[mcv]

Corporations being able to book their profits wherever they find it most convenient to book them, is utterly unreasonable. They make their profits in specific markets, and should be paying their taxes there. Profits made from selling in the US should be paid in the US, profits made from selling in Germany should be paid there.

The problem is, profits are the end result of a lot of complex corporate operations across many countries. Who's to say which bit of which revenue was used to pay for which costs, while other bits are pure profit?

There is another corporate tax that is entirely linked to the market they're selling to, though: VAT. The problem is: it's only over revenue made from selling to consumers, not to other businesses, and it's always completely offloaded to those consumers, and therefore not really a corporate tax but a consumption tax.

So how about treating profits that way? In every market, you count the revenue made from selling in that market, and subtract the costs made by buying, hiring, etc in that market. The difference is the profit you made in that market, and you've got to pay your corporate tax over that amount to the tax authority in that market.

That way you can't book your profits in a country where you didn't make any revenue. And if somehow you do make your revenue in a country where you didn't make incur costs, you pay tax over the entire amount. If you don't make revenue, then tough. You could have made some tax-free revenue there.

I'm no international tax lawyer, though, so there are probably problems with this idea. I like the principle, though: they've got to pay back to the market they're profiting from, and not to a completely unrelated country that offers them tax breaks for coming there.

[Nasrudith]

The problem with that is the expenses are already arbitrary with international businesses. It is Hollywood accounting of making movies "never turn a profit" writ large and arguably more honest. If say Amazon UK "rents" their branding, storefront, and similiar from Amazon US the value.

Essentially unfixed value goods + deductions = massive loophole. Unfixed fuzzy values are also very valuable to money launderers.

It is nastily entangled with other issues where a fix would carry major side effects. It is a metaphorical lodged bullet against the heart wall - its current existence is problematic but just yanking it out would do way worse damage.

Removing all deductions wouldn't be viable from many other business models.

For simpler amateur closes I can see a simple close being an explicit "your own external owned subcorporations never count as expenses" or "if you sell these exploitable things they must be open market bid and are transaction taxed" which would lead to lots of weirdness.

[mcv]

That's why I think you need to tie it in a non-transferable way to a market. So if Amazon UK pays Amazon US for a license, either it pays that license in the US, which means they can't deduct it from their UK profits, or they pay the license in the UK, which means Amazon US has to pay taxes on it in the UK. Either way, someone is going to pay tax over that revenue in the UK, and it'd be the most profitable for Amazon if it was done by the company that also spends the most on costs (labour, services, whatever) in the UK.

I still think that would actually close these loopholes. It would erect some barriers to international trade, though, because companies making their costs and revenue in the same market have an advantage over companies coming from other markets. I don't think that's necessarily bad, though, and it can be mitigated by trade deals by which countries decide to treat their markets as a single market for these purposes as long as their tax rates are similar enough. Of course then they shouldn't make those deals with tax havens, and they'd be stupid to do so, because they'd be inviting a loss in tax revenue if they did that.

[refurb]

Expenses aren’t arbitrary. Look up transfer pricing. There has been a ton of policy developed that severely limits what one subsidiary can charge another.

Are there still areas that need further tightening? Sure, but the prices charged within a company are not arbitrary.

[aembleton]

That's why I think corporation tax should be applied to UK Sales - UK Costs.

- Buy in the branding from the US? That can't be deducted.

- Import from China? Can't be deducted.

- Employ more people. Deductible

- Buy more from UK suppliers. Deductible. Now go on and export more with that. Those export sales won't affect your tax.

[danaris]

Unfortunately, that would make some entire categories of business non-viable. Any business that relies on importing raw materials would be hit with punishing taxes—unless their margins were huge, or their local & labour costs were orders of magnitude higher than their import raw material costs, they would likely not be able to operate.

Effectively, you would be taxing them on revenue, rather than profit.

[aembleton]

For those businesses that import raw materials, and sell on in the UK for a small margin then yes they would be unviable. They would have to increase that margin.

If they are exporting, then this would not affect them.

If they are selling on for a large margin, then they would be able to absorb at least some of the tax.

[mcv]

They wouldn't get to deduct the costs of importing those raw materials, but they would get to deduct the costs (labour, probably) of refining them and making something out of those raw materials. And if they sell back to the country they imported raw materials from, they get to deduct the raw material costs from those profits (assuming that country uses a similar scheme).

But you're right, for a company that makes their revenue in a different country than where they make their costs, it's effectively a tax on revenue. So it would encourage countries to make their costs in the same countries where they sell. It might stop companies from moving all their jobs to low-wage countries.

I admit raw materials would be an issue; those are not equally available everywhere. But at the same time, it would effect every company in that industry equally, so I don't think the end result would be that much of a problem. I guess it'd discourage extracting raw materials from poor countries. Would that reduce their exploitation by western companies, or would that deny them the exports they need to grow their economy? I don't really know.

[IAmEveryone]

That's totally unworkable. That banana you buy in the supermarket is imported and sold with a gross margin in the low single-digits. Taxes the revenue at income tax levels would effectively raise prices by the tax rate, i. e. 30% or so.

