Global companies offshoring profits and not paying enough tax (in the eyes of many countries) was a hot topic at the last G20 summit in Brisbane.
This isn't limited to Facebook, as the article explains. The issue and background here is that when large companies operate globally, each country has its own local subsidiary, owned by the global entity. Money is made in each country by selling goods or services. How are the profits sent upstream to the parent company? By charging costs for goods; or license fees for services. As the company chooses their own costs and license fees, they can effectively control in which entity they make a profit and which they don't. This is also how companies shift profits to no- or low- tax jurisdictions. See: Apple and their large amounts of cash held outside of the USA.
With increased globalisation, this is an issue for many countries. In Australia, for example (where I live), the roll out and success of Uber means that the taxi company tax base will erode. If Uber shifts profits overseas, the Australian Government gets less tax but still has to provide the same level (or greater) services. Uber's a better service, we want it to succeed, but tax is needed for necessary services.
While companies continue to do this, the answer is information sharing between countries' tax offices and laws to ensure a certain amount of profits must stay on-shore, while not dis-incentivising multi-nationals from doing business in each country. As this already has political attention, I'd expect laws in most major countries to deal with this over the next 5 years.
Apple is a particularly difficult case, because they control every link in the chain of supply from manufacturing to retail and pay less than 1% effective corporate tax from their profits. From every step of the supply chain.
It is very difficult, if not impossible, to compete with Apple without having a similar end-to-end control of manufacturing to retail. If a company has to purchase their products from a manufacturer or sell their product to a 3rd party for retail, they are losing to Apple because that flow of money can't be hidden from the tax man.
Europe is currently facing major financial issues and a significant portion of this is that money gets funneled away to the US (or offshore accounts of US corps) without the fair share of taxes of their profits left here.
The corporate tax rate in the US is actually higher than in many EU countries. The reverse is actually true, US companies choosing to base their "head quarters" in Ireland and the Netherlands.
It's worse than that. The "HQ" is in Ireland, but pays "royalties" to an IP holding company in the Cayman Islands, which is where all the profits go, on which no tax is paid. This is the "double Irish" referred to in other comments.
A very important piece of information is left out of the article: what Facebook UK is paying in "license fees" to other parts of Facebook.
The accounts show £131m in "administrative expenses", of which I can account for £86m in staff costs from the same document. £35m of that is a "share based payments charge", which represents the accounting treatment of share options. Of course, the shares handed out are shares of the US parent and not the UK subsidiary.
As for Toyota, Japan has the second highest corporate tax rate in the first world, after the USA. And until two years ago, Japan had the highest rates.
So I don't think Toyota was running the same schemes we see in tax havens.
If (and I have no idea of this is true) Japan doesn't tax transfers from foreign subsidiaries to domestic parents, and the US allows transfers from domestic subsidiaries to foreign parents to be expensed, such an arrangement would avoid taxes entirely, making Japan's tax rates irrelevant.
So can some tax attorney (we used to have a few on here) or CPA/CA break down how exactly this happened and how other people with corporations can do similar things? If Apple isn't going to be paying their "fair share" (yeah, that's a contentious term I'm throwing around) might as well benefit from the money they spent on lobbying and do the same thing they're doing. I'm in that limbo region where Julius Baer won't approach me as a 25MM+ net-worth individual but I'd still like to minimize what I pay.
You need to have "intellectual property" of some sort (patents, brands for franchising, copyrighted software). You create a number of corporations - one that is tax resident in a tax haven like the Cayman Islands and domiciled in Ireland, one that is tax resident in Ireland, one in the Netherlands, and one in each country where you sell your goods or services.
You then go and hire a good tax accountant who has experience with the Double Irish tax dodge (look it up on Wikipedia), and Bob's your uncle. (Though a double irish is harder to create for new firms since 2015 - you might have to acquire a ready-made shell corporation.)
Of course all this only makes sense if you have profits in the tens or hundreds of millions, so that paying for the shell companies, your Irish headquarters, your tax accountants and your lawyers is cheaper than actually paying tax.
The part I don't understand is that the brand was developed in the US. Don't you have to transfer the IP at something approaching fair market value to the tax haven corporation? How could you possibly have the resources (in the haven, no less) to do this without loaning money (at interest?) backwards?
So if you sell something on the open market anywhere, you can't sell it to your foreign subsidiary or owner for too much more or less than the open market price. But things get dicey when you're talking IP: patents and trademarks don't trade on the open market but are absolutely vital for a subsidiary to be alive, right? Amazon isn't Amazon if it can't call itself "Amazon".
The other trick is to offer some kind of service that's difficult to precisely quantify like having an accounting or service center in one country that every foreign subsidiary is required to pay for. It might not be a reasonable price but the cost of auditing all the call center records to find out it's costing $3/minute (on average) for a particular US based company to outsource its support calls to somewhere instead of $0.10/minute is going to be very steep. Do this across a few different lines of corporate support and your profit hiding is accomplished.
It's certainly not a level playing field when competing against a multinational like Apple. It's also hard for countries to enforce competition rules (e.g. Anti-dumping)..
Apple sells a huge number of physical devices - phones and tablets. They created a new market, and now governments are able to collect VAT and sometimes customs tariffs on all those smartphones. Why not let Apple have what's left?
Not trying to deny what you say is true, but just out of curiosity, is there any proof that Apple is doing this and how do implementations of this lobbyism look like? Just trying to understand how all this works.
Maybe it's because of coming from a European background, but this kind of questions are quite baffling for me. I know you mean well, but I find that the idea that corporations do this kind of thing doesn't need any more proof than the fact that the earth is round.
If one follows the news, there are constant reminders of this kind of lobbying going on (corporations asking for special treatment, especially when it comes to taxes) for a whole century. Besides a lot of this is done right out in the open. I mean coorporate lobbying was invented exactly for that -- to push governments for favorable laws, special treatment, laxer environmental and other protections, etc. On top of that, there are all kinds of under-the-table deals (with lots of them exposed frequently) with politicians and corporations.
That said, here are some pointers to the issue. First the general Wikipedia article:
A number of published studies showed lobbying expenditures can yield great financial returns. For example, a study of the 50 firms that spent the most on lobbying relative to their assets compared their financial performance against that of the S&P 500 in the stock market concluded that spending on lobbying was a "spectacular investment" yielding "blistering" returns comparable to a high-flying hedge fund, even despite the financial downturn of the past few years. A 2011 meta-analysis of previous research findings found a positive correlation between corporate political activity and firm performance. Finally, a 2009 study found that lobbying brought a substantial return on investment, as much as 22,000% in some cases.
https://en.wikipedia.org/wiki/Lobbying#United_States
One possible solution is making corporate lobbying illegal, with severe penalties, i.e. long prison sentences for those involved. Corporate lobbying corrupts democracy, so why should it be allowed to exist?
Then, simplify the tax system. The more complex a system is, the easier it is to game. If necessary, tax revenue instead of profits: if a widget is sold here, the company which sold it should be taxed here.
I agree with both ideas. Unfortunately for the thing to be fixed those passing laws should benefit from it being fixed -- but on the contrary they benefit for it being broken.
So, the first thing that should probably be fixed is: no campaign donations, at all.
Campain donations just let the politicians catering to the richer population get more advertising and marketing power.
I'd go as far as forbid all political / campaign advertising. If they want to convince, let them organically convince their local voters, then their state, and up to the whole party etc. Not with costly marketing, videos and large, costly, speaking appearances.
100% Right fix the laws. This is horrible and the Rich pay round 10% tax rate (They argue they pay so much? They pay a ton in taxes but in terms of percentage they pay less than most people)
The fact that companies are able to create loopholes via lobbying is the problem. When you accept corrupt government as an unchangeable fact of nature, you've already conceded defeat.
or... you might become a realist, and maybe try to come up with solutions applicable in real world, on real people and real situations.
I'm not claiming I know what the solutions are. But I am damn sure theoretical solutions for theoretical situations tend to fail spectacularly in reality, no matter what topic they are about.
100% agree, and this has been very frustrating for me over the last decade or so. Elected reps (in the US, at least) are barely going through the motions of obscuring the quid pro quo any more, and it seems like nobody really cares.
How can this loophole get fixed? My (admittedly minimal) understanding is that these companies don't have to pay taxes on the money until they repatriate it. From the perspective of countries like the US or UK, Apple earns very little in "profits" because they have expenses in licensing fees between their own companies that effectively pushes the profit to countries with very low corporate tax rates.
This all sounds sinister and it certainly is clever. But I don't see an easy way to fix it. I don't think a tax system where countries can tax profit that never enters its borders is viable. How would the UK feel if the Cayman Islands levied a tax on profit earned by UK companies?
a very heavy handed approach that will almost certainly fail in the real world would be to tax corporate revenue, not profit. This is VERY invasive and I would not recommend it at all but I don't see an approach that is simple enough like this that does not require international co-operation.
In my simple mind, the failure is in defining profits. How do we define profit? The devil is probably in the details. *
If Wally's world buys widgets for $6B and sells them for $10B but then turns around and spends $5B on long term infrastructure, did they make a profit? Do they owe any taxes?
Something closer to home: Once we get into the details, it is very easy to get lost in there. When they spend $100 per hour to hire a consultant (programmer), does that count as capital expenditure? How?
I am not a lawyer and I am definitely not an accountant. I would imagine loopholes can be closed but it requires technical expertise that I lack.
* Perhaps only allow cross-border expenses to countries that honor a certain level of agreement?
PS: I am not so sure about taxing income in other countries. None of what I say applies to expatriating money from overseas. It only applies to monies a company makes in our country and tries to ship overseas. If Apple sells $100B worth of iPhones in the UK, should they pay corporate income tax on it in the US? Why not pay corporate tax on that in the UK?
I think he means invasive as in it would affect companies' bottom lines more. Imagine something that primarily runs on a razor thin margin and makes up in volume and has $100M revenue and $5M profit, versus a company that has high margin and has $50M revenue and $5M profit. The first would be taxed much higher even though they have the same amount of profit.
Let me ask you then, do you think it's right that the tax burden is on those locally-run frozen yogurt places, over the extremely well-off multinationals like Apple? Is that the way you want to see the world run?
Of course I don't think it's right. I was only making the point of what they do is not skip paying taxes, but effectively trick the financial system into paying as little as they can.
I don't think he is saying that at all. Of course Apple is going to use every loophole they find. They are a business and that business is making money. The only way to fix it is to remove the loopholes.
Well, yeah. Like, if your company is headquartered in Cupertino, maybe then act like it when tax time comes and pay your US and California taxes.
Setting up a nesting doll stack of shell corporations to dodge all that is, right now, legal, but is that the world I'd want to have a hand in building? Nope.
general principle was there before apple. but for sure they do cook a 'book' or two, as one of the most wealthy companies in the world, without any strong sense of morality (not saying lack of it, just usual corporation as many others).
If you can invest for example 500 millions USD in bribes to gain 5 billions per year in not paying taxes, that's a damn easy decision for some CEO. And those fictional 500 millions will get you quite far in these times, where lobbyists in capital cities in both EU and US are not even illegal (in my opinion should be shot in sight), but just part of daily life.
Because we have quadriplegics who need 24 hour care so they don't die. Just to choose one random example of why we choose to have a government that levies taxes and provides services.
You don't choose anything (apart from some semblance of choice through voting). Stop using voluntary language for something that is compulsory. This isn't an argument against gov, but your reasoning about choice is after the fact.
We do choose. We vote in a government that provides services for those people.
Do you think that if there were a society of people where a majority were callous enough to deny those extremely disabled their medical care, that they wouldn't just vote out the bums who gave them that care, and the new generation of politicians wouldn't then rewrite the laws?
> Why not finance helping quadriplegics from increased VAT?
Because VAT, beside being a very effective tax (it's the biggest source of income of most countries), is the most unfair one.
Say a country have a 20% VAT
Low income household need to use the entirety of their income to survive (food, housing, etc). So effectively 20% of their income is collected as VAT.
