones. You could create one company in France that builds, buys and sells phones. In this case it becomes pretty clear it is a French company and all the money will be taxed in France. But let's say you have that same company and split it up into three companies. You put your corporate company A in Ireland. That company A owns a company B in India that makes the phones. The corporate company A also owns a company C in France that only sells phones. Company A can decide which company is profitable by deciding who much B charges C for the phones they make. Company A can also charge B and C consulting fees for helping to run their businesses. Basically A can decide which of the three companies is profitable and make the others even "lose" money as far as the accounting goes. It is now very unclear if this is a French company and at who's tax laws the money should be assessed. Obviously, the company A can make this much more complicated. It is also really hard to know which of these organizational things are about tax avoidance and what is about efficiency of manufacturing and running a business.


I was listening to Presidential candidate Andrew Yang in his podcast with Joe Rogan. His plans, since there's a lot of avoidance, is to attempt a different route called a "value added" tax where there's a tax for trucking mileage and online transactions. He mentioned other countries to both of these, but don't remember which he mentioned off the top of my head.

Here's the podcast for those interested, there's a lot of other interesting discussions here that are related to this topic, such as automation and basic income. https://youtu.be/cTsEzmFamZ8?t=843


A VAT tax makes a lot of sense. It would reduce the incentive for large market quasi-monopoly seeking companies to optimize for no profits to avoid taxes. The current dynamic is- why pay taxes when you can spend it to expand your market share?


VAT taxes are extraordinarily regressive. Next to lowering taxes on the rich, it's among the worst possible options.

Increasing the income tax and taxing capital gains at regular income rates, along with bolstering estate taxes on the rich, are the ideal near-term solutions to the US budget problem. The US still has a lot of slack taxing capacity on the wealthy. That should be maxed out long before we look at a VAT.


Regressive taxes can be fine, as long as you balance them with transfer payments so that the poor don't end up paying more.

They might even make the economy more efficient. I'll leave that argument to the economists, though.


I think you also need to have tax breaks on certain things, for instance groceries and non-luxury clothing. Many high-tax, high-CoL states here in the US are like this, so that poorer people don't pay so much for essentials.


Can you expand on why you think it's regressive?

> That should be maxed out long before we look at a VAT.

This is relative. The US government sucks at being efficient.


Not the person you asked, but as I understand it, poor people spend a higher percentage of their income on goods and services (because they have less left over after paying for basic necessities). So a higher percentage of their income is lost on VAT than a richer person. This makes it a much less progressive taxation method than e.g. Income tax.


What if they're only imposed on corporations?


VAT in European countries is often the highest or the second highest revenue stream. The downside is that it's usually a flat tax and it disproportionately affects poor people.


Except Digital sales take place in no-man's land, and are hard to tax. A federal tax hits Amazon, but would it hit Alibaba? The specifics are what make these ideas so difficult.


I think that's pretty simple. If the purchaser in this country, tax them for that sale.


Suddenly it strikes me that one fix might be eliminating international subsidiaries. It's possible it would be hard to enforce in practice, but the crux of the problem is the absence of a competitive relationship & autonomy between these supposedly independent companies.


The obvious solution is to eliminate corporation tax and shift it to areas that are harder to avoid such as dividends, capital gains and land value.


Sounds very reasonable. I'm sure there's a catch, but I don't see where it is.

Taxing a business looks like a weird thing to do: a business can only spend money on business-related stuff pretty much by definition.

In order for money to be spent on non-busines things, it should be paid out as a salary, dividends or something like that which we know how to tax pretty well.

I'm certainly missing something, but what?


Not an economist so I don't know the official reason. But a corporation can theoretically accumulate profits indefinitely without making a payout, while governments need stable yearly revenue.

Maybe more material from a public policy point of view is that we like to tax different things at different rates, to favor or disfavor spending on various things. Hard to tax a salary based on what the employer spent their money on.


A corporation could accumulate although I expect shareholders would stop that fairly quickly.

You could still implement Pigovian taxes such as fuel or alcohol duties.


There's many valid reasons for accumulating profits, such as planning buyouts or expansions. That being said, sometimes it can be done for reasons such as waiting for a preferable tax regime. Due to that, some countries have a separate accumulated earnings tax that is similar to individual wealth taxes to disincentivize accumulating without a business purpose.


Or stop taxing "profits" but tax every transaction on its total amount, that would also end a lot of "tax niches"


We already have VAT or sales tax.


> Or stop taxing "profits"

By "profits" I meant to stop business being able to claim expenses and reduce the tax. We could replace complex taxation scheme only-on-positive-profit with a simple 1% (for example) tax on all transfers, on the total amount, no matter what is the purpose of the money transfer


That incentivizes the creation of vertically-integrated conglomerates over small companies, in order to reduce the number of transactions; is that what you want to foster?


You need to take into account all the simplification it would imply in tax collection / paperwork / regulations etc. The cost of our current ways of taxing wealth and profits is huge


In the US, the IRS collected $3.33 trillion in revenue in 2018, with a total budget of 11.5 billion (2017). Thats 0.3453%, or 35c per $100 of tax revenue. Fairly minor in the scheme of things.


Monetary costs are a small subset of general costs (and the cheapest ones, easier to know and aggregate).


that's only one side of the ledger (collection). Now calculate the costs to the taxpayers (people and corps).


The trouble with that is it will penalise low margin businesses, Apple could easily afford it on their 30% margin but a budget PC maker with a 3% margin would struggle.


Small businesses are already penalized by our current laws and ways of taxing profits. I believe the alternative I am proposing (that will never come to reality) is easier for everyone


Sure, it's easier, but it also means you'll just have a bunch of giant vertically-integrated monopolies. Easier, sure, but I don't see how that's better.


It's better because it's cheaper for everyone to do business. More competition, everything gets cheaper.


You mean like VAT/GST.


Not like GST : it would be on all transactions in the legal currency, including B2B. There wouldn't be an artificial difference between "businesses" and "customers"

Not like VAT : VAT is way more complex and expenses are deducted at each step


So cheaper for large integrated companies? Sounds like it'd really hurt competitors starting up.


It would kill any business with a long supply chain, the only manufacturers left would be the ones where ore arrives at one end of the factory and finished goods come out of the other end.


It would be cheaper for everyone because of tax simplifications. Current system is already unfair to a lot of group of people, including small businesses. And large company also have money transfers so I am not sure to understand the example unless we go into the specifics a little bit more


How does that help France? Those taxes would still be paid in Ireland.


> one fix might be eliminating international subsidiaries

I believe that means "no multinational companies" - one could certainly argue for that, but it's a much bigger discussion. And I think you would have to end up forbidding citizens (residents? how does it work when you move countries?) of country A owning shares of company in country B if you really wanted that to work.


It's tax avoidance because we call it that, so why don't we start by not saying tax avoidance anymore and call it tax evasion like it literally is when a company invests massively in accounting to abscond with their taxes.


There's a big difference between the two. Tax evasion is breaking the law to pay less tax. Tax avoidance is working within the confines of the law to pay less tax.