If the supermarket doesn't buy the banana directly from the plantation, that tax would accrue at every step of the chain. You'd effectively be prohibiting trade and people would switch to monthly drives to local farms and an entirely potato-based diet.

[mcv]

Many products already have a VAT tax of 20%, and that doesn't seem to stop them. True, bananas would probably get more expensive, but again, countries could mitigate this through trade deals with countries they believe have a fair tax system.

But it's true, local products would have a significant fiscal advantage over products from other countries, especially products with complicated supply chains across many different countries, some of which countries are tax havens that the target country doesn't consider having a fair tax system.

The change would probably be a shock to many companies, but it'd also make it impossible for companies to shift their profits to tax havens.

[aembleton]

Only if every step of the chain is in your country. This tax would only affect the sale of goods in your own country, not those that you then go on and export.

Yes, it would increase the price of bananas in the UK as we currently don't tax food. But, it might make an apple relatively cheaper. That would then help to keep money in the UK as it could be grown here; employing people in the UK who then pay tax here.

[danaris]

> But at the same time, it would effect every company in that industry equally, so I don't think the end result would be that much of a problem.

It would be a problem if it meant that an entire category of product suddenly became completely impossible to profitably produce in the country—particularly if it was one that had been produced in significant quantity there for some time.

[mcv]

> "Now go on and export more with that. Those export sales won't affect your tax."

Not in the UK, but of course they will be taxable in the country you're exporting to. Assuming that country uses similar tax rules.

[occamrazor]

VAT works approximately like that (except for the fact that salaries are not deductible)

[aembleton]

It does work approximately like this, but this way it would be taxing the value added from imports and profits. Value added by paying someone for labour wouldn't be included as the government will get money for that through income tax.

[mcv]

That's pretty much my inspiration for this. Except I've been wondering if VAT wouldn't be fairer if salaries and other local costs would be deductible.

[gpresot]

>So how about treating profits that way? In every market, you count the revenue made from selling in that market, and subtract the costs made by buying, hiring, etc in that market. The difference is the profit you made in that market, and you've got to pay your corporate tax over that amount to the tax authority in that market.

>That way you can't book your profits in a country where you didn't make any revenue. And if somehow you do make your revenue in a country where you didn't make incur costs, you pay tax over the entire amount. If you don't make revenue, then tough. You could have made some tax-free revenue there.

This is already what is happening. Company A sells something for 100 in Country X. But the product is manufactured in Country Y, and the brand is "rented" by a company that owns it and set up in country Z. These costs that get passed to Country Y and Z are the local revenues in these countries. It happens that Y and Z are countries with lower tax rates, so the comapny tries to maximise the Transfer Price it pays to its legal entities located there.

[throwaway34241]

I can't upvote this enough, you've just described the actual solution to this problem recommended by economists (which of course no one is interested in). It's a bit depressing to have it be almost totally absent from the conversation even on HN.

It's called a border adjustment tax, you tax at point of sale and deduct domestic factors of production. So the tax is on what's remaining (profits and foreign production costs).

For the foreign part apparently the currency exchange rate appreciates to cancel out the tax so it doesn't actually have a protectionist effect, although that's certainly not obvious to non-economists.

It was actually floated as part of tax reform a while back, and got interest from economists on the left and the right, but corporate lobbying killed it.

Of course redoing the tax code isn't simple, but this appears to actually be a totally solvable problem that doesn't require the cooperation of every country in the world or legal battles with every company about where their profits are from.

[mcv]

> "For the foreign part apparently the currency exchange rate appreciates to cancel out the tax so it doesn't actually have a protectionist effect, although that's certainly not obvious to non-economists."

I'm particularly interested in this part, because this does seem to be the weakest part of my idea. Do you have any links with more information?

[throwaway34241]

Yeah that part isn't very intuitive (at least to me). This was actually proposed as part of a Republican tax reform attempt back in 2017 [1] but the idea was taken from Alan Auerbach who's the director of the tax policy center at UC Berkeley.

A lot of high profile economists on both sides of the aisle seemed to think the general idea checked out including Krugman who specializes in trade and is not known to be a cheerleader for Republicans generally [2]. Of course there was probably disagreement over the absolute rates but the general idea of it being a way to fix the tax haven problem while also being trade neutral seemed to be pretty widely accepted (although some people weren't sure if the currency adjustment would be immediate).

Unfortunately the Koch brothers and some other corporate groups were against it so it got killed, and what got passed was a bill that paid for a corporate tax cut by just borrowing money and didn't address the tax haven problem.

[1] https://en.wikipedia.org/wiki/Destination-based_cash_flow_ta...

[2] https://krugman.blogs.nytimes.com/2017/01/27/border-tax-two-...

[luxuryballs]

If the money wasn’t fake it would bother me more but all this is doing is hiding inflation or delaying it perhaps until the money repatriates at a later time.

I might even go as far as saying that to a certain extent fiat money disappearing is better for the economy than the government allocating it towards something that is a net loss in terms of actual productivity (compared to something else the same people/resources could be doing instead).