Now a upper class household, let's say they save 25% of their income each month as retirement plans etc, and spend the rest.
They've been effectively taxed at 20% of 75% of they income, so their effective VAT rate was 15%.
While you often see very high income people advocate for flat rate tax instead of progressive tax, none of them have the nerve to propose a reversed progressive tax like VAT is, where poor people pay proportionally more than rich people.
You can mitigate that effect by some kind of basic income or return of paid VAT (you collect receipts or something and get the money back up to certain amount or 100% up to certain amount, 50% up to another step etc.). You can make VAT progressive this way.
there is no enforceable way this would work. everybody would just pay some homeless/unemployed to buy him that expensive cool little thing, and give him 10 USD for the job. try to prevent that :)
at the end, poor people would become less poor, but only by screwing with system, and only very few of them. you can put some limits on who can buy what, but this will inevitably create a massive bureaucratic overhead, meaning another set of useless government jobs that create no added value, but draw cash steadily from treasury.
The best possible tax scheme for poor people would be a simple flat tax that is impossible for rich people to avoid.
I've always felt your definition of "most unfair" to be a great fallacy. Yes poor people pay a higher percentage of their income. They also receive more in benefits than they give and the flat tax ensures the rich pay their share. The more complicated you make the system the more it will benefit the rich.
VAT is a net benefit for the poor. Making the whole system work that way, particularly in the face of globalization, is the best course of action. To declare it unfair is to cut off your nose to spite your face. In my opinion.
>The best possible tax scheme for poor people would be a simple flat tax that is impossible for rich people to avoid.
You're looking at the wrong end of the telescope. It's really not that difficult to look at a tax table and cross-reference your income, so a flat tax is a very minor improvement.
Where every tax system gets tripped up is in determining what qualifies as income. People who manage to avoid taxes aren't somehow lowering their rates; they're getting inflows of money excluded from the "income" accounting box.
It's not an easy problem to deal with, either - states have been trying for centuries. Most of the write-offs individuals and corporations take are perfectly reasonable for some situations and very much abused in others. As you try to prevent abuse you end up with a tax code that's so complicated there are more ambiguous "gray areas" for people to take advantage.
The best possible tax scheme for poor people would be a wealth tax. Make it a flat wealth tax, and I'm with you: 10% (or whatever) of what you possess, into the community coffers every year. Don't muck around with income, it's too easy to game.
Some of us initially poor but nouveau-rich would like to retire before we're old, you know. A wealth tax makes that much harder than it already is. You would also kill property ownership by all but the ultra-rich who have enough assets elsewhere to make up the continuous drainage because home appreciation does not grow that fast.
Wealth tax is obviously (I think!) the best kind of tax but the problem with it is it's hard to collect (you would need to assess wealth of everyone and that is a problem).
So if I start my own company I have to give away 10% of that company every year? Because I own shares in my company. And those shares have value. Which contribute to my wealth. That seems terrible!
I don't see how a wealth tax is a good idea at all. If you could recommend a good article that argues why it's good and how it would work I'd love to read it.
Please consider what kind of behaviour you would encourage. If wealth erodes every year then this strongly disincentives long term thinking and rewards business ventures which give quick cash and then burn out, like strip mining, and punishes planning for the future like pensions.
You want your tax system to reward long term thinking, not punish it.
I don't understand why it would encourage what you are predicting. If you "quickly cash out and burn" then you pay a tax on it as well.
My argument for wealth tax is that people with most wealth are the ones with the strongest interest to keep the country stable and nice place to live in.
Treating everyone the same blindly is the very essence of fair. It is, however, unjust by your sense of justice. There's a vast difference between the concepts.
You're also assuming a specific sense of justice - you're assuming that the utility of money is linear. (That is, giving up $10 is the same to someone earning minimum wage and to someone earning $150k).
You can hold that view - but recognize that it is a specific view, not an essential definition of fairness.
Why not charity? Because then the people donating to charity will (at least try to) impose conditions. So only quadriplegics or a certain faith or with a certain set of circumstances with receive help. (See e.g. the concepts of the deserving/undeserving poor and moral judgements with charities helping the poor in the UK pre-1945.)
Stories like this make me question if corporate tax even makes sense. However well designed, a tax code with today's complexities is going to have holes. If a savings of even one per mill may mean millions, corporations are going to spend insane amounts of money to hire the best experts to use every last loophole.
Why don't we cut down everything to a couple of manageable groups that can be tightened down? I think the following set of taxes should capture mostly everything:
- Personal income including gifts, inheritances, capital gains, all on a set of progressive scales. This should include work benefits (like company cars) and probably include loans taken out.
- Use of public resources (property tax, vehicle registration tax, RF use...), taxed based on the specific usage (e.g. vehicle weight, or even kilometers driven).
- A consumption tax (VAT) could be added, although this doesn't seem necessary to me.
Thinking about this for a couple of minutes, I don't see any obvious problems. Applicability of the personal income tax would be a crucial point, and care would need to be taken to avoid loopholes. Why aren't tax systems as simple as that?
Someone put it best when they said "corporations may not have a heart, but they don't have a stomach either". Unlike people, corporations do not consume for the sake of consumption, instead they invest in assets. A tax on corporations is directly passed through to employees, customers, investors etc.
From what I understand, the actual proposed replacement for the corporate income tax is much simpler: eliminate it and replace it with a much more comprehensive capital gains tax. Then require companies to be much more forward with paying dividends.
Don't dividends get taxed at the residence of the person being paid the dividend?
The problem is that corporations use the infrastructure and resources of countries they operate in. So you would still have a situation of a multinational company using the resources of country X without necessarily paying any tax for using the resources of country X.
>Unlike people, corporations do not consume for the sake of consumption, instead they invest in assets.
Uh, what exactly is the difference between consuming and investing in assets? Most investment in assets is actually just a claim to consume some of the ROE.
Also, it's not clear to me how shifting cash flows into something makes an asset (or how a physical asset could directly benefit from increased cash flow [not sure how this is even possible; I can't pump FRN's into my car's gas tank]).
What about the majority of companies that don't pay dividends? I agree that tax codes are complex and the international theater makes them hard to enforce, but most of the proposed replacements for corporate income tax are typically half-baked.
Either (as the parent comment proposes) force them to pay dividends. Or don't: in order to profit from the higher share price, investors either have to sell some of their shares (realizing their capital gains) or use them as collateral for a loan (which should be treated as a capital gains realization event).
There are entire industries with thin margins (e.g. grocery, airline, blue collar services) that would be destroyed if you forced them to pay the same dividends as others.
Why are you fixating on share price? Now how are you going to tax LLC, LLP, etc.? Privately traded corps that don't have a market price?
As I said, forcing companies to pay dividends was the parent poster's idea. If anything like that were to be entertained, I'm sure the forced dividends would be in relation to the corporation's profit.
As for privately traded corps and partnerships: My proposal was to tax capital gains. This could be done at each realization event, and at that point your transaction will usually have a market price. If you are exchanging stock in two privately traded corps, some way to determine fair market value will have to be found, but that seems to be an edge case to me.
That would be double-taxing capital gains, since individuals are already taxed on it, and would de-incentivize companies from giving corporate income to workers while incentivizing companies to hoard economic wealth. You want companies to spend money, not keep it.
Most limited liability organizations also don't have equity, which creates another loophole in your system. Now you're starting to get into why corporate income tax is complex.
This doesn't solve the globalization problem. Say..an American company such as Walmart goes to a country, kill all their local competition with lower price, and make a ton of profit and then distribute them amongst Walmart shareholders in the U.S.
Sure those shareholders will pay cap gain or personal income, but now since you eliminated corporate tax completely, the net tax revenue of the country wal-mart operates in is no diminished.
This is a great idea to increase the wealth gap between developed countries and the rest of the world, for good or bad. Considering how many international conglomerates are American, European or Japanese.
Developing countries wouldn't stand a chance this way.
A much simpler tax system would be to tax everyone like hedge fund fees. You pay 2% tax on all assets and 20% on profits those assets generate. Regardless of asset type (if it is worth money and can be traded, it gets taxed). Ditch everything else (especially regressive taxes like VATs) and keep a progressive income tax. This 'everyone' is individuals because someone, somewhere owns the assets.
Note that those are the pre-2008 hedge fund fees and the fees are presently less than that.
The big problem with this is that, under a simple tax system, if a government wants to increase it's tax revenue it is extremely easy for voters to understand what is happening. Governments prefer to make complicated tax laws because they are easier to spin.
Ah yes governments always trying to make things too complicated!! Argh! Why cant we replace the govt with the private sector! They never do anything that would obscure or needlessly complicate things.
Not only govt, but private companies as well. Remember when the company behind the most widespread US tax software (can't remember its name) lobbied against simpler tax code? Why? It's simple, because it would cut into their sales!
Everybody who has something to lose will vote against a simpler system, doesn't matter whether its a private company or government.
Governments make complicated tax laws because of constant attempts to make the tax system 'fair', where fairness is a pretty vague concept and can be interpreted many ways by different people and parties.
There are lots of economic arguments for very simple tax systems that prioritise revenue collection over other things. But a lot of people would see them as "unfair" and therefore unjust.
Oh come on. The taxes that 90% of people pay are perfectly clear. The exceptions only affect a very small minority of people (namely those with enough income to make it worth their while to care about exploiting the exceptions).
You shouldn't tax corporations as it is simply an indirect tax on individuals. A good way to hide a persons total tax rate by making part of it be included in the goods they purchase.
But this is not true, is it? Corporation tax is on profits. Companies price things at the price that maximises revenue. Since corporation tax does not affect revenue, it is not a variable in their pricing calculation.
A low corporation tax is valuable because it attracts foreign businesses, but that is necessarily zero-sum.
Sorry, I might not have made that point clear: they wouldn't be taxed at all. Not at the corporate level, that is.
As far as I can tell, money will exit corporations in three ways: 1) salary, 2) shares and 3) payments for goods/services, mostly to other corporations. Income and capital gains taxes will take care of 1 and 2. The company won't owe taxes, but whichever natural person receives the money will. As for 3, my proposed system would be captive: because it doesn't charge corporate taxes, corporations won't have any motivation to try and move their earnings to other corporations (as they couldn't be taxed any lower).
This type of tax plan will incentivize wealth aggregation in corporations, while increasing the cost of employees and goods/services.
You want companies to spend, to increase economic cash flow and generate jobs, which is why existing corporate taxes are on net income, not revenue or costs.
Investors want a return, and this new tax plan makes it more expensive to move money out of a corporation, even for regular operational expenses.
Corporate income tax today allows for companies to pay employees and buy goods/services without increased tax cost. It incentivizes cash flow into the economy and job generation by taxing whatever is left over (net income) after doing business.
One possibility might be to charge capital gains whenever shares are traded. Then require shares to only be traded at exchanges with an agreement to report trades (or anonymously collect capital gains and send them your way, for privacy).
Another (probably worse) alternative might be not to tax them. The US will, and in exchange you get to tax UK shareholders of US companies.
You don't. But then again why would you - that shareholder gets no services from the UK government so there's no moral case for them to pay tax to a foreign country.
This doesn't solve the globalization problem. Say..an American company such as Walmart goes to a country, kill all their local competition with lower price, and make a ton of profit and then distribute them amongst Walmart shareholders in the U.S.
Sure those shareholders will pay cap gain or personal income, but now since you eliminated corporate tax completely, the net tax revenue of the country wal-mart operates in is no diminished.
This is a great idea to increase the wealth gap between U.S. and the rest of the world, for good or bad. Considering how many international conglomerates are U.S. based.
Yes, agreed, which makes it much more likely that laws will get passed to collect this tax as it will probably have strong political and voter base support.
The problem is that for many (smaller) countries, it's a race to the bottom. They want to attract companies that are huge compared to their "native" GDP or production capabilities, collect a little bit of tax from them, and maybe earn a whole lot more by creating (or maintaining) a financial services industry in their country.