Putting money in a retirement account is a form of tax avoidance, but it was provided and is working as intended. The issue is not the definition, it's that legal loopholes allows unintended tax avoidance. The way to correct it would therefore be to close the loopholes, and many of the remaining loopholes span international borders and are tough to close without negative unintended consequences.


The difference between avoidance and evasion is only relevant if you have tax law interpreted to the letter only.

Tax law should be interpreted by the lawmakers intention and companies should be ready to be fined or uptaxed if authorities find they pay less taxes than is reasonable given global profits and relative turnover within their jurisdiction.

Constructs such as paying “royalties” to parent companies, or taking very expensive internal loans to effectively move all profits to tax havens (using Dutch BV’s etc) should simply be outlawed. Countries simply shouldn’t recognize these as acceptable practices.

This obviously leads to what companies like to call a “hostile business climate” - so a country will need to be pretty attractive in other aspects to not scare off international business.


That would be a nightmare.

First, tax laws don't have clear intentions to begin with -- if a tax law passes with 51 out of 100 votes in the legislature, all 51 representatives could be supporting the "letter" of the law for 51 different actual intentions, many of which might not be noble in the first place (e.g. give a particular local factory a tax break to win more votes next election).

Second, because of this, "intention" would be left open to completely different interpretation by different judges and result in completely arbitrary, non-predictable outcomes in different cases, which would be a nightmare for companies to even attempt to comply with. There's a reason that laws are interpreted by their letter -- it's the only fair way to do it.

Third, the tax laws are passed by different countries and are not harmonized, so even if they had clear intentions, their intentions can completely conflict, and there's no reason why they should be harmonized -- different countries are allowed to have legitimately different philosophies on taxation, there's no "right" answer.

The things you say should "simply be outlawed" -- how? How are you going to determine which internal loan is merely "expensive" (OK) versus "very expensive" (not OK)? How are you going to differentiate between legitimate payments and the "royalties" you put in quotes that you call a construct?


> The things you say should "simply be outlawed" -- how? How are you going to determine which internal loan is "expensive" versus "very expensive"? How are you going to differentiate between legitimate payments and the "royalties" you put in quotes that you call a construct?

Example for interest rates: Credit risk and intrabank/central bank rates are considered by courts when judging whether a rate is “too high”.

Swedish tax authority guidelines from past cases

https://www4.skatteverket.se/rattsligvagledning/edition/2019...

Summary - interest rates should be based on market conditions and credit risk

- internal loans should not use significantly higher (or lower) than loans between independent parties.

So: the authority already makes a judgment of e.g credit risk. If the tax authority thinks the interest rate was too high, they will say what would have been reasonable - and the company will be taxed for the increased profit as a result of the lower interest rate.

I don’t see anything controversial about this and I assume this is how tax law is interpreted and enforced globally.

It should be noted that such cases are usually lost by the authority - that is, the courts do usually not find the tax authority could prove that the interest rate wasn’t a normal rate based on market rates and risk. I don’t think that’s a problem, but I think it’s important that this is how it works.


It's more complicated than that.

A few percent here or there is all it takes to make a company unprofitable. Most companies don't have huge margins even when they're not trying to reduce them on purpose. You don't need the rate to be higher by a lot, only a little.

And then there is the principal. If you want profits in a jurisdiction, the entity there can get cash by e.g. selling its shares to the parent, which it then has without having to pay interest on. If you don't want profits there, the parent pays nothing (or some nominal amount) for shares and the subsidiary borrows all of its capital, which it then has to pay interest on at prevailing rates which may by itself exceed its profits indefinitely.

And loans are far from the only opportunity for this sort of thing. Pay slightly more for COGS to a sister company and you make significantly less profit, because a small percentage of gross is a large percentage of net.

One percent here, two percent there and soon a 10% margin is -0.1%.

What causes this is trying to tax something (profit) which is independent of any specific activity or jurisdiction. If a company makes phones and sells them, there is no principled reason why a certain percentage of the profit should go to the place where the phone is manufactured vs. designed vs. sold vs. the residence of the investor(s). If your jurisdiction is the one where they're sold but not manufactured or designed etc. and you want to tax that, the bleeding obvious way to do it is with VAT or some similar product/service tax. Trying to contort income tax into that shape is silly and just provides more opportunities for lawyers and accountants to find new loopholes.


Yours is a very well reasoned argument.


We already have rules requiring that! So what's the content of your proposal?


My parent post was a description of how we already have “arbitrary judgement” - so my previous suggestions to e.g tax income based on share of revenue in a jurisdiction would be arbitrary but no more arbitrary than what we already have.


The usual solution is a "General anti-avoidance rule" (GAAR). This doesn't get into the intent of the tax law, only into the intent of the business action. If there would be a simpler, more natural, and otherwise cheaper way to do it, but it's been done a particular way to avoid tax, then it's unlawful.


This seems kind of like the "What is / isn't gerrymandering?" problem.

I am not an accountant, but couldn't most corporate structures be reimagined by taxing authorities as an idealized "single company"?

Then calculate the difference between taxes that would be owed by that company vs the actual structure?

If there's a statistically significant discrepancy, require the company to provide a rationale. Or pay some penalty.


I wonder how well that would work for intangibles like branding, patents, or copyright - all three are artificial and can essentially be charged for arbitrarily and the company value is what provides their worth.

I suspect it would be easier to have a subsidiary rate rule - they may charge percentage either net or gross but not expenses for any IP including required external salaries but even that probably has loopholes or inviabilities.


I don't think it is unheard of to have a judge interpret the intention of a law.


I disagree. Tax laws should be simple and explicit. The people in charge change over time. I don't trust that the people later will interpret the laws the same way as the people today, or that either will interpret the laws the same way they were intended, or that the group of people that wrote the laws all had the same intent.


Crimes much more serious than tax evasion have grey areas specifically to create room for judicial discretion. Words like “with malice aforethought” or “forcibly” are used in statutes because the law can’t preconceive of every possible way to commit a murder or rape.


And crimes much less serious, too. There's a LOT of US laws that are intentionally vague and/or grant far too much leeway for the justice system. The grants extraordinary power because of edge cases they want the law to be able to handle ("think of the children"). Yet time and time again, it's the average Joe that has the law abused against him. These overly vague laws are used incorrectly, and yet we keep creating them because we don't learn that the people in power cannot be trusted; most of them are good, but it only takes one bad apple to ruin the lives of many people.


> I disagree. Tax laws should be simple and explicit. The people in charge change over time. I don't trust that the people later will interpret the laws the same way as the people today [...]

You can say the same about law in general, yet law isn't "simple and explicit". It is very complex, hard to grok, therefore only a small amount of people are able to, leading to expensive lawyers and a law system which the poor cannot afford (ie. class justice).

Yes, ideally I also want laws to be simple and explicit. I'd even argue that worked quite well before globalization. Now it doesn't anymore. We need to adapt.


It's unreasonable to expect judges to divine lawmakers' intent on subtle issues of tax policy. If lawmakers want a tax to work a certain way then they need to just write that down so that it's clear to everyone.


