Bear Pit: now the sole domicile of politics at LuLa

[Robert Roaldi]

My question was: How does that (15% foreign tax) help America or American corporations?

There's no circular argument nor confusion.  Just a simple question.

The question makes no sense to me. Government policies, whether American taxes or foreign taxes, are not enacted to make life better for American corporations. That's not their purpose, why would they be. Maybe those taxes are the price they need to pay to play in the game. Maybe they are something else. Governments invoke taxes for the good of their country, not American corporations.

You seem to have a bizarre view of the world. We are NOT all here as a support system for commerce. Commerce is something we invented to make life better for us.

[kers]

My question was: How does that (15% foreign tax) help America or American corporations?

There's no circular argument nor confusion.  Just a simple question.

These companies ( the Goooogles, apples etc ) hardly payed any tax, anywhere...
;..for their profit is made in the "Bahama's' were they don't have yo pay tax....
Now they have to pay tax ....
They now will pay it in the countries as 15% of the local profit. If that is America- so it is..

[Alan Klein]

The question makes no sense to me. Government policies, whether American taxes or foreign taxes, are not enacted to make life better for American corporations. That's not their purpose, why would they be. Maybe those taxes are the price they need to pay to play in the game. Maybe they are something else. Governments invoke taxes for the good of their country, not American corporations.

You seem to have a bizarre view of the world. We are NOT all here as a support system for commerce. Commerce is something we invented to make life better for us.

These companies ( the Goooogles, apples etc ) hardly payed any tax, anywhere...
;..for their profit is made in the "Bahama's' were they don't have yo pay tax....
Now they have to pay tax ....
They now will pay it in the countries as 15% of the local profit. If that is America- so it is..

Maybe I wasn't clear.  I'm not arguing that taxes on American companies aren't good for non-American countries.  I'm arguing why an American president would support it if it hurts American corporations?  The American president is supposed to look after the interests of American corporations,  not foreign countries. 

In addition, American policies legislated through Congress are also in the interest of American corporations for the same reason presidents should be supporting protection for them.  IF Congress and presidents want to tax corporations for American purposes, that's another story.  That money goes into American coffers, not into foreign ones.  Do you want your corporation taxes to go to America?  Isn't that what the arguments regarding tariffs are all about?  It's the same thing with them.

[PeterAit]

But US corporate tax rates are higher than 15%.  And Biden wants to raise them even higher.   So companies still have incentives to move overseas.  All Biden has done with this new deal is to guarantee that those companies will pay taxes to other countries.  How does that help America or American corporations?

Essentially no corps pay the full US tax rate. Partly because they finagle things so some or all profit shows up in another country with low or no tax.

[TechTalk]

Our corporation, the Great Widget Inc. corporation, which is headquartered and incorporated in the U.S., sells a billion dollars in Great Widget products every year in the U.S. The corporation generates $100 million in annual profits from those sales. The tax on those profits in the U.S. is 21% or $21 million. Although the corporation benefits from tax funded infrastructure and other publicly funded services, the corporation doesn't want to pay U.S. taxes if it can avoid them.

So, we set up a foreign corporate subsidiary on a sunny island called Tax Haven Island where there are no taxes. Tax Haven Island has little in the way of an industrial base outside of tourism. The small population benefits from being a tax haven by collecting a relatively modest annual corporate registration fee from thousands of corporations and acting as a base for their subsidiaries and receiving billions of dollars parked in their banks from the profits shifted there. The corporate billions parked in the Tax Haven Island banks, to avoid taxes in their home country, is loaned and invested and generates income; creating a local financial services industry that generates profits for the banks in the small island.

So, we set up the foreign subsidiary in Tax Haven Island. The cost is minimal. There is a small office with a local "director" who is also a director for dozens of other foreign subsidiaries. There are no taxes, just some annual registration fees. In total, it costs the corporation $1 million to operate there, including the registration fee to the local government, but the tax bill is zero.