It's hard to stop those countries from doing so, in the current framework of international trade and business. I don't know if a treaty limiting this kind of stuff is in the cards for the near future. And if it is, I'm not sure it would be signed or ratified by financial safe haven countries like Luxemburg, the Seychelles, Monaco or Belize.
>As the company chooses their own costs and license fees, they can effectively control in which entity they make a profit and which they don't.
I've only seen one really effective way around that suggested, but it's not without it's drawbacks. If a country taxes each sale of a service or product, then it's no longer possible to funnel money out of the country. It effectively eliminates companies that operate in a country for years with a fake lose.
The drawback is that it will potentially cost jobs and close business that could be profitable in the long term.
> while not dis-incentivising multi-nationals from doing business in each country
I'd argue that the incentive to do business in several countries is the profit they're making in those countries. No company is going to walk away from a company because they're being charge x% of tax on the money they earn. They might say they will, but they may as well be saying this...
"Because I don't want to pay you $1, I will reject the $5 this other person is going to give me."
Return on investment weighs heavily on most business decisions. If I invest $X, by the end of the year I'll get $X*(1+return%).
Since companies can't invest everywhere at the same time, they prioritize investments. A higher tax rate might mean investing in that country later, as there are other investments than have a higher immediate return.
I could see a situation where an investment was profitable, but so marginally profitable due to the tax rate that the investment was delayed effectively forever.
But interest rates are low so if you see an opportunity to earn money, you can borrow to seize that opportunity.
This assumes that when you scale up your organization, your costs scale up linearly. If it caused marginal wage to shoot through the roof, that could be a reason not to do it I guess.
The reality is - The UK has a relatively low corporation tax rate. In the UK they would still getting plenty of return on their investment if they paid corporation tax on the profits generated in the UK.
These academic arguments about tax don't hold much sway with me. 18% is a perfectly reasonable rate of corporation tax. Paying that tax ensures the long term viability of the British economy from which Facebook will earn even more profits. Not paying it is just leaching the nutrients out of the environment. It's a scorched earth policy and HMRC should be merciless in their punishment of it. And I use the word punishment intentionally.
Well, in hypothetical laissez-faire capitalism taxes would not be needed to provide infrastructure - Uber would just have to pay its fees for driving on private roads (etc.). This would drive prices up, but fairly divide the costs between the roads' users. Although I must admit I have no idea how things could look with purely digital companies like Facebook. I can think of local ISP-s charging the company for allowing access to the website, but that would probably become just an additional earning opportunity for them, without any noticeable positive influence on the local population.
But you still need taxes to pay for courts, police, armies, etc.
Unless you are arguing the An-Cap thesis that these functions can be conducted by private entities. If you are, then congratulations: we're already living under your preferred system! It is just that for most territory, one company has seized monopolistic control of the territory, has called itself "the government", and no other companies have been formed to challenge it. Exceptions such as the West Bank where two companies are competing do exist.
I'm not an anarcho-capitalist, I'm just conducting a mental experiment to see how far state minimalism can go. I'm quite convinced we can (and probably should) limit the competences of current behemoth governments - what I don't know (and am therefore trying to discuss) is to what extent.
Just for the context, Anarcho capitalists believe that minimizing the government is not possible. For them, once a government is established, it always gets bigger.
From the `Impossibility of limiting the government` section of `What must be done`[1]
"Now, once the protection monopoly (government) is in place, a logic of its own is set in motion. Every monopolist takes advantage of his position. The price of protection will go up, and more importantly, the content of the law, that is the product quality, will be altered to the advantage of the monopolist and at the expense of others. Justice will be perverted, and the protector becomes increasingly an exploiter and an
expropriator. More specifically, as the result of the territorial monopolization of protection, two tendencies are generated. First, a tendency towards the extensification of exploitation, and second, a tendency towards the intensification of exploitation."
This arrangement collapses into monopoly very quickly. Facebook would bypass or buyout the local ISPs.
(A world of purely voluntary contracts and no compulsory purchase would never have got past the development of the railway or telegraph, so the whole prospect is ludicrous)
Not really. Monopolies are mostly created by the state. Either with crony capitalism, intellectual property laws or directly state controlled production. Besides, Laissez-faire capitalism can create large scale infrastructure, why do you claim otherwise?
Crony capitalism is not at all "capitalism". It is an beast created by the state, through military spending, stimulation, infrastructure or the means of social wellfare. The more "militaristic" or "social" a government becomes the more leaches appear.
Well, the ones tried were close enough. Soviets and the all eastern block, Cuba, Cambodia, China, North Korea. They all contained communist ideas such as common ownership, abolishing private property, central planning, and somewhat classless society. Apparently event the theory does not hold much weight as almost all collapsed or converted to some form of nationalist totalitarian regime. Perhaps once robots do all our jobs harvesting food and cleaning streets using power from endless battery fields, Marx's prophecy of inescapable history will be fulfilled.
That's theoretical, whereas government and corporations deal with realities.
100% capitalism isn't practical and is unfair (e.g, to the poor and sick). What is a fair way to divide costs for road usage: time of use, miles driven, emissions, cost of vehicle, ability to pay? It's not an easy answer, and many are practically unenforceable. Hence, tax.
And for the record: I'm generally capitalist by economic viewpoint.
Simple 1% revenue tax on companies with revenue of more than $15 million would fix the issue. No other taxes, just revenue one, no tax credits, no refunds. No hiding costs, no going offshore, no creative accounting. One tax on all revenues that will hit your account. This would also help to cut out all the middle man driving prices up and make the logistic chain quite small.
Some countries want to experiment with this starting with foreign corporations, we will see.
That would cause an immense consolidation as the 1% would be applied to the revenue of every country in a manufacturing/logistics chain and add up to a sizeable percentage of the final cost. More companies would take the Apple route and do as much as possible so that there would be fewer 'revenues' to tax per good made/service provided. Perhaps that is your goal.
Goal would be to remove middle man and shell companies. When you look at the product offered by lets say Samsung, how many companies such a product would go after removing middle man, 5? Mine -> Parts Manufacturing -> Producer -> Distributor/Licensor -> Sales Point (Mine -> Some small manufacturer making simple parts -> Foxconn -> Samsung -> Shop in Vancouver). Thats 5% tax on whole product that will not have added sales tax anymore. Thats low, probably would lower the price of product by huge. And there is no tax credits etc so no place to exploit. As simple as that, so companies can focus on what is important, especially growing ones.
Its better for economy if brokers would focus on long term trades. Also usually high-volume low-profit businesses are the ones that are arbitrating prices and often are just middle man. No need for that. There is a way around. Obviously there would be FEW businesses that would be affected and need to change the way they work, but this comes always with any tax changes.
Anyways, I said all revenue that hits your account. Brokers usually don't keep their money in bank accounts, but in investment accounts, right? Until the money hit their actual bank account they would pay null on trades. So they would pay tax on all withdrawals and payouts to customers.
If the whole chain of production and sales would be relieved from paying accountants and being charge stupid tax, then the overall prices would fall. You give me an example of Amazon. Would 3%* of overall cost added to the end product be higher than 3 companies sustaining their accounting teams going over taxes etc. + you required to pay sales tax? Revenue tax = no sales tax. Still think it would be more expensive?
1 very low tax to replace all the taxes from the producer to customer seems like much better option than being "not strangled" by current tax laws.
*3% assuming there is producer, distributor/owner and Amazon in the chain.
Its the revenue got in that country. If Apple gets $300 Mil in revenue to their bank account generated in Canada they pay $3Million tax to the Canadian government, as simple as that. Its tax on revenues that company got to their bank account in the country where they operate. If they want then move the money to US and US would have same rules, they would end up paying another 1%. Total of 2% tax for transferring money from Canada to US for example does not sound that bad, huh? Thats the amount of money PayPal would charge for 1 transaction. And this is all, no hidden tricks - this would result in huge increase in revenues country would get and almost completely wiping out black market as such a low taxes are not worth to avoid for small businesses.
Poland is one of the few countries that already have this tax, but it is high now (I think around 20%) and optional. There is a lot of public discussion to drop it to between 0,5-1% on all revenues for all foreign owned companies making more than €15Mil/year. This got really popular after information that Google is reporting constant losses and not paying taxes despite ridiculous high revenues from local market.
First we were told to be nice to the rich and give them tax reduction, because we will be all happy for the trickling down pennies. And now we are supposed to give the cooperation tax relief because there is money trickling down from the employees?
You're not "supposed" to do anything. If you want to raise tax, raise tax. Just keep in mind that this changes incentives for anyone who has to pay that tax. That's not a threat, it's a fact.
I haven't seen anyone claim that Facebook is failing to pay all the tax they are legally obligated to pay. Did you mean something else by "everybody pays his taxes?"
There are currently investigations in the EU if FB did fullfil the requirements to use the tax loopholes they are using. If not, FB did not pay the taxes they are obligated to pay.
And if they didn't, they'll be fined and be forced to pay whatever they didn't, which will probably not happen again in the future as a way to avoid being fined.
If they did? You seem to be dancing around the central point, which is, these numbers, while absurd, are generally completely above board and legal. Nobody is going to pay more tax than they're obligated to, and it's absurd to expect otherwise.
Thats actually not the case. Starbucks voluntarily paid tax in the UK, even though it was apparently not obliged to as it has never managed to make any money(!).
The problem about prosecuting these cases is that transfer pricing and IP "costs" are difficult to demonstrate as faked, and some of the loopholes may be legal, although Apple is now dismantling its double Irish Dutch sandwich, one of the tax avoidance strategies it invented.
"Investigations in the EU" means jack shit. There have also been "investigations in the EU" about whether Google is an illegal monopoly and whether Facebook needs to segregate all its data on European entities into separate European data centers.
From the perspective of someone who sees the options of "fuck your own population over and kill all healthcare, welfare, etc" or "force companies to pay their taxes, and maybe lose some features like Germany has almost no Google services available", I’m pretty happy with the choice of free healthcare, college, etc vs. having access to Google Wallet
As much as the minuscule corp tax bills infuriate me, my logical half laughs and says income tax is silly, just use sales tax.
I know we'll never pass something along the lines of FairTax, but I daydream about it all the time. And yes, I've heard all the arguments against it and I still think it's a much better solution than taxing income.
I did say something along the lines of FairTax. They proposed a yearly 'prebate' check of the taxes paid on base level spending. That is to combat the regressive tax situation.
If you're paid $100 in cash as wages and use it to buy food and pay rent, then your effective tax rate is equal to the sales tax rate.
If you or your company is earning $1m in profit, and use half of that for spending and buying goods (that are taxed by sales tax) and the other half to buy revenue-producing assets - shares of other companies, real estate, bonds - then half of your income isn't taxed at all, your effective tax rate is twice as small as the tax rate on poor people.
This introduces an even stronger rich-get-richer mechanic to the society, as accumulating wealth generation (not just wealth) is tax-free.
That's easy to explain (although it might be tricky).
The marginal value of money decreases as the absolute value increases.
Getting a raise from $1k per month to $2k per month is more significant than from $2k to $3k
Meaning that if you earn more, you'll usually save more.
So now stuff is taxed at 50% (VAT or Sales tax), so everything will cost more, but it will be easier for the rich to afford it, because of no income tax, and harder for those with less income (their income tax was not high to begin with)
If you have a low income and need all the money to buy food you get taxed on 100% of your income. If you have a lot of income and can save or invest 90% you only get taxed on 10% of your income.
If you are low income and they give everyone a tax refund on the first 30k or so of spending, then you perhaps pay 0% in taxes while the person spending over 30k starts paying a tax.
If I didn't buy an iPhone, I'd buy a different phone. The VAT would still be there. If I didn't use Facebook I'd be using a different image sharing service, or chat service, or whatever. The VAT would still be there.
Because I have a budget to spend on entertainment, and various companies compete for that budget.