You liter ally put it in a preamble.

Like, if you say "this tax break is intended solely for people who sell second hand cars" then you don't have to spend 100 pages exactly specifying every nuance to 100% prevent people not selling second hand cars from taking advantage of it.

Ots called principles based tax code and it works.

I was initially high sceptical of the idea but, based on outcomes, it is a vastly superior system to rules based tax codes. It makes it far simpler and clearer to everyone.


If it is that simple, you can add a clause to the law that makes selling second hand cars a requirement.

Then you have to clarify how much of your expanses are eligable. Just those directly involved in the sale? Upkeep of your main facility? Upkeep of your satalite corporate offices? Your finance division?

What if you sell new and used cars? What if you are actually a battery manufacturer that makes and sells cars and also buys back and resales used cars?

What if you are a software engineer who sells your current car every 6 months?


But what if the people 'engaged' in the selling of the cars are only tenuously engaged in the activity and are simply trying to game the law and rack up paper losses?

All the car buying and selling is racked up by agents working on their behalf and they pay absolutely no heed to buying a selling cars?

http://www.mynewsdesk.com/uk/hm-revenue-customs-hmrc/pressre...

https://www.theguardian.com/media/2014/feb/21/chris-moyles-u...


Enforcement of tax law is based on the spirit of the law, not just the text. Things which are legal for a few years could become illegal the best without any change in the tax laws themselves, though this is only a real risk if you structure your activities within the letter of the law but not the intent of the law.

(I'm a tax lawyer.)


tax evasion is illegal; tax minimization is lowering your tax burden using existing laws and is not illegal.

Governments should reduce the number of unintentional loopholes but (a) it's far easier to pass new laws than amend old ones, (b) if you change a law that an existing big domestic firm or voting block is exploiting they will let you know at the polls; with a new law you can sell it as "balanced fiscal justice - righting a great wrong by making big foreign multinationals pay their fair share!"

I'm definitely not against tax reform, my big concern is the common approach of new taxes as political theater without any honest attempt at simplification, broad application or coordination with other jurisdictions. All this tax is doing is targeting a small, low-vote target that will figure out a complicated way to shift taxable revenue into a different jurisdiction, perpetuating the exact problem it supposedly addresses.


> Governments should reduce the number of unintentional loopholes

They are intentional. Source: tax lawyer friends.


> without any honest attempt at simplification, broad application or coordination with other jurisdictions.

The problem with that is that the other jurisdictions have no interest in closing tax loopholes. The irish bend over backwards to let Apples unique sheme qualify as double irish (their tax office had to issue several private rulings) and they had no interest in getting rid of the double irish itself either. For a tax haven making even a cent in taxes they wouldn't have otherwise gotten while costing a different country a million is a win.


The double Irish was gotten rid of in 2015 https://www.investopedia.com/terms/d/double-irish-with-a-dut...


You can see the impact of that crackdown in their tax receipts and tax to GDP ratio. Government revenue from Double Irish tax arrangements was fully 5% of their GDP.

https://data.oecd.org/tax/tax-revenue.htm


For every company already using it "will be", in 2020. Enough time to migrate to the next trick.


> The problem with that is that the other jurisdictions have no interest in closing tax loopholes.

A lot of people see that as a feature. "Competitive governance" may be the biggest reason the world works as well as it does.


I could live in a world with a little less tax avoidance by the rich. So in this case I don't see the upside to a country violating long standing trade deals to make a little more on the side.


Banning tax evasion is easy. Just get rid of corporate income taxes and replace it with a sales tax. It's not like corporations pay taxes anyways; their customers do as tax is built into the cost of products.


I see a couple of issues with this solution:

1) Companies would not pay most of their taxes where they put the greatest strain in public infrastructure.

2) Moderate differences in VAT rates would create enormous price differnces, which would invite smuggling.

3) The incentive for rich people to move to low tax destinations would be even greater than it already is.

I won't deny that the solution has upsides as well though.


Companies don’t put strain in public infrastructure. They’re legal abstractions. People and their activities (employees, shipping, factories) put strain on the public infrastructure, and they can be taxed (income, real estate, and pollution taxes) at that point.

The issue is that when Google shows ads to someone in the UK to monetize a search service used by the UK person, Google uses almost no UK resources.


Exactly. What a lot of governments seem to want is some form of tax on foreign companies for the privilege of gaining access to their local population/market. For physical goods we call that an import duty.


They do indeed want that, but what is it that has changed recently that makes this so much more urgent? People claim that digitisation has changed the equation, but I don't understand why. Google is for the most part a regular US exporter.

It appears to me that the only thing that has changed is that the US has left everyone else in the dust, which causes envy.


What's changed is that the "foreign competition" are winning to the point that "local businesses" are closing. Exactly the same thing that drives calls for protectionism in physical goods industries.


Governments need more tax revenue. Almost every country with social programs is on a timer to figure out ways to raise tax revenue to pay for those programs. Almost every developed country has a fiscal gap.


I get why everyone (me included) wants money. But if every government comes up with its own inconsistent ad hoc scheme to tax foreign corporations then they will unleash the mother of all trade wars.


>The issue is that when Google shows ads to someone in the UK to monetize a search service used by the UK person, Google uses almost no UK resources.

Why is that an argument against moving from corporation tax to VAT though? I don't think it would change much in terms of the UK's (in)ability to tax Google.


>3) The incentive for rich people to move to low tax destinations would be even greater than it already is.

I don't know why people keep harping on this, it simply isn't true at all. If it were, all the rich people would be living in Somalia right now, and they aren't, they're living in high-tax, high-CoL areas.

Very few rich people live in a way that allows them to live anywhere on the planet. Most "rich" people in the US are still working, and have to live someplace that allows them to continue to work. Some millionaire running a business in Silicon Valley can't just relocate to rural Alabama and expect to continue that.


You're conflating all sorts of rich people into a single type and then use that as the universal example. Warren Buffet lives in Nebraska and operates his conglomerate just fine from there. This he was doing before the internet age, something that now allows for even greater freedom of moving and operating from distant places.


Warren Buffet is one of the richest people in the world, on par with Bill Gates. He isn't representative of "rich people", which in America can be said to be 1% of the population (or several million people).

Nebraska isn't exactly third-world either.


Yup. Tax things which really exist within a country, not accounting fictions (like precisely which arm of a multinational made how much profit).

Although I'd also like everyone to stop using the term "income tax" for this. It's a tax on corporate profits, and has nothing at all to do with personal income tax, a tax on wages.


... and you ban cash and all ad hoc barter networks. Good luck.


Make cash / ad hoc tax free. Want to avoid tax? Buy used!


not really. unlike people, corps pay taxes on profit, not revenue.

and the issue isn’t evasion. it’s avoidance. which allowance for is intentional by governments for good and bad reasons.


