[xs]

What I see here is tax evasion. But done in a roundabout legal loopholish kind of way.

1. Establish profitable company in your home country.

2. Establish 2nd company in a tax haven country.

3. Give 2nd company some kind of ownership, and then pay rental fees, licensing fees, or simply set up a high interest loan that the 2nd company loaned the first.

4. Once you set up a way to make it look like you owe the 2nd company tons of money, now your 1st company no longer is "profitable" and actually in debt losing money, which means it doesn't need to pay taxes on the massive profit it's making.

While I believe it's legal it hinges on bad ethical practice. But many large companies do this, such as cruise ships and I think Apple.

[koolba]

> Once you set up a way to make it look like you owe the 2nd company tons of money, now your 1st company no longer is "profitable" and actually in debt losing money, which means it doesn't need to pay taxes on the massive profit it's making.

It’s called “transfer pricing” and it’s been going on for decades: https://en.wikipedia.org/wiki/Transfer_pricing

Short of a revenue (as opposed to income) corporate tax or VAT, it’s a very tricky problem to address. Maybe an excise tax on foreign remittances to match the highest corporate bracket.

Or you just scrap corporate tax entirely because it’s a terrible idea anyway.

[toyg]

Incidentally, this is the real reason why "Western" states are so hung-up on copyright enforcement: nevermind the movie bullshit, IP is a door throughout which profits can be arbitrarily shuffled around by the rich and the powerful. It creates a parallel reality where imaginary goods can be transferred from jurisdiction to jurisdiction, creating infinite possibilities for transfer pricing. And if anyone objects? Ahh, they clearly want to starve artists and creatives!

It's genius, and we all go along with it because how can you hate art and imagination? It's such a fundamental side of human nature. By turning its output into pseudo-goods, we think we're moving up in the civilization scale, whereas we're just enabling a parasitical accumulation of capital.

[inertiatic]

Can you explain how that works for someone ignorant like myself?

[SpicyLemonZest]

In general, every country you do business in will charge taxes based on the profit you make within that country. So what you do is:

* Set up a company in the country where you'd like to pay taxes, and give it all of your intellectual property.

* Set up subsidiaries in the countries where you don't want to pay taxes. Have them pay licensing fees to the first company for the IP, making sure to set the licensing fee high enough that the subsidiaries don't make much profit.

* Now most of your profit lives in the first country, no matter how much business you do elsewhere.

[NaturalPhallacy]

>intellectual property

A concept invented by and for lawyers. Call it imaginary property.

[okeuro49]

All property is imaginary. It's a human concept enforced by legal systems and force.

(Talking as someone who likes the concept of private property).

[SpicyLemonZest]

I don't think that it's productive to make up snarky names for concepts I don't like.

[dustintrex]

Genuine question: does this require IP though? What prevents the subsidiary from paying the parent for "consultancy" or any other amorphous but non-IP service instead?

[toyg]

Most activities can be quantified, at worst by looking at sector averages. There is already plenty of tax law around those, about what you can and cannot realistically expect tax authorities to believe. The IP field, though, has massive value swings, that make it fundamentally uncontrollable. How much is the word "Starbucks" worth? How much is "Nespresso" or "Linizio"...? These can move hundreds of millions in one go, whereas you would struggle to achieve it with murky consultancy contracts over several years.

[triggercut]

You might be interested in the OECD's way to make blatant tax avoidance like the original comment a little harder.

[https://www.oecd.org/tax/beps/]

Groups where the ultimate parent is responsible for roughly over 1Bn in revenue are required to submit Country By Country Reports covering all cross border transactions their details and their transfer pricing methodology, and, in many cases, the underlying documentation of those transactions (contracts, loan agreements etc.). These are digitally submitted via your local jurisdictions Tax authority and shared with all member countries. Companies as part of that group are required to lodge more detailed information at a local level on just their cross border transactions with others in the group. This allows for some level of check that information being reported is globally consistent between tax authorities, who are then able to identify and place controls on unwanted behaviours.

[toyg]

It should be noted this is framework is all very new. IIRC Country By Country reporting became compulsory in the UK only last year.