We pay those taxes, Facebook/Apple doesn't 'generate' anything, that money would be spent on a different entertainment. We pay income taxes, if we didn't work for Facebook/Apple, we would have to find a different job, perhaps start our own company, etc.
I want to make this super clear. Those taxes, including income taxes, are our contributions, not Facebook's. The citizens are generating that money. If Facebook didn't exist, there would be a company filling that void with an alternative entertainment which VAT would still be charged on.
Now, on the flip-side, it's not entirely zero-sum and Facebook does increase the overall wealth. They are generating new markets, new growth, etc.
But is it by the percentage of money its extracting from the local economy? Of course not. And worse still, that money's sitting in an offshore account somewhere, not even flowing back into the US economy, because they're waiting for a tax break. So instead of doing what it's supposed to do, which is spur more growth, it's doing the worst thing it can, which is being excluded from the world economy.
Yes, VAT is payed 'by the consumer', and if people weren't buying Apple phones they would be buying something else, fair enough.
I just find it funny how the solution to lack of money is always wanting to squeeze more taxes from the companies and people instead of optimizing goverment spending (optimizing, not cutting)
Ah of course, living withing your means is now called 'austerity' and it's bad because?
And worse still, that money's sitting in an offshore account somewhere, not even flowing back into the US economy, because they're waiting for a tax break. So instead of doing what it's supposed to do, which is spur more growth, it's doing the worst thing it can, which is being excluded from the world economy.
Before Apple did iPhone, modern mass-market smartphones didn't exist and VAT from old-school smartphones was probably 10% of what it is today.
Before Apple did iPad, VAT from tablet sales was virtually zero.
I think you should tax what is easy and straightforward to tax; not aim for a "perfectly fair taxes".
Anyway, it shoud be good to you that you are paying taxes and not Apple. Next time Apple wants to ban phones with square screens, you tell them to back off because they don't pay taxes. You should get a voice here and you should to get your message straight. If you can't - blame your government and work towards digital democracy.
I don't agree with that in all cases, and I particularly don't agree related to Uber.
When I lived in NYC, I often called "311" to complain about taxi-driver misconduct. This was the only outlet, and you really only did it because you wanted to feel better. There were never any direct consequences that you knew of.
If you consider the decreased cost of operating the 311 service, as well as lower taxi-related crime, less drunk driving, etc., I'd guess that a government would spend less when Uber had replaced all traditional taxi services.
(You can also think of Uber as redistribution of wealth from wealthier to less wealthy, since riders will usually be wealthier than drivers. In that case, Uber makes tax revenue go up, since poorer people usually pay more in taxes.)
Edit: Clarified some language, since no one seemed to have understood anything I said the first time.
That's not what I mean. I'm talking about what the tax money collected gets spent on by government - roads, healthcare, infrastructure, aged pensions.
If industry X was paying $100mm tax, and industry Y disrupts and replaces that, while paying only $20mm tax, the government needs to find $80 million to replace that tax shortfall.
And what I was saying is that industry Y might save the government money as well. The net effect might be that the government has more money.
To continue using Uber as an example, not only do they potentially decrease the costs of operating the government (see my reasoning above), they're also still paying local employees. Those employees will spend their Uber revenue and pay taxes, just as taxi drivers would.
Further, Uber makes it easier to move physical objects around in an economy. That should generally make the economy more efficient, which could also help to swing the balance in favor of a net positive effect.
All I was saying from the beginning is that it's not always true that an international company replacing local companies is creating a net decrease in government income.
Old model: The taxi company spends 100% of its income in the state, meaning the state collects 100% of the taxes of the costs.
Uber model: Uber spends next to nothing in the state, so the state gets less.
Uber still uses the same governmental resources, uber drivers earn less than the taxi drivers (less income, less taxes), and have less money to spend (economy shrinks, less taxes).
Uber makes the economy less efficient, as more money ends up in the US than in local businesses.
No, it doesn't, at least not in the US. It uses fewer government resources, although I don't have the data to say how significant of a difference it is.
> they're also still paying local employees. Those employees will spend their Uber revenue and pay taxes, just as taxi drivers would.
This is drifting off-topic, but it's worth noting that Uber's short-term plan is to somewhat reduce the wages of people who drive taxis (or "share rides," as they call it), and greatly reduce the tax cities collect on that activity. Their long-term plan is robot cars with no paid drivers.
The government only needs to find $80mm if the disrupted industry consumes the same resources. If somehow the disrupted industry does not (efficiency, other tax base), government does not need the revenue. It is incomprehensible to some people that government should let go of funding.
Tax regular car drivers more. There's simply no reason why taxi users should (indirectly) foot that bill more than car owners. If your tax were set up on assumption that taxi is a premium service, time to rethink it.
Uber can only exist in a society with a detailed and rigorously applied legal code, decent transport infrastructure, and wealthy citizens. I'm sure there are more requirements.
As Uber benefits from public spending on these things, they should also contribute to their upkeep.
Not sure this one is a necessity. Uber is growing in China and India, and both of those places have legal systems and levels of corruption that shock those of us in the US learning about them for the first time.
I agree that Uber should contribute to the upkeep, but I was just doing an absolute comparison between Uber and taxi companies.
If you have a local taxi company, you make tax money from that company. If it's at least in your country, you make tax money from that company. If the support employees are in your city/country, you make tax money from those people.
So if the company is not from your country, and their support/offices/profits all go somewhere else, it's a loss for you (as a city or country) because before you got to make more money from the local taxi companies. Which you would hopefully use to pay for different services (not sure why you think 311 is the only conceivable cost here).
And honestly, you think rich people pay more taxes? Sorry, it's just not the case. 1 person making 100x more than an average person is going to pay less net taxes and will buy fewer things (even if it's more expensive stuff) than 100 people.
> 1 person making 100x more than an average person is going to pay less net taxes and will buy fewer things (even if it's more expensive stuff) than 100 people.
This just isn't true at all.
The top 1% of earners in the US pay more tax than the bottom 90% combined. Sometimes rich people pay a smaller percentage of their income than less-rich people but in absolute terms poor people and middle class constitute a minority of the tax base.
...he was talking about net income and personal expenditure. You're talking about income tax. They're different things. 1 person will buy less than 100 people.
Incidentally, the top 1% pay more tax, in absolute terms, because they earn more than everybody else. What's your point? That's how percentages and progressive taxation works.
You have completely misunderstood everything I said.
I understand that tax revenue goes down when Uber replaces local taxi companies. I'm not arguing with that.
However, Uber can possibly decrease the costs of running the government (police, 311, and possibly others). We can't know for sure without specific numbers, but it's possible that Uber saves a government more money than it removes by avoiding taxes.
And I wasn't saying that rich people pay more taxes. I was saying that rich people using Uber is a redistribution of income, since the rider is almost always wealthier than the driver.
You could call it "increased globalisation" but abusing transfer pricing was invented by the Vestey Brothers in the late 19th Century when they began importing beef from Argentina. They also invented the abuse of the offshore trust.
The legislative arms race that evolved was the UK tax office trying to tax the Vesteys, who went on to be one of the UK's wealthiest dynasties.
Sometimes I feel like a fool, but we've always said from day 1 try to do things as honestly as possible which I'm quite proud of, but there really doesn't seem to be much practical upside apart from not being outed and shamed.
First world problem I guess, at least we're turning a profit.
It is starting to make me a bit bitter though. For example, we've spent a LOT of time making sure we file and pay the full VAT due on all our sales which is insanely complicated. Then we suffer further with the new VAT Moss rules which are aimed at targeting these big businesses who are avoiding it as best possible, but the end consequences being an even bigger burden for small businesses like us.
Makes me wonder if we decided to exit if we could get a higher multiplier. Firstly we represent a reduced risk to the buyer, and secondly the buyer might see it as opportunity to absorb us into their accounting practises which would make us significantly more profitable overnight. I guess that is a potential benefit, but the idea of it ending like that doesn't sit comfortably with me.
I'm a one-man-band and I paid about double the corporation tax Facebook did in 2014. My turnover isn't even high enough to register for VAT. Really makes you think!
Just FYI, when you do need to register for VAT make sure you check out the benefits of Flat VAT, for us it was significantly more economical then regular VAT registration.
I'm constantly surprised how many accountants don't seem to even make their clients aware of this option.
Thanks for the advice. I was pretty close to the threshold last year and it's looking likely I'll have to register this year so I'll certainly look into it. I'm actually between accountants at the moment, although HMRC's own PAYE RTI app at least makes that side of things ridiculously easy for me. I certainly wasn't looking forward to dealing with VAT on my own.
When I started my UK Limited company I immediately registered for VAT, so I could claim VAT paid on purchased startup equipment, which was mostly computing goods. I could then obviously offset that against VAT collected in the first months of business.
I quickly discovered that quarterly VAT returns were a pain, and accountants aren't cheap (for some definition of cheap).
I am also just a one man band at the moment, and de-registered for VAT about a year ago. Unless there are significant savings to be made, or you're over the £82k per annum revenue threshold, factor in the cost of the effort to submit these returns. They really are just a distraction from the main focus of your startup business.
Have you looked into accounting software? Like you, I de-registered for VAT for a while, but since using FreeAgent I've re-registered and haven't looked back. VAT returns are now just a click each quarter (plus the minimal clicks to upload and explain my bank transactions periodically). VAT nuances (VAT on reclaimed mileage, reverse charges, etc) are taken care of automatically too.
Not to mention all the other time savings (expense receipts uploaded straight from smartphone, tax return & accounts now only take 5-10 mins at end of year using the reports FreeAgent generates, etc etc etc).
I'm not affiliated with FreeAgent (other than my referral code 44gf6bbt, which would give both parties 10% off for life). Just an incredibly satisfied customer; it was by far the best of the 3 or 4 tools I trialled.
I was told not to register by my old accountant, it was one of the few pieces of good advice he gave me. ;)
I know of a few contractors who registered so they could claim back 20% on a new TV, new iPhone, top of the range gaming PC... Perhaps I'm just too honest but I already had everything I needed (a high end laptop) and didn't like the thought of the extra hassle. Not just the day-to-day bookkeeping side of things (I use Sage anyway) but keeping up with the changes in allowances and thresholds and remembering to submit the quarterly returns. I'd rather just get on with my job!
Freeagent also deals quite nicely with VAT, and you can set up for automatic direct debit... In fact I sometimes wonder what I'm paying my accountant > £100/month for :-)
Many a true word spoken in jest! It depends on the specifics of your company of course, but between FreeAgent, HMRC's free filing software[0], and a very mild interest in accounting, I've yet to find an accountant that could give me a positive ROI.
First I've heard of FreeAgent. I've had Xero recommended to me by others in the same boat, and I personally use Wave just for invoicing (as it doesn't cost me anything and at least help me keep track of whether I've been paid).
Along the way we've been offered ways to get around this and that which we've politely declined. Most obvious one being put your HQ in some country you've never been to in your life, we'd save buckets.
Also, if you get down to the metal with VAT there's a lot of ambiguity (opportunity).
My experience is that scale is not a prerequisite for it being economically beneficial.
it's misguided to call tax practices like these dishonest because it puts the blame on Facebook, who is operating legally in the system they are provided.
the alternative is that they knowingly pay more tax than the law requires of them. which is ridiculous.
this is true in scenario where these massive corporations are just passive bystanders, obediently following all new tax laws that come up daily. the reality is, through networks of lobbyists, they put forth laws with loopholes that allow these practices.
i am not accusing facebook specifically, any and all multinationals are guilty in a similar way, be it banks, procter&gamble or newest computer fad beyond-startup company.
and of course there is the moral aspect - everybody can see from raw numbers how utterly immoral behavior this is. in a world where financial crisis didn't end as much as it became new norm.
It is not just the tax code - one can be honest in everything, but the most likely result would be the person is left behind and becomes bitter and unhappy. Because others will break, it at least bend the rules if they can get away with it.
In this case it kinda becomes a competitive advantage - all things being the same, if one company does "creative" accounting and the other doesn't, chances are the latter can't compete effectively.