Not really, people also pay tax on profit not revenue. Expenses related to business activity can generally be deducted in most places no matter whether you are incorporated or not. It's the basis on which business expenses you claim back from your employer are not taxed and the way unincorporated sole traders and bare partnerships are usually taxed. The rules on what types of expenses are tax deductible are pretty similar. If you incur business expenses which are not repaid by your employer you can usually reclaim tax on them.


That wouldn't prevent some of the shenanigans described above. For example, giving my IP away for cheap to a subsidiary in a low tax jurisdiction that actually performs the sale.


No, it would, that's the point. If your subsidiary in the Bahamas sells something in France, it pays French VAT.


Exactly!


The problem is that European politicians and their sympathizers have gone to great lengths to make you think it is tax evasion that they are policing. Tax evasion is illegal, these companies read the rules and follow them, but in the EU they are still in jeopardy in the courts, because the courts are arbitrary.


It's because for an international company there is really no clear cut way to say what is tax evasion and what is not. If your company is incorporated in France, has offices in Ireland and serves customers all over the world, how do you calculate where to pay what?

Sovereign countries are free to set their tax rate to 0 in order to attract companies there.


I'm pretty sure Google does not have a problem figuring out that the source of it's profits are not occuring in Ireland.


There is no science to what the 'correct' level of tax is, and assigning which part of a multinational corporation is responsible for what dollar of profit is genuinely complicated.

As long as they are playing by the rules, no company has an obligation to try and guess what level of tax is fair for them to pay. Since they are taxed according to their interpretation of the situation (as represented in their account books) there isn't anything wrong with choosing an interpretation that is tax effective.


Oh, I am not implying the "rules" are correct by any means either. Yes, I am saying that just because the rules/laws permit a thing, doesn't mean it isn't broken. The whole point of courts is to decide what broken laws mean, governments to fix holes in the laws, and people to decide who the government is.


It's not that simple?

How do you tax a German company paying an Irish company to show ads in France?


much like the trolley problem and driverless cars, you can easily get lost in the weeds in a legitimate, complex theoretical question, when for a concrete problem a simple answer can easily be obtained. In fact, the theoretical question obscures or acts as cover for the concrete case. For driverless cars, you just apply the brakes. For google, do you outlaw "The double Irish with a Dutch sandwich"


It's not that a simple answer can't be obtained, it's that many different simple answers can be obtained...


sure, if you are trying to solve the fully parametric abstract equation over all possible inputs, which is precisely what I was saying to try to avoid.

In absence of a grand unified theory, tackle obvious concrete instances when they crop up.

If the different "simple" answers (which I am not sure exactly what that means) solve the problem, then I really do not care if there is some equivalence principle there; just pick one as long as it produces the concrete outcome that you want.


The problem can be roughly stated as: For a company registered in country I, selling product/service in country F, with inputs licensed from and/or created in countries N, U, B, G, A, and C, and costs incurred in a potentially different set of countries, what's the amount of tax due to each country represented in the graph?

There are many simple answers to that question; who gets to decide which simple answer is the one enacted? Countries F, I, and U are likely to disagree on which simple answer is "best", which is why we rely on laws and courts to frame and adjudicate the issue.


Outlaw what exactly? Subsidiaries? Licence Agreements? Profit/Loss calculations? The European Union? "The double Irish with a Dutch sandwich" is an emergent property of a bunch of laws "working as intended".

So what you really ask is to get rid of the rule of law so you can target the bad guy du jour directly. Just remember that you may be "the bad guy" tomorrow.


I'm merely stating why "make avoiding taxes illegal" is not a clear cut thing. Apple got to pay over 11 billion of back taxes to Ireland and another 500 million to France for example, so if there is clear fraud it's easy.

The difficulty is to have a legal framework and not just some judge saying "I'll know it's porn when I see it".

This being said I am not a lawyer.


>Sovereign countries are free to set their tax rate to 0 in order to attract companies there.

Then those companies should only sell products and services in those countries. Otherwise, something should be done about it. I'm not saying it's easy, but it can be improved.


So exporting should be illegal?


Doing business with tax havens should be illegal. A tax Haven creates an agreement between companies and a country to steal another country tax reveneu.

Tax havens produce close to nothing, so they have very small exports. It's just a legal arrangement that has nothing to do with production.


You are assuming that somehow that tax revenue is theirs in the first place.

What if that tax rate makes a business non-profitable in France but a money-making machine in Ireland?

Also, too much focus is centered around taxes when spurious regulations are generally more damning for a lot of companies. For example some friends of mine have attempted to start escape rooms, they have all abandoned their pursuits because here in Spain the legal framework is unclear. All escape rooms in this country are in a legal greyish area.


> You are assuming that somehow that tax revenue is theirs in the first place. The big corporations that evade taxes are using the economic power, infrastructure and legal systems of countries without contributing to any of them. That is money that the corporations owe to the citizens of those countries.

> What if that tax rate makes a business non-profitable in France but a money-making machine in Ireland? I see your point, they are centred about maximizing profit. But, there are other goals as well. The goal of improving the taxation system is related to broad social issues like wealth redistribution. It has nothing to do with the only goal is to maximize short term profits for companies.

> Also, too much focus is centered around taxes when spurious regulations are generally more damning for a lot of companies. For example some friends of mine have attempted to start escape rooms, they have all abandoned their pursuits because here in Spain the legal framework is unclear. All escape rooms in this country are in a legal greyish area.

This is one of the many reasons regulations take a long time to be in place for new kinds of business: https://www.news.com.au/world/europe/five-girls-locked-in-ho...

I hope that your friends find a good way to start escape rooms in the end. If it is their passion they will succeed. Regulations may be slow, but regulations get set and then people can do business safely for everyone involved.


Or more likely: fewer people do business. It would certainly explain Spain's economy.


Escape rooms and haunted houses are a nightmare in local fire code in the states as well. Ends up putting a lot of smaller productions out of business.


If it were that, I’d understand. The main issue my friends had was with declaring their “official activity”. In spain you need to declare what activity your bussiness is into, and the categories available are so restrictive and ill defined that a lot of people end up just making up something and going with it.

I’ve seen contractors with numbers in their paperwork that was obviously made up by putting a completely random number (they even admitted to that privately).

It’s important? No, is a risk that could destroy your bussiness? Certainly.


Wow that's pretty lame then. We have something similar but it's not really something you're held to, mostly just for them to have an idea what your deductions should be (or something like that, not a tax expert). Wondering, could they classify themselves as theater or similar? That's what's commonly used at least in the circles Im part of.


Tax havens are often highly desirable tourist destinations. Making it illegal to do business with them would anger a lot of tourists and is, frankly, a violation of freedom of movement.


But shouldn't they like pay taxes for where the customer is from?

Suppose a guy from US purchases the service, shouldn't tax be paid there. Isn't that how its supposed to work? Taking only in terms of Giants.


Note that there already is a tax that people are paying 'where the customers are'. It's the VAT, which is one of the biggest sources of income for a state.


To complicate the situation, a French citizen, living in Spain, the sole owner of a company incorporated in Ireland, buys software from an American company to run for a customer in Brazil.

Which country/countries should be able to tax the revenue?