Next, we transfer, or sell for a small sum, all of the corporation's intellectual property to the Great Widget Tax Haven Island Inc. subsidiary. The copyrights for the corporate brand and its products, the patents and technical processes, licensing agreements, etc. all now reside offshore and outside of U.S. tax jurisdiction. The corporation can now "pay" fees to its Tax Haven Island subsidiary of $100 million to license the copyrights and patents, etc. and deduct that from its U.S. taxes as an expense. The corporation now has zero profit in the U.S. and owes zero in taxes. All of the $100 million in profits have been shifted to the Tax Haven Island subsidiary and its local banks, where there is zero tax and minimal operating costs. As an added benefit, Tax Haven Island has bank secrecy laws which makes it a crime to divulge financial information; so, it's virtually impossible to audit our transactions.

Instead of paying $21 million in taxes, the corporation spends a million dollars to operate in Tax Haven Island. The $20 million saved in taxes is retained by the corporation and its shareholders. The corporation and shareholders appreciate this dividend, derived at the expense of ordinary U.S. tax payers who don't have their income protected offshore, who have to fund the difference. Thanks! It gets even better in that we can also use that Tax Haven Island subsidiary to "loan" money to our operations in other parts of the world to offset taxes there, but that's a story for another time.

[TechTalk]

We at Great Widget Inc. have been using this legal tax haven scheme to shift our profits offshore for some time now and love the avoidance of paying our fair share of domestic taxes as a result. Unfortunately, governments all over the world have grown tired of losing tax revenues from where the profits are actually being generated to offshore tax havens. Even some citizens, who have to shoulder the tax burden that we avoid thru offshoring profits, have wised up to the scheme.

Now, governments are moving toward taxing us domestically at a minimum of 15% on those profits we have shifted to offshore tax havens, where the profits are not being taxed or taxed at a much lower rate, thru a Global Minimum Tax plan. Our $100 million in relocated profits, which are now taxed at 0% in Tax Haven Island, would be subject to a minimum of $15 million in domestic taxes in the U.S. under the Global Minimum Tax plan.

Our legal, accounting, and public relations departments are discussing whether it will be worth it to continue shifting profits offshore in that event. Being known as a domestic tax avoider thru offshore tax haven schemes may not be worth the damage to our brand and reputation when compared to the new drastically reduced tax savings under the Global Minimum Tax plan.

Well, we will lobby against the tax plan and see what happens. Wealthy campaign donors, who also park their money offshore to avoid taxes, will join in the fight. No doubt we will also be able to bamboozle and confuse some of the voters as well. We'll keep our fingers crossed and hope for the best.

* Disclaimer: As far as I can tell, there is no Great Widget Inc. It is purely fictional and being used solely for hypothetical illustration purposes only.

** This has already been explained in real terms previously here. The hypothetical is intended for those unable to understand the previously provided explainers.

[Alan Klein]

Our corporation, the Great Widget Inc. corporation, which is headquartered and incorporated in the U.S., sells a billion dollars in Great Widget products every year in the U.S. The corporation generates $100 million in annual profits from those sales. The tax on those profits in the U.S. is 21% or $21 million. Although the corporation benefits from tax funded infrastructure and other publicly funded services, the corporation doesn't want to pay U.S. taxes if it can avoid them.

So, we set up a foreign corporate subsidiary on a sunny island called Tax Haven Island where there are no taxes. Tax Haven Island has little in the way of an industrial base outside of tourism. The small population benefits from being a tax haven by collecting a relatively modest annual corporate registration fee from thousands of corporations and acting as a base for their subsidiaries and receiving billions of dollars parked in their banks from the profits shifted there. The corporate billions parked in the Tax Haven Island banks, to avoid taxes in their home country, is loaned and invested and generates income; creating a local financial services industry that generates profits for the banks in the small island.

So, we set up the foreign subsidiary in Tax Haven Island. The cost is minimal. There is a small office with a local "director" who is also a director for dozens of other foreign subsidiaries. There are no taxes, just some annual registration fees. In total, it costs the corporation $1 million to operate there, including the registration fee to the local government, but the tax bill is zero.

Next, we transfer, or sell for a small sum, all of the corporation's intellectual property to the Great Widget Tax Haven Island Inc. subsidiary. The copyrights for the corporate brand and its products, the patents and technical processes, licensing agreements, etc. all now reside offshore and outside of U.S. tax jurisdiction. The corporation can now "pay" fees to its Tax Haven Island subsidiary of $100 million to license the copyrights and patents, etc. and deduct that from its U.S. taxes as an expense. The corporation now has zero profit in the U.S. and owes zero in taxes. All of the $100 million in profits have been shifted to the Tax Haven Island subsidiary and its local banks, where there is zero tax and minimal operating costs. As an added benefit, Tax Haven Island has bank secrecy laws which makes it a crime to divulge financial information; so, it's virtually impossible to audit our transactions.