[pkaye]

> Or you just scrap corporate tax entirely because it’s a terrible idea anyway.

If you scrap corporate tax would rich people hold all their wealth in corporations so as not to pay any personal income tax?

[namdnay]

You tax it when they take the money out to spend it on themselves

[salawat]

Except they don't. They create corporations to do it for them.

As long as creating a legal fiction is a mere matter of having someone else do paperwork, you either need to extract tax from legal fictions, or kiss a big chunk of taxable activity goodbye.

[fighterpilot]

I don't think that's accurate if we're talking about large publicly listed companies, the only way for shareholders to spend the money on themselves is to take it out via dividends or sell the stock for a capital gain.

[Nicholas_C]

Shareholders can take out a loan for spending money that uses the shares as collateral.

[runT1ME]

This isn’t legal. A corporation that leases someone a car and a house is paying them a taxable income, regardless of it not being a cash income.

[matkoniecz]

It is trivial to work around.

Spending would turn into various non-monetary and indirect compensations. It is going already but would get even more efficient.

[judahmeek]

That would require a progressive, rather than moralistic, sales tax.

[draugadrotten]

The best way to "tax" the rich is to make them spend all their money. The more the rich consume, the more the less rich benefit. It's turtles all the way down after that.

So please order that custom yacht now, all you HN unicorns.

[matkoniecz]

Not at all!

It only redistributes work toward what rich people want.

Investing into something actually useful would be much better.

Scenario A: yacht is bought - economy is redirected toward luxurious yacht building, people get paid to work on building a yacht

Scenario B: investment into housing - economy is redirected toward house building, people get paid to build houses

scenario A can be a good one only when this people would be unemployed and seeking a work otherwise. Or if you think that building luxurious yachts is more important than alternatives.

[bsanr]

What if the point of taxes is not simply to redirect and redistribute funding, but also to reduce economic activity and, by extension, emissions and inflation?

[durnygbur]

> The best way to "tax" the rich is to make them spend all their money.

What a catastrophic idea. Do you want economy tuned to the tastes of the vain, wasteful, and capricious? In such economy there is no car, real estate, mobile phone, or clothes for you.

[hoseja]

Here we see a trickle-down advocate in the wild, folks.

[judahmeek]

Yes, Yes, they would.

[naasking]

> Short of a revenue (as opposed to income) corporate tax or VAT, it’s a very tricky problem to address

There's another post in this thread about changing IP law itself to disincentivize these arrangements. Seems like a good idea.

[sumedh]

> Or you just scrap corporate tax entirely because it’s a terrible idea anyway.

Then the owners will just get less salary but will have the corporation pay for their housing, transport food etc.

How does that help in making the system fair?

[coredog64]

In the US, at least, the IRS takes a very dim view of this. Nearly all of it would be considered imputed income and would be taxable.

[msh]

Well the fix for this is to tax revenue, not profits.

[Iv]

Several EU countries (France and UK) have, IIRC, made very clear that fictive debt or fictive licensing fees are fraud an would be judged as such.

[rich_sasha]

The UK shouldn’t really raise its voice here, easily half the tax havens are UK dependencies: Cayman Isles, Virgin Isles, Jersey, Guernsey, Isle of Man, Gibraltar. It is inconceivable to me that the UK lacks influence to stem these activities, so the only conclusion is that it willingly accepts status quo.

[jacquesm]

There is a reason that London was the financial headquarters of the EU while it lasted. They are going to try to do what they can to attract EU capital now that the last of these rules no longer apply to them, and will be the de-facto tax haven for the rest of the world except for the five-eyes.

[rich_sasha]

Well, the UK is well suited to finance in many ways, most of the legit. The way courts work for example. Maybe a bit like France and Italy have a natural talent for couture, say.

But the shady stuff is sure there, and shady. UK high end property market seems to be a Monopoly-esque money laundering machine, with the extra inconvenience of having physical real estate attached to it.

Maybe one good replacement market for NFTs.

[nextaccountic]

> The way courts work for example.

What do you mean?