Th worst in all of this is that the general public views these companies as smart for exploring loopholes rather than getting annoyed with them.
None of this is to say that one shouldn't be honest. Just be aware of what it costs to be honest, in a system full of loopholes
Note that the article, as I read it, only refers to UK taxes. Presumably Facebook also pays taxes in other jurisdictions. (Also note that the headline refers only to corporation taxes. Facebook will also be subject to many other sorts of taxes in the U.K. and a multitude of jurisdictions.
This is not to say, though, that Facebook on the whole pays its fair share of taxes. It probably doesn't, but a person can't draw many reliable conclusions about this on the basis of this article alone.
Corporation tax in the UK is payable on 'profits subject to corporation tax'. In laymen's terms this is roughly equivalent to to accounting profit.
Employee salaries, bonuses, etc are generally deductible; if you pay me 50K, that's 50K out of your bottom line.
The employees in question likely pay a variety of taxes including but not limited to the standard income tax. In an extreme scenario (recent graduate + highest tax band) that could be 61% rate.
(For comparison, the 2015 rate for Corporation Tax is 20%; so as far as the Exchequer is concerned, a salary payment is preferable, at least in immediate terms).
In summary, I think there's a discussion to be had here about abuse of taxation frameworks but the headline here is bait; the bonuses are irrelevant, any oddities regarding transfer payments etc. are what should be focused on.
edit: My position on taxation in general is that we should be focusing on Capital Gains Tax (taxes the gain on appreciation of assets such as shares) and Income Tax (taxes income from sources such as employment, share dividends).
Taxing corporations seems like it can only ever be arbitrary at some level, because they don't.... 'exist', for lack of a better term. They can be ephemeral, relocate, etc.
Exactly, it makes little economic sense to tax corporations. It makes much more sense to tax the people who own corporations when they take the money out of them.
Though there might be some practical reasons to tax corporations a bit. It might be easier to prevent tax evasion when you take the money at the source and it might lessen the amount of personal purchases being passed as business expenses to avoid taxes.
The problem with this is that the shareholders may be outside your country. It is pointer management. You can't trace it down 100% of the time. If you want an easier tax policy focusing on things that can't be hidden like land, highway use, pollution, etc is much easier.
We are not far away from that with the new regime, but ultimately that's mostly disproportionately onerous on small, risk taking entrepreneurs and small businesses.
For those people they would clearly stop drawing dividends as there would be no tax advantage to doing so. I'm not sure how you could say it is onerous (other than the fact they may have to pay more tax than they would have).
For right or wrong, the British tax code has long recognized that those putting their own capital at risk do not necessarily have the same safety nets of typical employees and taxes their rewards at a lower rate. This is why both dividend taxes and capital gains taxes are lower than income taxes, and also why Entrepreneur Relief exists.
I've read several times that the government doesn't think it can raise VAT much higher because it would start loosing money from an increase in excise fraud.
The UK press seems to have a field day when it comes to multi-national corporations not paying corporation tax.
We will no doubt shortly have a number of MPs telling us how unacceptable this is and that Facebook need to start paying up.
This all irks me a little.
362 Facebook staff on an average salary of say £65,000 will contribute at least £7,230,696.60 in taxes and NI to HMRC. Let's also not pretend that £65,000 is the average salary at Facebook UK, it's likely much higher.
Then we can look at those 'stock' bonuses that much of the article seems to point towards. There will likely be capital gains tax paid by employees on the sales of those assets down the line.
The UK has seen a strong economic recovery and remains a global financial centre and the business friendly tax policies of the UK likely contribute heavily towards this.
If I had a choice between Facebook paying £4,327 in corporation tax but employing over 350 highly skilled individuals in the UK, or relocating to somewhere like Dublin due to aggressive taxation policies. I know what I would pick.
> 362 Facebook staff on an average salary of say £65,000 will contribute at least £7,230,696.60 in taxes and NI to HMRC. Let's also not pretend that £65,000 is the average salary at Facebook UK, it's likely much higher.
First of all, that's Facebook employees paying tax. Not Facebook. That's their money that they are taxed on and they pay it.
Secondly, no one is asking for Facebook to pay tax on nothing. They should pay it on profits. It was tax payers money that built the Great British Telecommunications Infrastructure that Facebook 100% depends on for it's operations here.
> If I had a choice between Facebook paying £4,327 in corporation tax but employing over 350 highly skilled individuals in the UK, or relocating to somewhere like Dublin due to aggressive taxation policies. I know what I would pick.
No one is going to give up all the money they can earn in a country that has one of the lowest corporation tax rates in the world. Facebook is not going to convince it's key employees to leave Britain, uproot their families and go live in the desert or china. Any threat by a company to leave one of the strongest economies in the world is a pathetic bluff.
> First of all, that's Facebook employees paying tax. Not Facebook. That's their money that they are taxed on and they pay it.
Why is this distinction even relevant? Facebook then needs to pay its employees more to make up for the difference. No matter who the government taxes, everyone involved will shift their habits to compensate for it.
It's relevant because companies that are not multi-national can't afford to engage in these sort of tax reducing practices. If you want to get rid of corporate taxes altogether, that would be different, but suggesting that it's okay for Facebook to pay less than other companies because their employees pay income tax doesn't make sense. The tax code should provide a level playing field for all companies. You shouldn't get a break just because you can afford to move money around the globe.
If we got rid of corporate taxes altogether it would be different, and it would likely "provide a level playing field for all companies". And I'm not sure why companies that are not multi-national can't afford to do this too.. if their corporate taxes are absurdly high like they are here in the U.S., they are free to offshore their operations just like U.S. companies do, or lobby their government to reduce or eliminate corporate taxes altogether. In that respect, the playing field is level because the global economy is now the playing field.
This just isn't true. Small businesses can't afford to hire accountants and set up and manage global offices and tax codes. That means small companies are disproportionately taxed for their profits.
In addition, isn't the whole point of corporate taxes to provide money to the country in which that business is making a profit? We may live in a global economy, but we don't all live in a single country. Businesses should be taxed appropriately for their revenues in a country or not be taxed at all. Saying that it's okay to avoid paying taxes because you can afford to move money offshore is hardly a level playing field and gives money to countries based on their advantageous tax codes, not to the profits achieved in that country.
> First of all, that's Facebook employees paying tax. Not Facebook. That's their money that they are taxed on and they pay it.
I'm reasonably confident that HMRC is entirely happy with corporations choosing to pay their staff more (and have those salaries taxed appropriately) rather than paying their employees less and paying corporation tax on the profits.
But their employees get more isn't in the picture here - they just need to pay competitively with other British companies, whereas all the British companies that want similar talent but are not multi-national are at a distinct disadvantage, since they cannot recoup from avoiding the corporate taxes.
> That's their money that they are taxed on and they pay it.
The only reason Facebook doesn't have to pay taxes on that money is because they gave it to their employees (so it counts against profit). The money comes from FB profits, briefly goes to the employees, then to the government. Hence, the government is getting a cut of the money FB is making. What's the problem?
The reason they paid such low corporation tax is because they funnelled that money into a country where they dont pay tax as a business expense. Im not sure what Facebooks specific set up is, but it will be something like this.
Facebook luxembourg provides a license for Facebook UK to use the facebook logo. The fee for that license just happens to coincide with all the profits Facebook UK made this year.
It's a fictional cost, and totally legal. But its still dirt bag behaviour.
Afaik Facebook is still overwhelmingly based in Dublin, employing three times as many as in the UK. They likely hire in the UK the bare minimum they really need. So yeah, they've already "relocated" really.
This is the same for pretty much any European corporation, btw. Anyone who could leave for cheaper shores, did so in the '00s. What is left are the essential crews strictly necessary to the job of tapping one of the richest consumer markets on the planet.
The "employment threat" is basically toothless nowadays anyway, because "new economy" numbers are ridiculous in the great scheme of things -- 350 jobs won't change much of anything.
Do you think they'd pay more or less tax in Dublin compared to £5k? Irelands 12.5% seems very reasonable considering its so close to its effective rate. France, Britain and Germany all allow massive write offs and loop holes that mean their effective rate is multiples lower than their stated corporate tax rate and this story will be forgotten by the Brits, Germans and French who'll turn around and repeat their condemnation of Ireland as a cheap tax haven when negotiating EU funding.
Starbucks get away with the same thing. Amazon intentionally doesn't turn a profit and so evades this whole situation altogether. Anyway Facebooks EMEA is already in Dublin.
> Irelands 12.5% seems very reasonable considering its so close to its effective rate.
Very little of the actual profits of Facebook are actually subject to the 12.5% corporate tax of Ireland.
In a European corporate tax evasion scheme such as Facebook's, there's typically four to five legal entities in two or three countries. The branch making the actual profits (e.g. Facebook UK) pays their profits as "license fees" to an entity Netherlands or Luxembourg that has a flat-rate tax deal. This money is then transferred to the Irelands, where it stays for a few milliseconds before it is wired over to another corporate entity in NL/LUX ("license fees" again), subject to a flat rate fee, and then through ownership deals gets transferred back to Ireland. This trick is called the "double Irish with a Dutch sandwich", and there are dozens of similar, widely-employed schemes.
If this money is actually needed in the US, it gets funneled through one or two hops in Bahamas, Bermuda or Cayman Islands or so.
The net result is not 12.5%, more like (12.5%)^2 - (flat rates paid in NL/LUX). Effectively down to a few percent.
Since this is well known, I'm really curious how a typical conversation about this scheme in one of the other EU countries looks like. Typical politicians are usually somewhat in the pockets of industry by getting payed for speaking engagements etc, but shouldn't they at least realize that it isn't really in the interest of their own country to let this happen?
It's always funny when Brits complain about foreign tax havens. The UK is a massive tax haven, with oodles of little overseas territories, or Isle of Man, or the Channel Islands.
Urgh. This is part of the problem. They're Crown Dependencies. They're neither fully independent countries nor part of the UK. They're accountable to their own local electorates but host a lot of firms doing business that's really in other countries. They're ideal tax havens.
I am fond of the constitutional tweeness of Man, Sark, etc, but their situation really does need to be regularised.
If they hold them for 5 years there is no Cap Gains tax to be paid on the shares.
Arguing that the tax employees pay should be taken into account when calculating a companies tax provision lacks merit. That's employees tax not the companies - this is especially true for companies such as Starbucks where if they were not monopolising high street space by abusing the tax system and small local coffee shop would happily take their space in a fungible manner meaning the employee tax payments would still take place and there would be no net loss for Starbucks not existing.
The cap gain is only paid on the profit made when selling. RSUs are taxed as regular income when they are awarded. Most likely the employees are high rate tax payers so it comes out at 40-45% tax + National Insurance.
Sorry what is this RSU you speak of? tax on employee share options is quite different in the UK to the USA.
With a HMRC approved scheme CGT effectively goes away and you only pay CGT after your yearly allowance and only on a real gain - no massive tax bill on underwater share options.
An RSU is more like a stock grant than a purchase option -- the company provides shares of stock to its employees according to a vesting schedule. The fair market value of the shares at the time of vesting is considered income, and there is no cost to the employee (other than income taxes).
I don't know if this is a US-only arrangement, or if it's used in other countries as well.
You are correct about share options, on which your gain is only the price difference for which you pay CGT (or not). But the liquid tech companies (Google, FB, Twitter) give out direct stock which is taxed on their Fair Market Value at the time of vesting. RSUs are taxed the same way both in UK and US.
>362 Facebook staff on an average salary of say £65,000 will contribute at least £7,230,696.60 in taxes and NI to HMRC.
Why should Facebook get to enjoy an advantage over 36 companies employing 10 people each at a similar average salary?
>If I had a choice between Facebook paying £4,327 in corporation tax but employing over 350 highly skilled individuals in the UK, or relocating to somewhere like Dublin due to aggressive taxation policies. I know what I would pick.
You'd prefer every large company to be based in the UK and not pay corporation tax?
Of course not.
