The problem with a person doing this style of tax avoidance is that the barrier to entrance is much higher than the gain.
Assuming general principals of US tax law, if you're already working as an independent contractor, you could legally set up a local company and an overseas company, have the local company bill the client, pay you a reasonable amount, and pay the overseas company the remainder for the use of its name (or whatever justification you like).
Your local company would have no net income, but may pay employer side taxes on your wages, and any minimum taxes on corporations in the local jurisdiction.
Your overseas company would have a net income, but you picked an overseas jurisdiction with low taxes, right?
You would have recognized income of the wages, and unrecognized capital gains in the overseas company. At such time as you take the money from the overseas company, that would be recognized as a capital gain.
At the end of the day, you have to run two companies, one in an unfamiliar jurisdiction, and you get to defer recognition of income and change the character of the income from normal income to capital gains. You may also have paid taxes to the overseas jurisdiction that I'm not sure qualifies for a foreign tax credit. It's a real gain, but it may not outweigh the costs.
If you're a direct employee of a company, it's also not an option, since you can't redirect your wages out of your recognized income.
You're right that it is a lot of hassle, but you're also missing the fact that it's a lot easier for Google to defend itself to the IRS than for you to do so. The amount Google would need to pay lawyers, in that case, is so much smaller than what they save on taxes, that it makes perfect sense for them. The opposite is true for you. For example, the IRS will probably call you on your name licensing trick and charge you with tax evasion. Even if you could afford to defend yourself, you'd probably lose the case.
Also, I'm not an expert on the subject, but I seem to recall reading that in some countries, corporate tax tricks like that don't work for one-person companies. It depends on how many full-time employees the company has.
I think it's ridiculous that big megacorps can eliminate huge parts of their tax burden while the regular Joe cannot. The system is overly complex and tilted in the favor of the rich and large companies. That's not what the people agreed to when they accepted a taxation system during and following the first world war.
Yes, if you're making $50k a year. But not if you're an entrepreneur pulling in $1m a year. Everything involving intellectual property rights is generally very fluid and easy to move around.
A smaller scale example would be living life as a perpetual traveller°: an internet based entrepreneur who makes $200k a year and bases him/herself in a jurisdiction that does not tax income. Or who travels around between countries to avoid tax.
Instead of paying 40% tax on $200k (= $80k gone, poof) you put that in your pocket and use that to pay for travel expenses. "Going into tax exile" essentially ends up paying for itself, and then some. That is why companies (and individuals) participate in tax avoidance.
°: exception; this doesn't apply to Americans. You get to pay US taxes wherever you reside, above a certain income threshold.
How does this apply to other countries? Aren't you supposed to get residence in some country before losing the residence connection of your original country?
That being said, there are countries with loose taxation like Thailand where you can establish residence and avoid taxes as long as you are not operating in the country itself.
Not really, but it's better to have official residency somewhere, though. Some countries are quite flexible on residency, however. Cyprus offers residency after spending 60 days per year in the country, and exempts foreign income from tax. In Malta you can get residency by paying €20k a year (no requirement to spend any time in the country), and foreign income is also exempt from tax, etc.
> That being said, there are countries with loose taxation like Thailand where you can establish residence and avoid taxes as long as you are not operating in the country itself.
I believe you can run foreign companies from Thailand without having to pay tax there, as they have no CFC laws. So the example the poster above gave basically applies, but you would book all your income in ForeignCo and take a small salary in the Thai company from fees you charge ForeignCo. That's essentially a zero tax country then.
Panama also does not tax foreign income. I worked remotely from Panama for many years and it was lovely. My take home salary was better than what could be achieved working for the likes of Google or Facebook, stock compensation not considered. I met my wife there too. But the threshold to get residency is higher.
Not true at all. Canada, for example, taxes your worldwide income.
USA and Eritrea are unique in that they will tax your worldwide income even if you no longer live in those countries (are non-resident.) No other countries in the world have the brass balls to do that.
The scheme you are suggesting is money laundering. The reason it might work for some big names is that those have stronger reasons to bill the off-shore jurisdictions.
For example, a Starbucks LLC in "NewTown","Small-EU-Country" is fine billing an "off-shore" company for the use of Starbucks name.
The same is not fine if you are opening a local coffee shop.
His example wasn't perfect. But say you create an app. You can definitely hold those intellectual property rights (+ sell it on the App Store) through a foreign company.