The company would pay corporation tax in Ireland. The French citizen, if resident in Spain, would probably pay taxes in Spain (generally countries tax residents).

The customer may need to pay sales tax on the purchase to Brazil, if Brazil has such a thing.

But I agree with your point - it does get quite complicated and bureaucratic.


> The company would pay corporation tax in Ireland.

You'd assume that, but you could also very well be wrong. Depending on tax treaties and the "effective place of management" principle, he could be liable for corporation tax in Spain or in both Spain and Ireland.

One reason why tax laws get very complicated very fast is because every country wants to tax everything it can which inevitably means that two different countries end up taxing the same thing. To avoid this, you get double taxation treaties and loopholes.


In the example above the American company presumably has most of its employees in the US and ought to pay significant tax there somehow.


It will: the process of paying employees is heavily taxed. Who writes the check and what the nominal salary is doesn't matter too much... between the cost to the company, and the employee getting to spend the money, the government gets what 30-40%? That's a lot. And it's hard to avoid, you can't move a hundred engineers to the Bahamas at the stroke of a pen.


It gets really hairy in cases like Google and Facebook, where the guy paying the service might be a US agency paying to show ads to YouTube/FB users in Europe.


My guess: Big corporations often have more potential to outsource, and are better known, and have a stronger PR and legal department. These traits give them a much better negotiation position (don't remember that governments profit from taxes, so it's a bit of a demand and supply thing: If taxes are high in one country, a big company will threaten to move to another, which costs the country money in the end).

At least, this is the argument that the Dutch government uses to abandon as many taxes for companies as possible.


Yeah, the Dutch government, ran by the VVD...


First, it is not tax evasion if the law is being followed. The real problem is that tax laws have these various loopholes, and the question is why the law is written that way. Almost always it is because wealthy people benefit from the loopholes and lobby for politicians to either keep them in place or replace them with new loopholes (which is the likely outcome from this French tax). When the tax code is complicated enough, as it will inevitably become over time, you wind up with a situation where accountants find creative ways to combine different aspects of the tax code to minimize a company or individual's tax bill.


Political economy and a race to the bottom. Though take hope, there are many people working on this and the silver lining of tech's centralization is that it will be easy to chase them down once the right laws are in place.


Tax evasion is already illegal.


Tax evasion is, but tax avoidance isn’t.


What's 'tax avoidance'? Doesn't everyone avoid tax when they claim expenses and make deductions?


yes - so maximizing your use of any method to reduce your tax burden is (a) the smart thing to do and (b) the (a)moral imperative of a corporation.

not a judgement call, just not sure how you frame the raison d'etre for something that oesn't embody life to begin with.


Why moral imperative? Perhaps you mean ethical or legal, but is not even legally required, so far as I know, that a corporation must maximize return to investors.

More broadly, society created the concept of the corporation and imbued it with valuable privileges such as limited liability and a potentially favorable tax regime. Some argue it would be morally reasonable to require it balance the interests of stakeholders.


Evasion is a bug in the tax code. Avoidance is a feature. Laws are written to create the possibility of avoidance - e.g. we add a 20% tax on cigarettes. We create a 20% tax credit on solar panels. We don't tax interest gains off of savings accounts.

For what it's worth it's pointless to complain about tax law complexity. Complexity increases with the amount of money you're trying to drag out of the economy. The more money you want the greater the temptation to create loopholes because they end up being worth more. Imagine a country where the tax rate is 100%. If you pass a law that taxes building cars at 90% you've effectively created an industry. Compare that with how much you'll be loved if the tax rate is 10% and you lower the tax on making cars to 9%. Still good but you'll only garner like not love.

Honestly this is why the details of tax law - how fair it is for example - only marginally interest me. The overall rate - and for that you might as well include borrowing, so it's easier to just ask - what percentage of GDP does the government spend are a lot more interesting to me.


Exactly, and when companies do the same thing it’s legally considered perfectly fine.

Morally can be a different matter, though.


Illegal avoidance is called evasion.


You make it sound as if taxation is a good thing. In much of the world capitalism, retained profits and growing the economy is used to make people wealthier. The countries with fastest growth and highest employment, healthiest companies tend to have lower tax rates (China, USA).

Countries that treat companies as if they a problem that need more tax (much of Western Europe) tend to have high unemployment and poorly performing economies where young people leave. Europe has the advantage that it got rich through its empires (and low taxes) and is now stagnating into poverty. Companies and people already pay a lot of tax compared to the rest of the world, Europeans should be trying to reduce this burden instead of figuring out how to tax more.


> Countries that treat companies as if they a problem that need more tax (much of Western Europe) tend to have high unemployment and poorly performing economies where young people leave.

Maybe countries with high unemployment and poorly performing economies have a problem with companies paying too little taxes.


How does that fix the problem though? The government doesn't create jobs, companies do.


If only it were that simple.


The countries with fastest growth and highest employment, healthiest companies tend to have lower tax rates (China, USA).

Another yardstick for comparing countries is how they treat and take care of the poor ones. High-tax countries often fare well in that and China, USA not so much.


Thanks a lot to all your answers.

My question was badly formulated. I meant to ask: why are we tolerating this situation?

Regardless of tax evasion / tax optimization or whatever is the wording, most people agree that these companies are not paying the amount of taxes they should. I get the why and how these companies are doing this. I just don't understand why we, as a society, accept that. Our society has never been so rich, yet we see decline in education, health, etc. I do think we should only have progress: more culture, better life, less work, etc.


> most people agree that these companies are not paying the amount of taxes they should

They will say this because the news tells them this is true. But it seems far from obvious to me.

If a multinational sets up shop in France, then a whole pile of taxes do get paid: VAT is 20% of all sales. Then there is income tax / social security / etc. I don't know any French details, but I'm quite sure it's above 30% in total... all of which you should think of as being collected on the transaction that A pays Mr. B. If the company spends most of their revenue on salaries, then this already sounds like order of 50% of throughput goes to tax.

In addition to this, they may make some profit. And it seems pretty hard to know where the profit was made. How much is iOS worth? Or the Starbucks logo... quite a bit, your groggy airport customers know what they're getting, but there's no really obvious way to put a unique number on this. And thus it's honestly difficult to say where the profit was made.

Yet this is often the whole violent argument! Over maybe 20% of say 5% profit, 1% of sales... 1/50th of the taxes already collected above. If they wished to collect more, they could easily tweak those numbers. I'd go so far as to suggest that we should just give up, set the tax on corporate profits to zero globally... but at least they are generally moving down.

> Our society has never been so rich, yet we see decline in education, health, etc

But we collect more tax than ever. It it buys us worse healthcare, or education, than it did in the past, then the problem may lie elsewhere.


Yeah, I find that the tax avoidance issue is overblown. The numbers look large because they have collected over several years, but in the grand scheme of things they're a cup in the bucket compared to VAT, payroll and income taxes.

You have to remember that VAT, payroll, and income taxes roughly scale with revenue, but corporate taxes scale with profits.


That is a great philosophical question. My banal answer: entertainment is also better than it ever has been, and the messes of people are this more numb and manipulable than they ever have been.