[rich_sasha]

IANAL but I understand UK courts have a reputation for being quick, pragmatic, fair and unbureaucratic. Finance often turns on 'legal innovation', or introducing entirely new financial constructs, and where on the Continent a more prescriptive legal system is in place, UK law is more interpretation-based.

Possibly not a concern with many EU countries, but with some for sure: the legal system is also stable, doesn't change on the whims of the politicians, and appears to be genuinely un-politicised.

Since Finance heavily relies on parties promising huge contingent payments to each other, having a trustworthy and reliable arbiter is key. If I enter into an agreement where I pay upfront, and I'm guaranteed insurance-type payments for 20 years into the future, the legal apparatus is the backstop to my claims.

[unreal37]

The City of London itself is a tax haven.

[0] https://platform-production.s3.amazonaws.com/therules-134-Ci...

[topicseed]

This is debatable... The City of London is not really a tax haven as it has the same tax rate as the rest of the UK.

As the document whispers, what the City of London is, is a massive financial hub, that accommodates the offices and sales arms of many tax planning companies which sell professional services in London that would design structures to tunnel profits to various Crown Dependencies.

But you would find such services in any supercity. London is simply sitting at the crossroads of multiple hubs so it facilitates a lot of what's despised — but in itself, there's no haven in town!

[moffkalast]

Ireland: chuckles "I'm in danger"

This is literally their entire economy lmao.

[OliverM]

It literally isn't.

[moffkalast]

> In 2016–17, foreign firms paid 80% of Irish corporate tax, employed 25% of the Irish labour force (paid 50% of Irish salary tax), and created 57% of Irish OECD non-farm value-add. As of 2017, 25 of the top 50 Irish firms were U.S.–controlled businesses, representing 70% of the revenue of the top 50 Irish firms. (Wikipedia)

Are you sure about that?

If the EU enforces what they preach and Ireland loses its tax haven state they could lose a huge chunk of their GDP.

[sva_]

Pretty sure Ikea does it this way, and numerous others for sure.

[oneplane]

Once a company becomes big enough it turns into 'yet another big one' that inherits the branding and the original activities but simply starts doing whatever else is doing to min-max everything beyond human ethics.

It's like having a very small company with only a few people. There won't be any HR because that kind of overhead isn't something you can afford or make use of. So you work 'for the boss' and if you need something your boss is also the person who makes the decisions. But when the company gets bigger, you now get HR between you and the boss, and suddenly you are insulated. You work for the company, and are beholden to HR. Every step after that is just more insulation, more min-maxing and just making things worse for the sake of scale. Usually.

[jacquesm]

HR does not get between you and the boss, but middle-management (hence the name) does. HR gets between the company and you if there is a chance of you damaging the company, other than that it is mostly (regulatory) window dressing and to save some cost on recruiting and onboarding.

[laurent92]

Movies too. The studio charges the movie, so the studio is positive while the movie is in debt. Actors get a lumpsum and a percentage on the movie benefits.

In this case, it’s not shell companies, the studios actually have in-house expertise (=shooting most of the movie) while the movie mostly drives the scenario and the actors, so it’s harder to define what is illegal.

McDonalds also has a franchise system, although it’s easier to control whether the pricing offered to the franchisees is constant or proportional to benefits.

[earnesti]

How can you say what is fictive and what not? Licensing fees and loans exist on market anyway.

[kemitche]

The existence of valid licensing fees does not mean all licensing fees are valid. Surgeons are allowed to legally cut people, that doesn't mean we can't figure out when someone was illegally stabbed.

Let's not give up without even trying.

[Iv]

If a profitable company is making a loan it does not need to a subsidiary it controls, that's a fictive loan used to disguise a transfer.

When licensing costs are paid to a shell company with 3 employees in a country that is neither the place where the HQ are or where the company originates from, that's fictive.

[travoc]

Any time legislatures have a hard time defining the line between legal and illegal behavior, courts tend to take a “we’ll know it when we see it” approach. Justice might be served but rule of law is diminished.