Personally, I think we're long overdue another huge waste like DeLorean coming along.
So you should not be entitled to bonuses when you work in the UK office because the UK office does not have enough revenue to make up for the cost of the workforce, but the same people in the SFO office should?
>So you should not be entitled to bonuses when you work in the UK office because the UK office does not have enough revenue to make up for the cost of the workforce, but the same people in the SFO office should?
1. I didn't say that.
2. What's to stop the SFO office issuing the bonuses?
But those are shares. They have no monetary value until you try to draw a dividend or sell them, at which point you have to pay tax again.
The pre-tax loss is for the UK operation, not the global entity as a whole.
It seems that the real question is not about what Facebook UK's corporation tax bill should be but how we want to deal with global corporations as a whole and how we want to benefit from that relationship.
My gut feeling is that if you are dealing with the tiny arm of a very successful US company, you are not in much of a position to negotiate.
The thing is that is the employees that pay the the income tax _not_ Facebook. Facebook (and others) are still not paying the taxes on the the income they earn from operating in the UK no matter how many people they employ at high salaries.
The choice you present is a false one, the multiplier productivity effect that Facebook employees gain from operating in London as opposed to Dublin far outweighs what Facebook would end up paying in corporation tax under a more reasonable system.
You forgot the VAT that Facebook's UK clients have to pay, the VAT Facebook have to pay on their expenses in the UK, the council tax that they have to pay on their offices, the pension and NI contributions they have to make, etc, etc.
At the end of the day, they aren't a UK corporation, so why should their corporation tax by high?
To be honest, it's hard for me to really form an opinion on this when the information provided by the media is so superficial. For that reason I tend to share mrkmcknz's sentiment. It all smells too much of the kind of trolling that's institutionalised in the media now.
I'd be happy to pretend that. Most of Facebook UK staff are actually employed here as high value employees (engineers, sales). I'd be very surprised if there were many contractors here in the UK.
maybe stupid question: do you expect a lot of fake contractors or there is another way? Because if they are contractors they wouldn't be part of those 362 in staff right?
I think the parent is referring to contractors, who avoid PAYE but still have to pay dividend and corporation tax. The dividend tax rate is about to go up so the PAYE issue is about to become void.
Sorry, I was more thinking of the executives, whose large salaries would skew the average, and would have a complicated compensation package, and can afford accountants to do creative accounting. I do not know if there are executives included in that 362 employee figure.
oh right, good point. If only journalism wasn't in such a sorry state, we might know the answer to that question. They might be drawing a high salary, equally they might be drawing no salary at all and living as non doms.
I don't think it's advocacy of "aggressive taxation policies" to argue that the corporation tax bill for a profitable multinational earning millions in UK revenue ought to be higher than the income tax bill for an individual person on the UK average wage. YMMV.
How many of Facebook's 362 UK staff would be unemployed for any significant period if they relocated to Dublin? How many would instead be adding value to a company that paid 20% corporation tax, whilst paying similarly high taxes on a similarly high salary?
>If the Facebook UK staff relocated to Dublin then the loss to the UK economy would be exponentially worse.
Can anyone say that for certain?
How do you know, for example, that the same staff they'd employ wouldn't end up working for a company that does pay a large amount of corporation tax, leaving the UK's tax coffers substantially better off than they'd be otherwise?
I'm not saying they wouldn't - I'm sure they probably would - but that wouldn't stop there being 362 fewer roles in the UK.
If the industry in the UK continues to grow then yes we would be better off, but the fear is that more companies would learn from Facebook's example and relocate, taking the growth with them.
That's why it has to be done across many countries so global companies cannot play one country against another. Your assumption that there are only two options doesn't apply.
No-one expects companies to pay the full whack of tax. But Facebook is taking the piss. They need to be a bit careful, because they risk causing much tighter tax regulation in EU.
Citizens don't see this behaviour and think "well done, got one over on the government". Most citizens are infuriated by this scumbag behaviour.
And before anyone says "they're just obeying the law" -- we don't know that. They're clearly not evading tax, just aggressively avoiding it, but some tax avoidance schemes haven't been tested in courts yet.
> "No-one expects companies to pay the full whack of tax."
Why? I don't understand why this is considered acceptable. I'm expected to pay the full whack of tax (income, VAT, etc), but somehow it's taken as given that corporations will pay 'less than they're supposed to'. How can we fix anything if this is the prevailing attitude?
In this case, Facebook did pay the full whack of tax. The article implies they avoided paying corporation tax by paying out large bonuses, causing them to have been operating at a loss (on paper). If that is the case, then I don't think that's such a bad thing. All of their employees will still pay tax on their bonuses, so it's not like the tax payer is being completely robbed. At least their workers are getting a cut of the profit, rather than having it all go to Facebook's coffers and the government (in the form of corporation tax).
It depends on what is meant by "the full whack of tax".
If your tax bracket is 30%, nobody expects you to pay 30% of your income in taxes. No, that's the top marginal rate, and you have deductions, and so on. This could charitably be put in the same realm -- they're getting all of their loopholes that they're dubiously entitled to.
It's sort of like if a speeding ticket costs $200. But you know you can get away with speeding most of the time. If suddenly we had a perfectly-enforced system where you paid $200 every time you exceeded the speed limit, it wouldn't seem 'fair' even though it is, strictly speaking, 'fair'.
However, to cost the average person the same amount, the amount per offense should really go down if enforcement is perfect.
In the same way, the US corporate tax rate is insanely high, but the actual amount major corporations pay is insanely low.
'some tax avoidance schemes haven't been tested in courts yet'
Probably because the law isn't either fit for purpose, or clear enough for someone to litigate.
As far as I'm concerned, if they (are obeying the law) and getting away with it, then articles like these only expose that the government are the incompetent ones.
> Probably because the law isn't either fit for purpose, or clear enough for someone to litigate.
No UK tax authorities use courts as a measure of last resort. They persuade companies to pay unpaid taxes. See, eg, Vodafone who came to a deal. These bills were billions of pounds.
> They need to be a bit careful, because they risk causing much tighter tax regulation in EU.
Don't think they've got much to worry about as long as Juncker's in charge of the commission at least. There will be huffing and puffing, but no blowing the house down.
Some background: Jean-Claude Juncker, the current President of the European Commission has served as the prime minister and financial minister of Luxembourg. During his regime, they effectively turned Luxembourg into a tax haven for international corporations, allowing them to transfer "license fees" of trademarks, copyrights and other immaterial rights with effectively a flat fee (ie. no taxes paid, just a one time not-a-bribe fee paid to the tax authorities of Luxembourg).
The primary export product of Luxembourg is banking and financial services. They also have some steel production and industry, but effectively without their shenanigans on tax evasion, the country would be bankrupt.
A lot of this has recently come into daylight in the LuxLeaks [0] scandal.
They need to be a bit careful, because they risk causing much tighter tax regulation in EU.
I think this is going to happen anyway, as it's not just Facebook. Governments see it as a reduction in tax, and it's politically safe for a Government to do without getting voted out.
Exactly, they take it from "mild annoyance about the state of the world" through to full-on rage.
I'd like to know whether - annoyingly - even if they knowingly bought about huge tax reform, whether the short terms gains of doing this now would still make it worthwhile. Sadly, I can't see any way that it's not worth abusing whenever possible.
I run my own business here in Germany and I'm all for getting every penny out of every tax loophole possible.
But then in my peer group I'm the only one who thinks that way. Most people would rather want everyone else to be as highly taxed as themselves than lower taxes overall it seems.
I think there's a lot more grey here than you're making out.
I'm all for minimising taxes within the legal framework, but that does not mean I agree with all the legal details.
In this particular case, there is something wrong with how large multinationals are able to avoid paying any taxes at all, it's a major problem in my country, Belgium, as well.
I don't agree with your last statement that people would rather want everyone else to be equally highly taxed than lower taxes overall.
I think people just want their tax legislation to be _fair_, and while that is definitely a fungible concept, these large multinationals are crossing the line for the majority of people.
Is that because you believe you pay too much tax? Wouldn't it be better if the loopholes were fixed but there was a reduction in tax charged too?
Tax evasion ends up pushing up taxes for everyone else, it's not your government that you're short changing, it's your family, it's your friends, it's your neighbours. This may sound harsh, but it's just the reality of the situation. I hope you will give it a second thought next time.
>Is that because you believe you pay too much tax?
If I pay more than I'm required to by law then I pay too much by definition.
>Wouldn't it be better if the loopholes were fixed but there was a reduction in tax charged too?
Of course this would be better and ideal. But it's a curious things with politicians. New taxes come easily. But they seldom leave voluntarily.
We're still having an extra tax on sparkling wine here in Germany. It was introduced in 1901 to finance the German Imperial Navy to rival the British Empire [1] ...
>Tax evasion ends up pushing up taxes for everyone else, it's not your government that you're short changing
Yes, but I'm not talking about evasion. Evasion would be illegally saying "I earned nothing" and hiding the money. Tax optimizaton by out-smarting the system is legal though.
> "Yes, but I'm not talking about evasion. Evasion would be illegally saying "I earned nothing" and hiding the money. Tax optimizaton by out-smarting the system is legal though."
There's a difference between the spirit of the law and the implementation of the law. If tax laws were perfectly implemented then the loopholes would not exist, but that doesn't necessarily make the intention behind the laws unclear.
You've decided to follow the legal options available to you rather than honouring the intended use of the laws. You can call it 'tax optimisation' if you want, but it's just tax evasion under a different name. I can understand why it's tempting, I've probably done similar acts before on a smaller scale (things like avoiding customs duty on some posted items), not something I'm proud of.
> "We're still having an extra tax on sparkling wine here in Germany. It was introduced in 1901 to finance the German Imperial Navy to rival the British Empire [1] ..."
If you have such laws, then efforts should be made to remove them. Is it harder to remove them than using tax loopholes? Yes, but it's still the right thing to do. Don't German citizens have the right to start a citizens initiative?
Tax as money needs to move otherwise it has no value.
If you want to pay the least possible taxes, don't be surprised if your government will do its best to not support you, to not help you, to not listen to you...
>I feel that's a sad attitude when you're making every effort possible to contribute as little as possible.
Even the minimum is more than enough. I'm not talking here about making my own dutch-irish-sandwich where I pay no taxes or just straight out lying when declaring my taxes.
It's more about getting it from 40% to 30% by depreciating my iPhone as an instrument for software development, etc.
But maybe I'm just lacking the moral strength to voluntarily pay more than I need to. ;)
> When people say they want higher taxes, they are almost always talking about higher taxes for everybody else than themselves.
No, they generally mean for everybody, in a fairly distributed way. Of course nobody is going to pay extra if they think that thereby they're subsidising a rich person who knowingly underpays.
My one-man-show consultancy pays far more than that in UK corporation tax. Of course that pisses me off, regardless of how you paint this whole tax avoidance scheme.
Someone said that "paying tax is for poor", and this goes a long way to support it.
An alternative point of view: if your one-man-show consultancy was not IR35 compliant, paying corporation tax instead of NI and PAYE (i.e. salary) would be a sign that you're avoiding tax.
So they paid next to no corporation tax. Meanwhile their employees will have paid a stack of income tax & the new rules on VAT should mean that all Facebook Ad sales to UK customers are subject to UK VAT.
I don’t think the UK is being shortchanged all that much. When Google/FB et al were able to shift Ad sales to low-VAT regime holding companies, that was definitely taking the piss. This? Meh.
This argument is not valid. Yes they are paying VAT and income tax. So what? They should also be paying corporation tax. A start up competitor would have to pay VAT, income tax and corporation tax.
these 'loses' are entirely due to bogus licensing fees paid to the mothership, and the 'loses' are made up with very generous term 'loans' from the same.
I'm asking someone who is more knowledgeable than me on this topic. What would happen if you replace all (most) tax with VAT?