Anything taxed has to have an asset value determined for it, and reliably recorded. This is extremely complicated to enforce on almost anything if you sit down and really think about how - if it were the only thing you had of value to offer - you might be able to hide it's true value.


The point isn't tax evasion, it's France wanting more tax revenue without pissing off the public. Remember that the yellow vests protest started because of a tax increase on the general public.


> Couldn't we just ban tax evasion? What makes it so hard? (honest question)

Two things, mostly. The first is lack of financial transparency. The other is how corporate tax is levied.

With respect to transparency, there's no shortage of options to create structures in tax havens such that there's little if any paper trail that ties it to their owners or beneficiaries. And just in passing, the US and the UK are not void of problems here; on the contrary, they regularly appear on worst offenders lists:

https://www.theguardian.com/us-news/2016/apr/06/panama-paper...

The other issue is basically related to accounting and how corporate tax gets levied. If you're a multinational, it's possible to set up a subsidiary in a place with to no corporate tax and make your international profits all appear there instead of coming home where they get taxed. (This is the reason US businesses were so many billions abroad in the run up to Trump's tax cuts.) Related to this is the ability to move money out of countries that do tax, using questionable licensing fees and accounting tricks the like. Example:

https://www.telegraph.co.uk/business/2016/04/20/mcdonalds-fr...

Anyway, to fix this you basically need to get all countries together so there's more transparency, and dig into how corporate taxes get levied.


Europe is losing ~globalization and we are fighting over the scraps. Which European country do you think will be overall obviously better in ten years? And not in the sense that "everything gets better", but in the sense of having a high rate of success in converting progress to prosperity. I don't know of any.


From my travels it sounds like (some) Europeans don’t work that much compared to their American or Asian counterparts. Like, French citizens gets way more vacation than anyone I know.

It’s obviously good to live a decent life and spend time with family, but at some point it cuts into your national productivity.


I don't generally think it is that big a concern. You are unlikely to outwork people, especially with something like 20%. Or more specifically there are always people with less to lose than you do. It isn't something that European countries can compete by, and especially not smaller countries. I think greater concerns are systematic defect. But there is no meaning to have a lack of education, apartments or other things that would mean good conditions for being productive. Those are the things you can't afford as a smaller country that wants to be competitive.


The Eastern European countries have been growing consistently for years. If you only look at economics countries like Poland have been doing very well.

You have to remember Western Europe has developed economies. They aren't likely to grow at the rate Asian countries are as those economies have a lot of catching up to do.

Also European countries don't necessarily have the same priorities as the US for example. Most of us prefer decent workers rights and consumer protections over 1/2% on GDP.


>Most of us prefer decent workers rights and consumer protections over 1/2% on GDP.

Weird framing considering inviduals don’t care about the GDP. It would probably be better to say that people in the US tend to care about higher incomes vs state entitlements. This is evident in the fact that brining up tax cost per individual is an easy way to kill universal healthcare plans.


Absolutely the eastern countries have been growing.

This is because they went from a system of extreme socialism, and moved towards capitalism.

They still might not be as capitalist as America is these days, but they are doing much better.


I am not so much concerned about growth as such, but about European countries inability to convert progress into prosperity.

This might not be the best example, but take cars. A country like the US would build a interstate highway system, probably subsidize car manufacturing and go on to create a huge factor of progress for decades to come. You have successfully converted technological progress into a meaningful factor for society. While in a less developed country only the rich will have cars and roads will be broken. Of course these days that era is coming to an end.

The same is true for other things that are progressing. Yet, in few to no European countries would you expect that the fundamentals of the information age like education, health care, housing, infrastructure and work environment will get better and more accessible in the next ten years. At least not organically i.e. without a crash.

What you can say in most countries is that education is getting more competitive, health care more complex, housing less accessible, infrastructure more expensive and work environment less comfortable. This is people fighting each other trying to get whatever there is, not somewhere where people are preparing for the future as societies.

So the only conclusion I can make, while it certainly might not be the correct one, is that Europe is losing. Because if Europe was winning we would be investing in the future and getting it better. Unless we are just hopelessly arrogant, which doesn't bode well either.


>Yet, in few to no European countries would you expect that the fundamentals of the information age like education, health care, housing, infrastructure and work environment will get better and more accessible in the next ten years.

I do expect that. Of course there are some problems like an ageing population and the fiscal irresponsibility of some countries, but those problems aren't unique to Europe.

To take your example of the highway system there is huge development going on across Europe.[1]..[8]

Your conclusion is too gloomy, I know it's the standard message spouted by the media but I really don't think it's true.

[1] https://www.theb1m.com/video/norways-47bn-coastal-highway [2] http://www.crossrail.co.uk [3] https://theurbandeveloper.com/articles/designing-cities-with... [4] https://en.wikipedia.org/wiki/Gotthard_Base_Tunnel [5] https://en.wikipedia.org/wiki/High_Speed_2 [6] https://en.wikipedia.org/wiki/Blanka_tunnel_complex\ [7] http://www.vde8.de/---_site.index..ls_dir._function.set__lan...


The example of the highway system was more for its time. Europe did, and has, just as the US built a lot of infrastructure over the years. But it is still lackluster in many places.

Though the real lack of conversion isn't in one specific thing, it is that Europe (and probably much of the world for that matter) can't offer people good opportunities. I hope I am too gloomy. It is just a hard argument to make that in terms of life prospects it wasn't better to be young ten years ago than it is today in many places.

If people believe that someone else won't come and eat their lunch over that I think they are wrong. As I alluded to in another comment, Europe probably lost at least half of the tech industry it could have had if it wasn't for capital going into things like rents.

I people were expecting things to get better they wouldn't essentially hold back growth. We would see new rapid affordable development because not doing that would be losing out. But I don't see countries being concerned about that. They are perfectly happy taking decades building things and going over budget. They let mortgages double or triple, so everyone who came before win at the expense of those coming after. They sell companies with valuable technology are to foreign interests.

So I don't really understand how someone e.g. would end up working less when they have twice the mortgage than their parents and the companies they work for are owned foreign investors who wouldn't mind moving activities abroad at any point.

And to that point almost all major successful companies are vertically integrating today, because with information being accessible there isn't much reason not to control your own activities. Yet, most European countries are doing the opposite. Outsourcing their main activities to complex constellations.


What exactly are they losing?


As a European, I feel like the EU, in general, is on the losing side of globalization.

There is not a single European internet company in the top 15. I think part of the reason for this is cultural (aversion to risk), part of it is due to the environment (relatively low salaries for IT, limited access to venture capital) and a part of it is due to bad policies being enacted by the EU - most notably the EU VAT on digital services, the GDPR and now the Copyright directive.

When it comes to digital services, Europe is seen as a place to sell things, not make them. This state of affairs has left Germany and France bitter over the success of American tech giants, particularly as they put ever increasing pressure on local businesses. So the EU reacted in pretty much the only way it knows how - by introducing legislation against said businesses. This had the unintentional consequence of targeting European tech startups as well, making Europe an even worse place to start a new business than it already was. Instead of a single digital market, you have 28 different national markets, each with their own rules and regulation, only ~11 of which are actually interesting due to their size and purchasing power.