Different countries have different laws to combat the use of foreign companies, though. It might end up not being worth it because there are other costs associated with setting up an entity (e.g. some substance requirements)
No, the intent of the law is absolutely unmistakeable especially in tax-related domains.
Bad-faith actors don't deserve the statutory crevices through which they divert their accounting. Fix the moral compass of their boards and officers or assign them a post-facto "we really don't like what you did there" penalty. Could be a fine, business restriction or mandatory supervision by the public authorities.
The notion that these companies should only be beholden to the strictest letter of the law is nonsensical.
> The notion that these companies should only be beholden to the strictest letter of the law is nonsensical.
Right, they should be beholden to the letter when it benefits them and the spirit when it benefits them. Seriously -- you wouldn't want to live in a world where this isn't the case.
* Nobody should have a technicality in the letter result in fines and punishment when they were following the spirit in earnest.
* Similarly, nobody who takes care to follow the letter exactly should be punished even if it violates the spirit. Because otherwise people and companies have no clear way to know what is and isn't allowed.
It's only when someone is violating both the letter and the spirit that there are grounds for punishment.
Yes that argument makes sense for rational actors, but I believe some privte organisations are simply too well adapted to the sane model for it to be effectively usable to mitigate their bad actions.
I'd argue corporations specifically could do with some more fear of the stick, in the cases where they fall in a grey area.
I think that all relies on a lot of judgement and perspective. I think that the way to fix things is to shrink down (or expand) the letter of the law so as to catch the corner cases and to protect people appropriately (from the application of the law).
I think that the letter of the law must be applied generously and sparingly - but the rapid expansion of egregious evasion should be addressed because it is having corrosive social effects that will compromise this attitude and the norms that underpin it.
Avoidance, you mean. I think there are more distorting effects in the market at the moment than tax avoidance, such as extremely low interest rates and quantitative easing (outside of the US).
Yes - agree, sorry sloppy language. I agree that both of the other distortions are important and difficult too - but I think imposed on authorities by circumstance.
Also having other things in play doesn't mean that this thing shouldn't be fixed...
Yes, agree, but I just think in many cases the resources and effort it requires for tax authorities to win these cases often makes it not worth it.
A full tax case can easily run for 5 to 10 years, and the upside will be relatively limited. A lot has already been done in recent years and for a lot of EU companies the actual tax rate they pay has gone up with a few percentage points. But now most of the low hanging fruit is gone.
1) Reading newspapers and watching the news gives me the impression that there are large numbers of people who are not happy with the current social contract.
2) Speaking to people in and outside of my community informs me that there are many people who are not happy with the current social contract.
The line of reasoning I have is that there are simple ways that could readjust the flow of revenue and capital to enable the removal of many of the perceived injustices that other people cite when I speak with them or read of their experiences.
Just like corporations, people don't actually end up in jail because they don't act morally. They end up in jail because they don't act within the boundaries of the law.
There are plenty of rich assholes out there who would screw people over on a deal (for example, one well known New York real estate developer..)
It's one of those things where either everyone has to do it, or no one does. Nobody wants to be the first schmuck to pay higher taxes while allowing the competition to accummulate larger cash reserves and gain better margin flexibility.
The grandparent would be eligible to pay taxes at off-shore locations if he had any income generated at those off-shore locations. The IRS would treat that as foreign income and the first $100,800 of it might qualify for exclusion https://www.irs.gov/individuals/international-taxpayers/fore...
Yes - it must be this way round. If there is a clear level playing field then things will sort themselves out in the medium term. While there's a lot of nonsense and confusion bad outcomes will arise.
Assuming general principals of US tax law, if you're already working as an independent contractor, you could legally set up a local company and an overseas company, have the local company bill the client, pay you a reasonable amount, and pay the overseas company the remainder for the use of its name (or whatever justification you like).
Your local company would have no net income, but may pay employer side taxes on your wages, and any minimum taxes on corporations in the local jurisdiction.
Your overseas company would have a net income, but you picked an overseas jurisdiction with low taxes, right?
You would have recognized income of the wages, and unrecognized capital gains in the overseas company. At such time as you take the money from the overseas company, that would be recognized as a capital gain.
At the end of the day, you have to run two companies, one in an unfamiliar jurisdiction, and you get to defer recognition of income and change the character of the income from normal income to capital gains. You may also have paid taxes to the overseas jurisdiction that I'm not sure qualifies for a foreign tax credit. It's a real gain, but it may not outweigh the costs.
If you're a direct employee of a company, it's also not an option, since you can't redirect your wages out of your recognized income.