That would mean everywhere there is a real transaction, that generates greater value, that is where the tax is. It would also make it impossible for big companies to do tax evasion - since you limit the effects to the 'leaves' of the tree that is the economic system, you can catch the money before it escapes put the company 'tree' structure, out of the reach of the state.
VAT is the most unjust tax there is. People with low income spend it on things like food, clothing, housing, entertainment, that are all subjected to VAT, whereas richer people have access to the stock market, investment, and tax lawyers, and pay relatively less VAT. VAT is effectively a degressive tax, if you leave only VAT then you accept a system where the poor pay for the rich.
However this is already the case in Europe because the VAT rate is so high. For example for France, tax revenue in 2014 was 74B€ of income tax, 39B€ of corporate tax, and 139B€ of VAT. I'm guessing this is a political game where you have to keep income tax high enough so that the inequalities are not too obvious.
It depends on the country I guess, in France you do pay VAT on food (5.5%), clothing (20%), and for rent it depends on what you're renting but for most people you're right that they're probably exempt.
> What would happen if you replace all (most) tax with VAT?
The poor would pay considerably more of their income as tax than the rich.
And yes, there are ways to do tax evasion with VAT. There was a court case in the UK about whether Jaffa Cakes were a cake or a biscuit (because there are different VAT categories)
Now you create an incentive for everyone to stay just below the limit of what counts as "poor" and have their actual assets in other countries and get it as loan from themselves.
How do you do that? What's the limit? Is it all or nothing, or a sliding scale? How is each and every shop suppose to know and keep track of if someone is in this category or not?
The issue with VAT is that as usually applied it is an extremely regressive tax. Poorer people spend a far higher proportion on their income on purchases that have VAT applied. If more categories of basic goods were zero-rated or exempt, or if other mechanisms were used to make the VAT burden less regressive, then it might be viable.
True, but at least the price label in the supermarket is the final price you pay, no nasty surprises at checkout. VAT is already included in the advertised price, so you know exactly how much you'll have to pay. Apparently, the same is not true of sales tax in (some states of?) the US.
It doesn't say the VAT rate on the label, but you can figure that out from your receipt after solving a bin packing problem :) Receipts contain a listing of the different VAT rates (e.g. in Germany, x€ at 19% and y€ at 7%)
The FairTax proposal in the US addressed this with a "prebate" that was mailed out to every person (not sure the criteria) at the beginning of the year. This was a check that covered the taxes on base (poverty?) level spending. This was meant to remove the regressive taxation effect.
Part of the problem though is that most businesses pass VAT tax on to consumers. Meaning that VAT tax essentially allows businesses to get their customers to foot the tax bill, and that everyone pays taxes corresponding to their consumption instead of their income. Usually you want the lowest earners not to have to pay much (if anything) in taxes, and VAT taxes don't allow for that.
From my tax knowledge, in South Africa it's difficult to get away with paying ridiculously low amounts of tax consistently. The corporate tax rate is 28% taxed on worldwide earnings. Though you prepare returns as a single entity (i.e. each subsidiary files its returns and the holding company would also file its own return), there are transfer pricing provisions, as well as provisions for connected persons (related parties/companies) that make it difficult to just keep 'profits' in Ireland without paying taxes on them.
If I could argue that if FB was headquartered in SA it would be paying at least 20% effective taxes, then surely the issue would be that the specific countries (US and EU) have lenient tax laws. Companies will keep gaming the system if lawmakers don't have the appetite to ignore company lobbying and do what's best for the income of their countries.
Whether the issue is that they don't want to lose the business of these tech companies is something else.
South Africa started imposing VAT on digital services sold by foreign companies last year. As a result my Google Play Music subs started costing me 14% more, funny enough as I technically shouldn't even be having All Access as I'm in an 'unsupported country'. Apple still charges me the same for music, which means someone had to take the loss to keep the value the same. Nonetheless, some people are unhappy, but our country gets to benefit with the extra 14% collected.
It's a good headline but in this case, HMRC made somewhere between two and five times as much money through Facebook's accounting choice here than had they kept the money as corporate profit.
That's because the Facebook paid out those profits to employees as bonuses. That wiped out the corporate profit but the employees have paid income taxes which are much, much higher than corporation tax.
This is significantly different from the corporate tax dodging companies like Amazon EU do by bribing EU states into letting them have a super-low corporate rate if they put all the EU books through that country. Not saying that Facebook aren't also doing that, that's just not what this is about.
I wonder what the response would have been had it turned out Facebook were going to pay their employees less, because they'd be making more profit that way ;)
Am I alone in thinking corporation tax is idiotic?
I think corporations are incredibly immoral institutions (due to skewed incentive structures), however - ultimately it's a collection of investors, owners and employees.
Why not be honest and tax the corporations on the outflow of capital? ie. dividens, wages and sales tax
Corporate tax is ultimately a populist hidden tax on the whole economy b/c no one "feels" it. If you raise it everyone will whoop and cheer (b/c fuck big co!) and not appreciate it's impact on salaries or retirement funds.
Corporations don't pay tax even when they do. The tax is a cost passed on to the end consumer. I'd rather see a combination of a progressive consumption tax (necessities < luxuries) combined with trade tariffs that's appropriate for the country being traded with. This would circumvent the shell company trick.
The idea that all taxes are just costs passed onto the consumer is patently abusrd, if they could easily raise prices to that level and have people pay, they already would have. It effects profit margins much more than it does the prices they set.
Yes, corporations pay tax, even when it looks like they just pass it on in prices, since they lose after tax income (except in the unusual case where price does not affect volume sold so long as competitors face the same price increase.)
The thing that large corporations should remember is the the UK is one of the few countries in the world that can pass retrospective legislation and then enforce it (this has happened on tax issues as recently as the 2000s). At some stage a UK government is going to claw back this money and I think it won't be pretty for anyone. (NB I fundamentally don't agree with the concept of retrospective legislation I'm merely saying the UK can do it.)
I don't know if is the case of Facebook, but in general this is the story of most of tech companies, all are located in Ireland where they pay so much less taxes, and in rest of EU countries all this big companies pay this quantities or in the worse case the government return money.
EU is totally broken, one market with one tax per country; Obviously, all companies go to the country with less taxes. And the different is not 1% or 2% is like 10% or more.
> Its most recent Companies House filing shows the company as making a pre-tax loss of £28.5m last year, but the firm also paid its 362 UK staff a total of £35.4m in share bonuses.
So £35m was distributed as income towards the employees. This means the employees are paid extra, have more money to contribute and spend locally, and have paid the correct income taxes on the bonuses. How is this a bad thing?
> Facebook reaps the rewards of the UK infrastructure. Facebook should behave as a responsible citizen and help fund that infrastructure.
Paying their employees an extra £96,000 (on average) per head isn't them being responsible? The money is being paid to UK employees who will (in theory) spend it in the UK. I'd have a problem if they did what Apple are doing in the US - sitting on wads of cash because it's too expensive to bring it back into the states, but this is a win for everyone. The money is redistributed back to the employees, and taxed appropriately, how is that a problem?
its only responsible in the sense that they have to pay the caliber of tallent they want to attract that much. Its not like facebook is paying them more out of the goodness of their own hearts.
Also you can make the arguement that its the employees themselves paying these taxes, not facebook.
People are assuming that the numbers reported are the result of using loopholes and that the reported loss does not accurately reflect how much money they make in the UK..
The reason the share bonuses are of some interest is that it seems odd to most people if they give away share bonuses worth 35.4m if they are genuinely losing that much money on the UK market.
Yes, it's possible, but the seemingly more likely explanation is that Facebook like most other large international companies are routing their revenue from the UK market through a more tax efficient separate corporate structure.
Can't comment on the FB case but most share schemes are structured so the employee pays the minimum (if any) tax on the shares - typically by holding them for a number of years
What's the point of having a company like FB or Starbucks in your country if they're an incredible net loss to the economy? Why not stop attracting these kinds of businesses or even actively seek to kick them out? I mean, assuming that fixing the tax laws for corporations is impossible, which I think at this point is a fair assumption.
With numbers like this, it'd be easy to morally justify looting, and other otherwise criminal activities against both these types of corporations and the government that allows them existence. It'd seem to start tearing down at the social fabric in many countries, not just the UK, where the poor are actually taxed more than these corporations. With just a little more poverty and misery, I wouldn't be surprised if at some point we started seeing violence and social upheaval as people realize they have no other recourse.
And who could blame people if they reacted this way?
FB is playing the game that corporations play all over the world - global tax arbitrage. They shift operations, losses and profits to different countries based on tax policy.
The similar thing happens here in the US at the State level. It isn't uncommon for large companies to pack up and move their operations to lower tax States, or to actually bargain with individual States over who will give them the best deal. Here in Massachusetts, Fidelity packed up and left for North Carolina and Texas - they found it was cheaper to move employees than pay the taxes.
This will likely continue as long as different countries (and States) have different tax schemes - and that isn't going away anytime soon.
Soon we'll probably have a renewed call for a lower tax rate here in the US for companies to repatriate those revenues.
Tax policy, but not just tax policy. Companies also place their operations based on cost (total operating cost, including logistics costs and whatever). For instance, it is not a surprise that so many computers and smartphones are made in China.
Completely agree - but if you look at these global companies, many just locate their headquarters in tax-free zones while not having a substantial amount of employees, or engage in tax avoidance strategies like the Double Irish. But you're right - it's not typically only for tax reasons.
Another reason is that tax havens (such as Cayman Islands, or within EU also Luxembourg or London) often have substantial amounts of financial services - lawyers and other experts are available. So, for the logistics of running headquarter functions, it's not necessarily that taxes are low, it's also that there's available expertise for operation.
Shameful. Just shameful. I don't care how it gets sugar coated, if you claim to be working for the good of humanity (in facebooks case by connecting people together) and then you loophole yourself out of paying taxes, you are morally bankrupt.
I wouldn't be so quick to condemn them. If you were running a business that had earned millions in profit for the financial year and were faced with the option of A) distributing it all out to your employees in the form of bonuses (which, of course, would be taxed) or putting all the profit in the bank and paying a huge tax bill, which would you pick? This seems like a good example of wealth trickling down to me, but it's painted as tax evasion.
If the tax law allows it, they have no reason to pay more than they do. To do so would be not in the interests of their owners/shareholders.
If you have a problem with tax "loopholes" then fix the tax law. Don't blame a business for paying only the tax it is legally obligated to pay. Would YOU pay more taxes than you have to?
Most people pay more tax than they need to because they don't have access to devious accountants who create excessive tax-avoidance schemes.
Most of these schemes are neither normal tax planning nor a bit of tax avoidance. They are aggressive tax avoidance that exploit the regulations in weird ways. They're legal, but only because the regulations were malformed (and will get re-made) or because the schemes haven't been tested in courts.
And the way UK tax authorities work is rightly to use courts as a measure of last resort, preferring negotiation instead.
Oh believe me, I'm plenty mad at UK politicians :) But since our current government gained a majority while only actually taking around 37% of the vote, I'm pretty sure we're stuck between a rock and a hard place in actually getting the system changed.
Gonna quote a post from reddit:
"Facebook does do things honestly & by the book. It just so happens that they have a presence in multiple countries around the world. Due to this Facebook Uk® must pay massive amounts to lease the licenses for software & intellectual property from Facebooks conveniently placed HQ in the lowest tax capitals in the world. Doing so at a price Facebook themselves chooses perhaps based on quarterly earning estimates runs at an amazing cost almost siphoning off all profit.
So the resulting entity which owns all the IP / leasing then pays tax in the country it is in on its earnings. Now they may be incorperated in a place with minimal corporation tax & simply keep a post office box there, but I assure you that's entirely the focus of their operations & is absolutely not just in place as a tax avoidance tactic.
Now if you dislike this you can absolutely tell them it's unacceptable. I'm sure politicians will be telling them off and using them to get press for .. oh 7-14 days until people move on & forget about it. At which point those same politicians won't change anything which impacts the practices at all."
