[ringtail]

In my understanding what you are saying is, a country will tax profit on revenue generating from its own territory by its own tax rate.

For the sake of simplicity, assume 100% profit margin. Let R and R' be revenue generating without and with such tax law. Let T be tax rate.

So a company was hoping R into its bank account. But with the new taxes it would be (R - RT). Naturally the company would just increase the revenue to R' (by increasing prices) where it would give R'T to Govt and keep (R' - R'T).

R'(1 - T) = R

R' = R/(1-T)

Actually I underestimated new tax, for T=33% it would be 49.25%.

[IanCal]

I think the key thing here is "based on" does not have to be "equal to".

One option, which I've not thought through, would be something like the following:

You make £500 profit.

You pay 20% corporation tax, so that's £100. The question is who does that get paid to?

If 15% of your revenue comes from the UK and 50% comes from France, then £15 of the corp. tax goes to the UK and £50 goes to France.

More complicated with different company structures and corp. tax differences between countries, etc, but I think this may be what they're getting at.

[ringtail]

Thats easy to avoid. US Co will sell to Ireland Co which in turn will sell in UK/France. Since Ireland legally allows to go profit as low as 0.05%. UK/France is not getting much.

Also when US says 20%. It means US gets £100. US aint the sharing type :p.

How would this even work with territorial taxation countries such as Singapore/Hong Kong ?

[alkonaut]

The US->Ireland->EU thing is exactly what's going on now, and exactly what proposals like this are trying to address.

This kind of system will only work within a group of nations that agree that this is a good idea, such as the EU. Ireland and the Netherlands probably don't agree - but can hopefully be forced.

Obviously no countries in the EU have territorial taxation.

[ringtail]

The US->Ireland->EU thing is exactly what's going on now, and exactly what proposals like this are trying to address.

Thats why gave this example to show that it does not work as profit remains the same.

Lets assume there is no US Co. Ireland Co is parent company and its only doing business in EU. Then either Ireland [1] allows low tax rates to attract business in which case profit is low and thus UK/France share is low. Or Ireland is high-tax, then business move to another low-tax in EU.

This only work if there is single tax rate in EU. But if there is single tax rate, then why even go this complicated tax calculation route.

[1] Estonia (and in near future Latvia) does not tax untill profit distribution, reducing effective tax rate to 0%.

[Xixi]

In your example if Ireland Co makes 30% of its sales in France, then it would have to pay taxes on 30% of its profit to France (at French rate). That limits the reason to go to Ireland in the first place, which is why Ireland is largely against it. In fact it would encourage corporations to move their costs to countries with large customer base and high taxation rates to reduce the profits there, so it would favor the like of France, Germany or Italy.

The "trick", if I understand, is to only care where the final service/product is actually delivered. So in your example the idea would be to ignore France SAS, or rather I imagine to assume Ireland Co and France SAS are one and the same, and tax them "together".

At first glance it sounds very hard to setup (and it certainly is), but that's what is being attempted here. On the other hand it's not particularly complicated to know whom Google is selling ads to, and where iPhones are sold, so there must exist a solution to this problem...

[alkonaut]

> In my understanding what you are saying is, a country will tax profit on revenue generating from its own territory by its own tax rate.

Say we have a hypothetical company that operates only in Sweden and Ireland, and has offices only in Ireland. It has a revenue of €10M and a profit of €1M.

This company had €4M (40%) of it's revenue in Sweden (tax rate 22%) and 60% of the revenue in Ireland (tax rate 12.5%). How should this corporation be taxed?

By proportion of revenue according to the normal tax rate in the country. So

In Sweden: Tax 40% (the proportion of revenue) of the profit

(€4M/10M) * €1M * 0.22 = €88k

In Ireland : Tax 60% of the profit

(€6M/10M) * €1M * 0.125 = €75k

So the total tax went from €125k to €163k, because the corporation was forced to pay taxes where it made business, rather than on Ireland alone.

Basically you just pretend that the corporation was in fact two corporations, where one €4M revenue corporation was in Sweden and the other was a €6M revenue corporation in Ireland. That's all.

[ringtail]

But you are not increasing prices. Taxes gets passed on to consumers because companies do not take hit on profit margin just because of different tax rates.

So lets assume €10M is the already inflated ammount to accommodate for Ireland/Sweden share. Then only (€3.12m, €5.25) was needed from (Sweden, Ireland) if taxes were zero. €3.12m + €5.25m = €8.37m. €163k (€10m - €8.37) went to Govts. Then consumption taxes would be (28.2%, 14.2%) for (Sweden, Ireland). Swedese are paying (.282-.142)/(1+.142) = 16.3% more than Irish for same product.

You can calculate all these from equation in my comment before. I write here again,

R'(1-T) = R

whereas T is tax rates. R' is inflated revenue. R is zerotax revenue.

[alkonaut]

Yes, all kinds of secondary effects may come of this. Such as price increases, (and from that then tertiary effects such as reduced consumption). A reasonable effect is also companies moving around somewhat to get closer to business rather than close to low taxes.

In this example Swedish consumers would potentially see price increases - but on the other hand they could see tax reductions if the increased tax revenue from corporations gives some reform space for income or consumption tax cuts. Potential for jobs moving in from Ireland has the same positive effect on the bottom line.

The losers in the above scenario is the Irish because they'd see increased prices, lost jobs, and potentially raised taxes to offset lost corporate tax revenue.

[ringtail]

A reasonable effect is also companies moving around somewhat to get closer to business rather than close to low taxes.

Why ? The payroll will increase even if profit remains the same.

The losers in the above scenario is the Irish because they'd see increased prices, lost jobs, and potentially raised taxes to offset lost corporate tax revenue.

I doubt it. Consumption tax are never popular. Instead of businesses, the people at large might migrate to Ireland for significantly low cost of living.

[alkonaut]

Ok now I'm not sure what you are arguing: are you saying this is a bad idea because it is too hard to implement?

Or a bad idea because of how it would increase corporate taxes, which would land on consumers?

I can't see how it would be a net negative for those countries that would get a nonzero corporate tax from megacorps that today contribute around zero. Even with price increases, the net effect seems like it would be positive

[ringtail]

Its very high consumption tax. Effective, implementable but harder to get public support for. Cost of living (CoL) would rise. High corporate tax means high CoL. Every percentage increase will make it worse than last percentage. Wages would have to rise significantly. This will discourage business from moving to high-tax countries. People will likely move to low-tax countries.

I can't see how it would be a net negative for those countries that would get a nonzero corporate tax from megacorps that today contribute around zero. Even with price increases, the net effect seems like it would be positive

Because countries are not getting new money. Old money is just cycling between govt and people.

[wastedhours]

So almost like an EU VATMOSS for profit?

Could be a few issues with it still, e.g. declaring that your in-house logistics operation requires €100 to transport your €200 widget to Sweden, rather than €10 to Ireland, no?