Instead of paying $21 million in taxes, the corporation spends a million dollars to operate in Tax Haven Island. The $20 million saved in taxes is retained by the corporation and its shareholders. The corporation and shareholders appreciate this dividend, derived at the expense of ordinary U.S. tax payers who don't have their income protected offshore, who have to fund the difference. Thanks! It gets even better in that we can also use that Tax Haven Island subsidiary to "loan" money to our operations in other parts of the world to offset taxes there, but that's a story for another time.

That's illegal.  Just as Trump was accused of underestimating the value of his property to lower his taxes, when the corporation is audited, the IRS will find this activity illegal or atg a minimum inappropriate.  At a minimum, the company will wind up paying the tax value plus interest and penalties.   When you transfer, you're selling an asset and have to report its value accurately in order to pay taxes on it. The activity you described is fraud.  It would be like you transferring to me a house you own for $0 and then I charge you rent for using it.

[Alan Klein]

We at Great Widget Inc. have been using this legal tax haven scheme to shift our profits offshore for some time now and love the avoidance of paying our fair share of domestic taxes as a result. Unfortunately, governments all over the world have grown tired of losing tax revenues from where the profits are actually being generated to offshore tax havens. Even some citizens, who have to shoulder the tax burden that we avoid thru offshoring profits, have wised up to the scheme.

Now, governments are moving toward taxing us domestically at a minimum of 15% on those profits we have shifted to offshore tax havens, where the profits are not being taxed or taxed at a much lower rate, thru a Global Minimum Tax plan. Our $100 million in relocated profits, which are now taxed at 0% in Tax Haven Island, would be subject to a minimum of $15 million in domestic taxes in the U.S. under the Global Minimum Tax plan.

Our legal, accounting, and public relations departments are discussing whether it will be worth it to continue shifting profits offshore in that event. Being known as a domestic tax avoider thru offshore tax haven schemes may not be worth the damage to our brand and reputation when compared to the new drastically reduced tax savings under the Global Minimum Tax plan.

Well, we will lobby against the tax plan and see what happens. Wealthy campaign donors, who also park their money offshore to avoid taxes, will join in the fight. No doubt we will also be able to bamboozle and confuse some of the voters as well. We'll keep our fingers crossed and hope for the best.

* Disclaimer: As far as I can tell, there is no Great Widget Inc. It is purely fictional and being used solely for hypothetical illustration purposes only.

** This has already been explained in real terms previously here. The hypothetical is intended for those unable to understand the previously provided explainers.

A few years ago, I believe under the last administration, the US enacted the repatriation of corporate profits earned overseas.  It allowed corporations return those profits to the US with a low tax rate.  Over a trillion was returned. 

But why would you encourage having foreign countries tax American companies 15%.  That money stays in a foreign country and any taxes America does collect from the foreign activity has the 15% deducted as the US can't tax twice.  So America doesn't realize any benefit from that 15%.    Foreign countries charging a minimum of 15% on America companies' profits overseas just seems like a losing proposition for America and American corporations.  Maybe I'm missing something that you can explain.

[TechTalk]

There are several methods for moving intellectual property (IP) offshore in order to create a financial arrangement in which the offshore IP is licensed back to the corporation to avoid domestic taxes. The method may vary depending on the country where you want to park both both the IP and your profits. There are a number of U.S. accounting and law firms that are happy to offer you their expert services to guide you in how to do so. Some methods have interesting names like the Double Irish Dutch Sandwich. This is only one of multiple methods to avoid paying domestic taxes where profits are actually earned by shifting the profits to an offshore tax haven.

https://fortune.com/2020/01/08/corporate-tax-haven-laws-loopholes

"Thanks to a change in Irish law, Google in the U.S. will do something it hasn't in years: own outright its intellectual property, including patents, trademarks, branding, and more.

For years, Google and other companies employed a legal tax avoidance strategy called the Double Irish, Dutch sandwich. Here's how it works: Using complex multi-national structures, they transferred ownership of intellectual property to wholly owned subsidiaries in low- or no-tax regions and then licensed the material back to the rest of the company. Profits turned into "license fees" and thus avoided taxes.