Companie often put in enourmas amount of effort into "only paying it's required taxes" with a vast network of otherwise economically pointelss subsidiary companies that money is shuttled through to take advantage of locally negotiated tax deals to reduce tax liability in third party jurisdictions.
The breadth of complexity and the depth of thought that goes into these corporate structures transcends and notion of "simply doing business"
I worry about the drip-drip-drip of information that the British public can (and probably will) use to end up at the conclusion that leaving Europe in the future will be the silver bullet to all of the issues.
Immigration from Europe > Leave Europe (we're an island!)
Can't deport or be cruel to alleged terrorists > Leave Europe (we don't need the European Convention on Human Rights)
Can't stop corporations playing the tax system > Leave Europe (the borders become hard, the taxes unavoidable)
Our press don't really need more reasons to whip up the anti-EU mob, corps shouldn't help them do so.
Not from me:
As an accountant, most people are not going to be happy with my comment, as it goes against the Group Think here, but this number likely makes sense for the following reasons:
1) Facebook is an American company so discussing up its U.K. Income tax is click bate, pure and simple. American companies pay the majority of income taxes to the US, of which Facebook had at $1.9B tax bill in 2014.
2) there are very complex cross-border income tax rules, where at a high level, other countries will make a corporation pay income tax on business income earned in its country. However, it says right in the article, Facebook UK had a taxable loss last year, and in most jurisdictions you can use prior year losses to reduce current year taxes payable, which is likely what is happening here.
3) they would be paying a lot of other taxes to the UK government. The article mentions employees meaning there will be a host of payroll taxes. There would also be sale tax. The article implies shirking the system, but believe me, governments want and get their money.
In summary, this article is click bait trying to get people angry at things they do not understand unless you work as an accountant or tax lawyer..
Tech companies don't show profits as long as there's place for development. They're still paying tax on everything else, including renting offices, paying salaries and bonuses etc.
> They're still paying tax on everything else, including renting offices, paying salaries
So is every other company operating in Europe, and they have to pay their corporate taxes. But the multinational corporations evade their corporate taxes and get an unfair competitive advantage.
A practical example: a hamburger and fries from a local franchise costs 2 eur (about 20%) more than one from McDonalds, because the latter doesn't pay their taxes to this country, using the same "license fee" trick as Facebook, channeling all of their profits through Netherlands, Luxembourg and/or Ireland.
These tricks are known with names such as "double Irish with a Dutch sandwich".
That's a different case. I was simply saying _tech_ corporations often operate at a loss for a very long time. I'm reasonably sure Amazon didn't make a profit for decades, assuming it does now. This is not paperwork hand-waving, they're actually reinvesting all income, plus as much extra they can raise.
> I was simply saying _tech_ corporations often operate at a loss for a very long time.
Facebook is not operating at a loss in the UK or elsewhere. That's just their creative accounting after diverting funds offshore to tax havens in the form of royalties.
The exact same scheme is employed by the aforementioned hamburger franchises.
>Isn't that a tax paid by the employee, not employer?
It's technically both - there's an element of National Insurance tax paid by the employer and an element payed by the employee (then the employee pays income tax on the remainder). The core of your point is correct, though, the bulk of the tax paid as a result of salaries is taken from the employee
> Isn't that a tax paid by the employee, not employer
I don't know why people still fall for this. The government may say whatever it wants, but the value of the paycheck is market determined which means taxes are taken from both sides. Unequally, of course, depending on how (in)elastic work supply and demand are.
"It's about the spirit of the law versus the letter of the law. At the end of the day tax evasion is illegal, when you're deliberately setting out to not pay your tax by hiding your money,"
This is so wrong. Close these loopholes so a million dollar accountant and a regular accountant play by the same rules.
It's as if a soccer didn't have an offsides rule and then some complained about teams taking advantage of offsides. Change the law and move on. Don't complain about companies exploiting a huge hole you created.
So...the employees likely pay a larger amount in income taxes than Facebook would have paid in corporate taxes, and the remainder goes to the actual UK employees rather than shareholders in the US. Isn't this the best possible outcome for the UK? Is this article just pure mood affiliation (greedy corporations!), or is there something I'm missing?
Trump's solution? Cut the U.S. corporate tax rate to 15% from the current top rate of 35%. This would make corporate inversion unnecessary. I think he also had the idea of capping tax at 10% for companies wanting to bring their money back.
At some point you have to ask yourself "why are companies doing this?" and fix the root cause.
Creating a race to the bottom is the opposite of fixing the root cause. The US already has a way to deal with this as it's the system used internally between states: levy taxes where sales happen.
Do any presidents actually follow through with what they say during pre-election? Plus a president doesn't even have the power to lower corporate tax by himself anyway.
- companies need to be treated as "unitary" - that is passing profits around internally should not affect the tax paid
- profit is the least definable of all measures. Revenue is something companies don't like to lie about.
- this change will have to come to small and even consumers to be fair (my wife and I are a unitary item ? Can we share tax allowances?)
- even if we decide on treating companies as one black box, choose a better metric to tax on (revenue, dividends) we still do not have a formula for distributing across national borders. Should the US get all Facebooks profits? No. Should Facebook pay UK based on number of UK users it has? Doubtful. So ....
We are not going to see this end well - unitary treatment seems obvious but a international agreement on how to divide tax will need another two world wars to sort out.
The basic problem here is that business is now global whereas taxation is still at the nation state level. Countries have to compete for business and smaller states with limited resources can bring in money by becomming tax havens. I don't really know of any solution to this.
I think it's worth pointing out that even from the perspective of most businesses this situation sucks. Smaller companies or startups lack the resources to benefit from tax avoidance schemes so are at a disadvantage to their larger competitors.
And if you do start a company that is growing large you don't really have much choice but to start doing it too. You won't be able to compete if you are paying 20% and the competition is paying 2%. You have to do it because everyone else is doing it.
They should have a new tax where a companies profits are estimated globally and then a percentage of that is allocated to the countries where it trades based on the amount of trade done there. So if facebook's global profits are $2.9bn and it does 50% of trade in the US then it should be taxed as having made 1.45bn there and then pay US tax (35%) there so $507m there, even if they claim all the profits were made in some tax haven.
It seems a simple solution but there is probably not much lobbying money in the politicians bringing it about.
I'd kind of like to spend a day with the people who think up these schemes and pick their brains (lawyers, accountants, CFOs, whoever works on this). Not because I want to "optimize taxes" but because I'm genuinely curious about how they tick, if they see it as a game of sorts etc.
You have a complicated legal framework and try to optimize in it. At the end of the day I'd still wonder...gee is it "ok" that we pay only that much but like I said I'd like to see how this general problem is approached.
As others have pointed out, this is far from unique to FB. I'd be surprised if any large multinational corporation didn't do such creative "optimizations" globally.
E.g. British companies doing the same thing in the US:
The £4,327 tax is only talking about the UK subsidiary, right? Because from their income statement [1], they paid $1.97B in income tax on $4.91B income before tax for a rate of 40.12%.
I might be misinterpreting something, but I think we should be careful to accuse them of abusing loopholes if they're still paying such a high rate overall.
So, the generic answer for why we favor income or value-added taxes over revenue taxes is that (1) we want to encourage investment, so marginal business expenses are essentially tax-free, and (2) revenue taxes limit the ability for competitive middlemen (who can lower transaction costs) and give massive advantage to vertically integrated semi-monopolies.
The political point here is that big corps are unfairly draining a lot of money out of the local systems they operate in. This leads to reducing services locally, starving the unemployed and the poor and straining middle classes big time. Exhilarating amounts of money are funnelled and stockpiled under the name of unaccountable entities named Apples, Googles etc. against many millions poor that wil need basic income to survive sooner than later. Is this the world we need, really? The principle is simple: local branch entities pay taxes locally just as any local small business.
So, Facebook provides a free service to millions of people in the UK, and people are pissed that Facebook isn't PAYING more for the privilege of giving them free stuff?
Why do people think that taxation follows a simple accounting mechanism of collect-and-spend? Taxation is collateral for a soverign to get loans and bonds. Taxes do not pay for anything.
They don't make actual losses - they pay all of their profits as "license fees" to some offshore entity to get their accounting show no profits. This probably means Luxemburg or Netherlands where they have a personalized deal with the tax authorities and the taxation of immaterial property is very low.
In reality they made a shitload of money, and are using creative accounting to make it look like they made a loss. This is tax evasion, not making a loss.
The UK subsidiary made a "loss" whilst paying out millions of bounds of stock bonuses. Either Facebook UK is the most incompetently manged company in the world orrrrrrr...
The bonuses were taxed at personal tax rates, rather than coroporate. Furthermore, the personal tax rate is higher than the corporate, so why is this a bad thing again?
In terms of providing social value, Facebook employees far surpass any government's employees. In just a few years Facebook has revolutionized how people connect with each other, whereas governments have, in general, barely been able to maintain the accomplishments of previous generations. This despite the fact that government generally force people to pay about one fifth of their labor, whereas Facebook offers its services for free. Governments should wither and die in favor of more socially beneficial organizations like Facebook.
You're taking a highly subjective view and presenting it as fact. That Facebook is a "socially beneficial organization" is extremely debatable. I would argue that Facebook has actually had a detrimental effect on social cohesion.
Facebook offers free services to ordinary people to help them stay in touch with their friends. It also offers a paid services to businesses to help them communicate to actual and potential customers. Anyone who uses Facebook can stop at any time. People use Facebook by choice.
In contrast, governments are violent organizations specialize in coercion. Governments extract their revenue by force or threat of force and use their revenue to fund institutions and projects that people would not pay for voluntarily. Governments maintain power by direct force (police and military), by deceit and misinformation (control of the money supply, compulsory education), by monopolizing necessary institutions and services (dispute resolution, security), and by appealing to people's greed and envy. It is nearly impossible to opt out of government services, especially in the sense of not paying for them (taxes).
> "We have to ensure our taxes are simple to eliminate loopholes, and that taxes are low to increase our competitiveness, so that companies choose to base themselves here."
"It means Facebook's UK corporation tax bill was less than the tax the average UK employee paid on their salary."
"The average UK salary is £26,500 on which employees pay a total of £5,392.80 in income tax and national insurance contributions."
Corporation tax and personal tax are not the same thing so I don't see how they can be compared. In fact, in terms of taxes paid to HMRC, they would have been paid more tax overall.
However, considering they made a pre-tax loss, they should have probably reviewed those payouts of which I assume was shared amongst those on top.
If they reduce their profit to zero by paying out to the employees this means they don't have to pay any corporate tax, and the employee has to pay income tax. The personal income tax rate is generally higher than corporate, so why is this a bad thing?
I don't have a hope that this tax issue will be solved any time soon. There are hundreds of billions dollars involved globally, and when you are talking about that much money... It's very hard to do much about it, let's be realistic.
But they have that advantage already, they can afford to do things as described in the original link. They employ a bunch of accountants, offshore experts, etc.
I am not exactly sure if similar means as described in the article I've linked would change much.
This isn't limited to Facebook, as the article explains. The issue and background here is that when large companies operate globally, each country has its own local subsidiary, owned by the global entity. Money is made in each country by selling goods or services. How are the profits sent upstream to the parent company? By charging costs for goods; or license fees for services. As the company chooses their own costs and license fees, they can effectively control in which entity they make a profit and which they don't. This is also how companies shift profits to no- or low- tax jurisdictions. See: Apple and their large amounts of cash held outside of the USA.
With increased globalisation, this is an issue for many countries. In Australia, for example (where I live), the roll out and success of Uber means that the taxi company tax base will erode. If Uber shifts profits overseas, the Australian Government gets less tax but still has to provide the same level (or greater) services. Uber's a better service, we want it to succeed, but tax is needed for necessary services.
While companies continue to do this, the answer is information sharing between countries' tax offices and laws to ensure a certain amount of profits must stay on-shore, while not dis-incentivising multi-nationals from doing business in each country. As this already has political attention, I'd expect laws in most major countries to deal with this over the next 5 years.
But Facebook are taking the piss here.