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A thought on international tax avoidance
Jan. 30th, 2018 11:26 amA lot of tax avoidance strategies* seem to depend on payments from one part of your company to another part of your company, where the second part just happens to be in a low-tax country. Where the company puts their hands up and says "We'd love to pay more tax, but it turns out that Nike (Australia) owes Nike (Denmark) a billion dollars, and so we have to pay that off each month before we see how much left we have as profit."** This is literally how Nike ends up with 2% profit in Australia and 14% in the USA - because it's moving all of the profit to somewhere it doesn't need to pay on it.
So, my thought was this - how about a tax rule which says "If your company owes (or is otherwise paying) money to a foreign company which it owns more than x%*** of then that money is not removed from the balance sheet for the purpose of tax". So it's fine for Google (UK) to pay Google (Ireland) £1,000,000 per month for use of the Google logo - but that comes off _after_ they've worked out how much tax they're paying.
This seemed so simple to me that I thought it must have some kind of negative affect, or it would already have been instituted.
But I've been thinking about it for about three years now, and I can't work out what it is.
So, anyone who understands tax better than me care to tell me what the thing I'm missing which would stop this working is?
*Legal methods of avoiding tax, by following the rules. Different from tax evasion where you ignore the rules. But varies from the generally acceptable (pensions, investing in R&D) to nitpicking through tiny loopholes looking for ways to combine them in a way that the people writing them didn't expect.
**I sometimes see an answer of "Tax them on revenue rather than profit" - but that means that, for instance, a company which buys in £1000 computers and £1000 printers and then sells them combined for £2050 would pay tax on £2050 rather than £50. Seeing as they are legitimately only making £50 on that (less, once you think about other costs they have, like people) that basically makes that company impossible. It also means that a vertically integrated company which makes both the computer and the printer has a massive tax advantage over one which buys in parts and then resells them.
***I'm not sure what X% would need to be to avoid situations like "Our pension fund is invested in the FTSE, and so we own shares of damn near everyone". I'm sure that arguments could go on for ages over that.
So, my thought was this - how about a tax rule which says "If your company owes (or is otherwise paying) money to a foreign company which it owns more than x%*** of then that money is not removed from the balance sheet for the purpose of tax". So it's fine for Google (UK) to pay Google (Ireland) £1,000,000 per month for use of the Google logo - but that comes off _after_ they've worked out how much tax they're paying.
This seemed so simple to me that I thought it must have some kind of negative affect, or it would already have been instituted.
But I've been thinking about it for about three years now, and I can't work out what it is.
So, anyone who understands tax better than me care to tell me what the thing I'm missing which would stop this working is?
*Legal methods of avoiding tax, by following the rules. Different from tax evasion where you ignore the rules. But varies from the generally acceptable (pensions, investing in R&D) to nitpicking through tiny loopholes looking for ways to combine them in a way that the people writing them didn't expect.
**I sometimes see an answer of "Tax them on revenue rather than profit" - but that means that, for instance, a company which buys in £1000 computers and £1000 printers and then sells them combined for £2050 would pay tax on £2050 rather than £50. Seeing as they are legitimately only making £50 on that (less, once you think about other costs they have, like people) that basically makes that company impossible. It also means that a vertically integrated company which makes both the computer and the printer has a massive tax advantage over one which buys in parts and then resells them.
***I'm not sure what X% would need to be to avoid situations like "Our pension fund is invested in the FTSE, and so we own shares of damn near everyone". I'm sure that arguments could go on for ages over that.