At the same time, austerity policies enacted after the 2008 recession have resulted in cuts in the scope and quality of public services. Prices for most goods and services are rather high. The middle and lower classes are particularly hard hit, leaving many to wonder whether globalization is worth it.


> [...] and a part of it is due to bad policies being enacted by the EU - most notably the EU VAT on digital services, the GDPR and now the Copyright directive.

These rules came into effect the last year or so, the "battle" for the tech industry was fought ten to twenty years ago. US companies all have had a huge advantage "only" being under the (at the time very criticized) DMCA while European companies had to abide by local laws, often in multiple jurisdictions. Large US companies also avoided paying the same taxes European companies had to, amassing large reserves for acquisitions of any successful European companies.

That Europe can't produce technology companies is false, at least to the same extent that applies to the US. They just either got outmaneuvered by large US entities, got acquired or ended up limited in their growth by things like housing. If you look at e.g. Sweden you have MySQL (eventually acquired by Oracle), Skype (eventually acquired by Microsoft), Minecraft (acquired by Microsoft), Spotify (public with many offices). Any of these companies could have been really big domestically, if it wasn't for it being hard to grow and easy to get bought.

These rules, whether you agree with them or not, should have been there 20 years ago so everyone had to play by the same rules.


The VAT directive on digital goods most certainly did not come into effect in the last year or so.

> US companies all have had a huge advantage "only" being under the (at the time very criticized) DMCA while European companies had to abide by local laws, often in multiple jurisdictions.

So we agree that Europe, in general, is a worse startup environment compared to the USA?

Also, I think it's pretty disingenuous to claim that large companies like Apple or Microsoft got big because they didn't pay taxes in Europe.

> Any of these companies could have been really big domestically, if it wasn't for it being hard to grow and easy to get bought.

They were big domestically. They were even significant internationally. Just not nearly enough to match US companies.


> Also, I think it's pretty disingenuous to claim that large companies like Apple or Microsoft got big because they didn't pay taxes in Europe.

I didn't, that is another story. I am saying that they had an easier time than they should have competing with and acquiring any European competition by effectively having a ~30% advantage and discount.

> They were big domestically. They were even significant internationally. Just not nearly enough to match US companies.

They all except Spotify got acquired before they could potentially become big companies. If you want to have large companies with thousands of employees in Europe they have to survive as domestic companies. Spotify had potential to become one, but at that point the Stockholm housing market was already in a bubble. https://www.ft.com/content/bdf04bc2-6a0f-11e6-a0b1-d87a9fea0...


Essentially competitiveness. Countries that are, or at least aspires to be, competitive would be restricting foreign companies and invest in infrastructure. While Europe is doing the opposite. We are selling our companies and restricting the building of infrastructure.

And while you can point to specific examples, like startups, that are successful in Europe it is mostly an illustration of how much we are leaving on the table.


switzerland


> Is it because of bad laws?

No, it's because of the good laws. Taxation is theft.

And it's not called tax evasion but tax planning. No one is obliged to pay more than the minimum.


> Taxation is theft.

No it isn't. Property rights are determined by the state, hence taxation by the state cannot be considered theft.


That’s not really a valid argument against “taxation is theft”.

As a citizen born in a country, you never enter into an agreement that the government should be able to take a cut of all of your transactions, but that’s what happens and refusal to partake results in violence (an arrest and time in prison).

It’s no different than the local mob going around giving beatdowns to get protection money from businesses. The people that voted for the government sure think it’s different, but it’s not much different to the people who didn’t.

There is a reason they had to put the ability to tax right in the constitution. And there is also a reason the US is no longer part of Britain.


No, but you also don't have to partake in the economic system, that is your choice.


It's easy to establish the duty to pay your taxes even using "freedom of contract". By stepping foot on a public road, you accepted the terms and conditions.

Market extremism is a funny thought experiment, but ultimately absurd.


I agree that taxation isn't necessarily theft, as part of the social contract, but aren't property rights at least in some cases fundamental?


Dude I know this is weird but looking at your comment history I'd love to talk to you. If you're up for it, my contact info is in my profile.


This is not very helpful or informative. In the case of Google, who are they going to tax? Google Ireland? Google France? How exactly?


Money collected for services rendered through a French IP. That is, on ads shown to French viewers, on GSuite accounts paid while connected to a French IP address, etc.


The money is collected by Google Ireland. So they're going to charge Google Ireland? It's probably safe to assume they're not charging Google LLC in Delaware.


Presumably France has access to the not in considerable French origin advertising revenues.


How? Based on VAT? I can think of multiple approaches, but each of them is convoluted or deviating from existing norms in its own way. Every time there's an announcement like this, it's often surprisingly low on actual details.


So what?

If I rent out an apartment in Paris, does it really matter if I collect the money as Pierre Francois, a french resident, or Pierre Francois LLC, a Delaware corporation? It mostly doesn't - I'm bound by French rent law, and pay french taxes related to rent either way (Income is more complicated).

Such a law is very simple: "You pay 5% of ad/media sales for the privilege to send data to french IPs", residence of person/corporation collecting the money not important.


Why wont government taxation agencies have tax bounty programs?

If you, as a tax professional, find a taxation loophole that allows big businesses to lower their taxes - you get a $$$ compensation and the loophole gets publicized and "officially" patched.


I don’t think knowledge of the loopholes is the issue. It’s reasonable to determine what loopholes were used after the fact. The problem is actually closing them and the political fallout involved.


perhaps the loopholes should be exposed to the general public then so that we can hold the public officials accountable to fix them.


As usual, highly inefficient governments trying to expand into every wallet in their sight, in order to keep funding their inefficiency with no accountability.

We need market de-regulation. End of government-sponsored monopolies. Accountability on budget spending. Enablement of profit-oriented policies that generate surpluses. Enabling equal opportunities to people of all social classes, and performance reviews to keep everybody accountable.

Then, and only then, equal and fair taxation that promotes social wellness and stability.


Although I can partially agree with you, I think it is worth looking at the other side of the coin to understand why things don't go the way you think is best. Below I will give you a few examples to consider (there will be ways to refute, but bare with me since the goal is to start/move a dialogue)

Government-sponsored (oli)monopolies - This is sometimes a policy tool to get the country's key strategic interest moving. Sometimes some goods & services are obscenely expensive without Gov support directly or indirectly (that includes g&s you take for granted). In another case, if you don't sponsor, but other countries do, the other countries will become more competitive in the global market, impacting your countries long-term economic success.

Equal opportunity for all classes - At what point would you create equal opportunity? Is it providing basic, quality educational institutions? How do you account for parents willing to pay for extracurriculars, tutor and any new technologies that come along? Will you forbid higher income parents to spend their hard earned money to get their kids ahead in the name of equality?