One of the Irish laws that made the tactic possible expired on Jan. 1, 2020 due to international pressure from many countries—the U.S., France, the U.K., and Spain, for example—that were tired of losing tax revenue to low-tax Ireland, among other havens."

https://www.offshoreaffairs.com/post/double-irish-dutch-sandwich-tax-avoidance-explained

Double Irish Dutch Sandwich Tax Avoidance Explained

"The Double Irish with Dutch Sandwich is one of the most popular tax avoidance schemes as it is used by the biggest tech companies such as Apple, Facebook, Google, Microsoft, etc., taking profit from legal mismatches and loopholes. The name of the scheme comes from setting up two Irish subsidiaries and one Dutch company in the middle of the tax structure.
 
How does the scheme work? first, it is necessary to point out that the U.S tax system does not tax the U.S, Companies who do not repatriate dividends from foreign subsidiaries (Tax Cuts and Jobs Act), hence a US company sets up two Irish companies, Subsidiary 1 and Subsidiary 2.
 
Why are the foreign subsidiaries set up in Ireland? Because pursuant to the Irish tax system a company can be tax resident by place of management, not country of incorporation if the company is controlled by another company residing in a country that has a double tax treaty with Ireland.
 
Subsidiary 1 will have its place of management in a pure tax haven (0% on income tax) to avoid being an Irish tax resident, and Subsidiary 2 will be a tax resident in Ireland and will carry trade and bring profit (income) from sales.
 
Now that we have the 2 Irish companies set up, the U.S. company grants a license to Subsidiary 1 to exploit certain intellectual property, and Subsidiary 1 will license said intellectual property to Subsidiary 2 who will generate real profit from real sales.
 
If Subsidiary 2 sends the resulting dividends directly to Subsidiary 1, as you might have guessed, the income could be liable for Irish withholding tax, and there is where and why the Dutch subsidiary comes in.
 
To avoid the Irish withholding tax on dividends, we set up a Dutch Subsidiary and Subsidiary 2 will send the dividends from sales directly to the Dutch Subsidiary, and the Dutch Subsidiary will send the dividends tax-free to Subsidiary 1. But why is it tax-free? Because under EC Directive 2003/49 interests and royalty payments made by a company in a member state to a company in another member state are tax-free.

Is this legal? Yes."

[Manoli]

But why would you encourage having foreign countries tax American companies 15%.  That money stays in a foreign country and any taxes America does collect from the foreign activity has the 15% deducted as the US can't tax twice.  So America doesn't realize any benefit from that 15%.    Foreign countries charging a minimum of 15% on America companies' profits overseas just seems like a losing proposition for America and American corporations.  Maybe I'm missing something that you can explain.

There are many regimes where the tax cost is close to zero. By agreeing a world-wide  minimum tax rate of 15%, the incentive to engage in these low cost tax regimes is reduced by, surprise, 15%. For arguments sake , the US corporate tax rate is 25%. If XYZ corp has to pay 15%, it may consider the differential of 10% not worthwhile. Unlikely but possible.

The US corporation isn't 'going' to <low tax regime> 'cos they're charging 15%, they've gone because the cost is as close to zero as possible. 15% narrows the differential. It is intended to offer some form of disincentive.

From memory, only 130+ countries have so far agreed. There are another 70+ who have not. So none of the 'big boys are losing too much sleep over this.

An article a few years old, but probably still relevant, For the Wealthiest, a Private Tax System That Saves Them Billions

[Manoli]

This an old graphic, UK based, but it gives you some idea.

[Manoli]

But why would you encourage having foreign countries tax American companies 15%.  That money stays in a foreign country and any taxes America does collect from the foreign activity has the 15% deducted as the US can't tax twice. 

If that 'foreign' business activity is legally taxable in the US AND is taxable in the country where the activity takes place, then the US will apply a deduction on the tax already paid against it's own tax rate, say 25%, resuting in this case to an additional 10% paid to the IRS. The US does not tax twice, it can and does top-up.

This not only applies to corporations, but also to all US nationals working abroad.

[Alan Klein]

First off, profits of these companies made overseas cannot be distributed to stockholders as earnings until they are repatriated. Once that happens, the profits are recorded as income and American taxes have to be paid.  So, while it's true they may pay no American taxes until then, it has no value to anyone here as long as the money is held overseas.  That's what the repatriation bill was all about. To encourage corps to bring the overseas profits home at lower tax rates.  These companies returned those profits to America by the billions.  I suppose America can set up something similar to have that in effect all the time.

But we still go back to the same question.  What value to America and American corporations does encouraging foreign countries to tax American corporations 15%?  That 15% winds up in foreigners' pockets, not Americans. 

[Alan Klein]

If that 'foreign' business activity is legally taxable in the US AND is taxable in the country where the activity takes place, then the US will apply a deduction on the tax already paid against it's own tax rate, say 25%, resuting in this case to an additional 10% paid to the IRS. The US does not tax twice, it can and does top-up.

This not only applies to corporations, but also to all US nationals working abroad.

Same point.  If there are no foreign taxes on those profits, then America can tax them at the full tax rate, say 25%.   The US gets all the tax money.  However, if the foreign country first taxes at 15%, then America can only tax 10% of those proifits.  So the question again is, why would an American president help foreign countries tax Amercia corporations?  He's suppose to be on our side. 

[PeterAit]

 The American president is supposed to look after the interests of American corporations,  not foreign countries. 

No, no, and double no! The president  is supposed to look after the interests of the American PEOPLE! We need corporations to be sure but when they are too wealthy, powerful, and unrestrained it's the people who suffer.

[Alan Klein]

No, no, and double no! The president  is supposed to look after the interests of the American PEOPLE! We need corporations to be sure but when they are too wealthy, powerful, and unrestrained it's the people who suffer.

Peter, The president is not looking after the American people if American corporate taxes go to foreign countries as Biden is encouraging. If he feels corporations are;t paying enough taxes, he should change American tax laws to get that money taxed by us not foreigners.   Why would we want Amazon taxed so money goes to European countries rather than America?

As an aside, American corporations have made America wealthy. They provide millions of jobs to Americans.  Most corporations pay taxes.  When they issue dividends to stockholders, those dividends get taxed.  Employees for these corporations not only have jobs, but they also pay income tax, state taxes,  Social Security, Medicare, and other taxes as well on their salaries.  When stockholders sell stock that has increased in value, there are capital gains taxes.   

[PeterAit]

... when the corporation is audited ...

And there's the rub. Even if such activity is illegal, which, let's face it, neither you nor I really know, the chance of an audit is tiny because of lack of IRS resources. Biden proposed a significant increase in funding but the GOP blocked it.

[Alan Klein]

And there's the rub. Even if such activity is illegal, which, let's face it, neither you nor I really know, the chance of an audit is tiny because of lack of IRS resources. Biden proposed a significant increase in funding but the GOP blocked it.

I'm not opposed to additional resources for IRS audits.  Tax cheats should get caught and go to jail.  Errors in tax payments should get caught as well and corrected.  But there have to be more taxes collected than additional costs for more audits. Otherwise it's a waste of money.  The fact is most large corporations already get audited.  However, if we're just going to audit a bunch of middle-class people and small businesses who can't afford accountants to go to IRS audits, that's just a waste of time and resources.

My own experience when I own a small company was a NYS Sales Tax audit.  They did find my corporation made a $600 error over three years (that's $200 per year - chicken feed).  But it cost me $8000 in accountants and employee labor costs to handle the audit.  It wasted huge amounts of my time adding thousands more to the costs.  All for nothing.   How much did it cost NYS to do their audit?  I'm sure they made no money on the $600 mistake. 

The point is audits are expensive to the people and businesses getting audited.  While large corporations which already get audited can afford it, small companies can't.  Biden wants to audit everyone. It's a huge burden on small companies. 

[James Clark]

Same point.  If there are no foreign taxes on those profits, then America can tax them at the full tax rate, say 25%.   The US gets all the tax money.  However, if the foreign country first taxes at 15%, then America can only tax 10% of those proifits.  So the question again is, why would an American president help foreign countries tax Amercia corporations?  He's suppose to be on our side.

Because by minimizing the benefits of operating overseas, it encourages American companies to operate in the USA.  The point isn't to make American companies pay foreign taxes, it's to reduce the incentive for dodging American taxes.

[James Clark]

Biden wants to audit everyone. It's a huge burden on small companies.

Biden doesn't want to audit everyone.  Stop.