Accountability on budget spending - Most advanced democracies allow you to review the budget of your city, state, federal and even get involved in the process (via elections, open forum,etc). It is mostly someone's prerogative to get engaged or not. Also, since governments are usually required to help create jobs, etc through different forms of stimulus, you will see money being spent in different ways with different levels of return.

Performance review - Govs and private institutions have performance review, even politicians have it via re-election. How would you optimize it? How would you fix its issues to ensure people don't exploit it? What makes your solution function better than the ones already tried?

As I said, although I agree that we should strive to be better at some, if not all the points you have listed, I think we need to move past throwing the words out there, and become more engaged in our communities. This will help everyone to better understand how the world around them actually works and how to improve it


What would you say is an example of a country that -- more or less -- follows these principles?


Different governments do different parts of that well. If there was any government that did it all perfectly we would be saying "we should do things like X" not describing policy in the abstract.


This reminds me of a horrible tax I came to know of recently - something called the EU VAT MOSS on digital goods. Apparently, it is supposed to target giants like Amazon who route money via multiple countries to evade taxes. Not surprisingly, this ends up affecting the smallest players most drastically. Worst, the glib language used to describe who should pay the tax is utterly confusing. As always, this means the actual target company of this tax chalks it down as yet another thing they need to remember (amongst a million other things), while the tiniest players who are starting out and who don't reside in the EU will have to worry and stress endlessly about the stupidity of dealing with something like this.

Here is what I have learnt about Eurocrats: a) they don't understand economics b) they definitely don't understand unintended consequences c) I am willing to bet not one of them has ever bootstrapped a successful venture and finally d) there is a good reason why no country in Europe is able to create its own Silicon Valley - they are just too busy creating more busywork for themselves.

And to the well-intentioned person who comes along and says "Well, if you are clearly not the target of this, then why do you even worry?" I have a question - if it turns out that you are wrong, are you going to pay the taxes on my behalf? Actually, this is literally what I asked a friend of mine from Europe who expressed that sentiment. Not surprisingly, he wasn't really willing to put his money where his mouth was.

I am frankly astonished by all the people from EU who come in and comment things like "Oh, you don't really know how European laws actually work. If you did, then you wouldn't be worried". Do you not have nothing better to do in life than trying to understand the nuances between the "letter of the law" and the "spirit of the law" in every country around the world?

Oh, and by the way - HN will be very interested to know this: right now, there is a company called Paddle which is a Stripe competitor - and this one law (EU VAT MOSS) seems to have single handedly revived this company. It was (and apparently still is) a painful software to use, and Stripe is faaar superior in terms of API and integrations [1], but Paddle has now become the defacto choice [2] for everyone who actually cares about the EU VAT MOSS because Paddle handles all the annoying crap on your behalf. My guess is, Stripe - which is too Silicon Valley focused - is going to be blindsided by EU VAT MOSS, hand over a lot of their next generation of customers to Paddle, and won't even know what hit them in a few years if they don't pay careful attention to what is going on here.

[1] https://www.indiehackers.com/forum/anyone-using-paddle-for-s... [2] https://www.indiehackers.com/forum/how-do-you-handle-vat-mos...


I didn’t know what this was, so I checked (https://europa.eu/youreurope/business/taxation/vat/vat-digit...). Long story short: MOSS stands for “mini one stop shop” and looks explicitely designed to make it easier to sell across the EU.

> The Mini One-Stop-Shop (MOSS Scheme) enables you to supply digital services within the EU without the need to register in each EU country you supply to. It can be used by both EU-based businesses and non-EU businesses.

Honestly from reading the quick description of the law, if I was a business I would definitely try to take advantage of the law instead of registering in different countries for the single purposes of paying VAT.

I get that some payment actors allow you to do that easily, while others don’t (yet), and yes this would be a criterion in choosing a payment gateway. But apart from that, I don’t really see how this law is evil, or an illustration that Eurocrats don’t know anything about business (there are plenty of other examples, but this isn’t one). Can you explain in which way the MOSS is “horrible”?


I can sell services domestically up to a limit of about 40,000 euros before I need to register and account for VAT. If I make even a single EU sale, I must immediately register for VAT and pay tax on that sale, either through MOSS or directly to the country my customer is in. The EU is now "generously" considering introducing a limit of 10,000 euros before you need to register for VAT.

I also need to disagree with the parent poster - the rules for what is and is not a digital service are relatively clear - but not clear enough that your local tax officials understand it, apparently. I've had situation where my local tax agency incorrectly interpreted that my services (freelance software development) could be construed as being digital services and thus could fall under this scheme.

Due to this and various other reasons, I am considering emigrating from Europe - some back of the napkin calculations show that I could live a comfortable middle to upper middle class lifestyle in other parts of the world just on the tax difference.


> The EU is now "generously" considering introducing a limit of 10,000 euros before you need to register for VAT.

No, that limit was passed in 2017 and took effect for digital services in January 2019:

https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=CELEX:32...

I.e. if your cross-border EU sales of digital services are less than 10 000 €, you can consider the sales domestic.


Thanks for mentioning that! I remember reading that it was being discussed, but not that it had already been implemented.

It's not much, but still better than nothing.


The fine print around who actually needs to pay. A very simple example - say you sell online courses. Should you register for VAT?


Well the page on MOSS lists “distance teaching” as falling under the definition of digital services. So I guess the answer is yes?


Alright, thank you. Now, if I were to earn, say a total of $1000 [please feel free to substitute this with a more trivial number, however you may define trivial] for the whole year on online courses sold to EU residents (considering its a side gig, not too shabby), should I still register?



It took me 5min of googling to find out VAT MOSS

> MOSS means you don't need to register with tax authorities in every EU country you sell to, instead, you can register for VAT, file VAT returns and make payments in one single place.

Sounds pretty great to me.


>> Sounds pretty great to me.

I see. Do you mind spending another 5 and tell the answer to this question: suppose someone sells online courses. And they don't themselves reside in the EU, but the have customers who do. Should they register for VAT?


What do you mean "should they register for VAT"? You should be registering for VAT in your home country anyways. Or are you talking about additionally registering for VAT MOSS? The answer is no you don't have to, it's just convenient because it's less admin (as otherwise you should be registering for VAT in each EU country that you have customers). I knew all that from the previous 5 minutes I spent on it.


All this stuff is super confusing. https://www.austrade.gov.au/contact/faqs/i-want-to-export-my... says you need to register if: > your VAT taxable turnover is more than £85,000 (the 'threshold') in a 12 month period > you expect to go over the threshold in a single 30 day period

WTF? How the hell would anyone know that? What if you never sell to the UK, but someone goes on a run because some product randomly becomes popular. It is such an unnecessary minefield.


The bullet point right below the 2 you quoted literally answers you question. "If neither you nor your business is based in the UK. You must register as soon as you supply any goods and services to the UK (Same with EU)". Alternatively, don't do business in a country you consider to complex to deal with.


You can register after the fact. Why don't you people inform yourselves instead of being such whiny, clueless brats.


Those VAT rules were brought in because companies like Amazon were abusing the system to save paying VAT.


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