[tshaddox]

Not really. “Fictive” just means “not real,” and courts have processes for judging whether things are real or not. The fact that courts still have to judge the actual facts of the matter doesn’t mean the legislature isn’t doing its job or that rule of law is diminished. It’s no different than courts judging the truth value of claims in a murder case or a fraud case.

[kazen44]

a major difference between continental law and common law is the intent of the law though.

If the court can prove that they did not handle with the intent of the law, it can still be decided that this is fraud. In a common law system this is not possible.

[bryanrasmussen]

Common law is based on precedent and common sense application of the law, so it is generally common law systems which are described as being open to interpretation.

[salawat]

Common sense has nothing to do with common law after a couple generations morph any type of sense a law could have made into something nigh unrecognizable. Go digging through case law in different jurisdictions and marvel at the contradictory interpretations that arise. This is why strategic changes in jurisdiction are a valuable part of litigative strategy.

[nabla9]

You figure out what the intent is.

If the same owner is behind both, and there seems to be no other reason that avoiding taxes, guilty.

[burnished]

"oh no, our publicly very profitable company actually doesn't make any money because of all the.. license fees we pay, that we are clearly in a position to bargain for better, yet mysteriously do not! oh its such a coincidence that everyone in the C-Suite still makes money off the the shell company."

You can obfuscate fraud. But don't try that post-modern horseshit "what is being, man" on us.

[deelowe]

That’s the thing about laws. It’s up to the courts to decide.

[opportune]

It is technically tax avoidance. Tax evasion = not paying taxes you legally owe, is a crime. Tax avoidance = using legal means to reduce the amount of tax you owe, not a crime (by definition).

This is why I support taxes such as those that France levies on digital revenue originating within their country. I also think it makes sense to wholly eliminate corporation taxes (which are not only avoidable, but are a form of double taxation) and replace them with these revenue taxes.

[throwawaythekey]

Australia has specific laws to stop the abuse of tax avoidance [1]. While at a high level they seem reasonable they haven't resulted in us getting the desired amount of income from multinationals [2]. The article I linked relates to big tech though, and maybe that's a separate argument when very little of the innovation happens in Australia, mostly just sales.

[1] https://www.ato.gov.au/general/tax-and-corporate-australia/a... [2] https://www.smh.com.au/politics/federal/tech-giants-pay-reco...

DISCLAIMER: Not a tax expert

[fragmede]

Step 4 glosses over a ton of details but is sufficiently correct in Apple's case, which pioneered the Double Irish. That was supposed to stop in 2020, but unless you keep up with the world of corporate finance and global tax law, things keep shifting.

Apple's easy to pick on, they're one of the richest companies in the world and should pay more taxes. But for companies that are less successful, it's entirely possible that the second company is actually losing money. Without an appropriately sized army to track through the 200th company (tracking transactions between two companies is simplified to make the tax evasion easy to understand. Real world tax evasion is dramatically more complicated.)

[dataflow]

What I never understood is, (how) does the money get transferred to the home country eventually? Doesn't it need to do that to have some utility? Otherwise, what's the point of just accumulating money offshore that you can't eventually use where you actually are?

[underdeserver]

There's a lot you can do, such as borrow against it as collateral, transfer it to other offshore companies in return for services (the entire deal happening in the tax haven - therefore not taxed), or even have it hold property which you can then use.

[dataflow]

But if you use it to pay someone else offshore, presumably you get something in return at the home country, right? And you didn't pay for it there, right? So isn't the fair market value (or something along those lines) of whatever you eventually receive in the home country therefore taxable income? I don't understand how the value loop can legally close without taxation one way or another.

[Mvandenbergh]

First of all, you can spend money on things outside your home country (second/nth house, buying a new yacht, etc.) and depending on how those are structured you can avoid that being taxable income. If someone takes a direct distribution or benefit in their country of residence and domicile then yes, those are definitely taxable events and careful tax avoiders pay their tax on these transactions.

Second your intuition is correct, often people do break the law at this point, it's just very hard to detect without files like this which is why the previous Panama/Paradise leaks have led to so many prosecutions and tax recovery actions. They made clear what otherwise was secret.

A common tactic is using the funds to buy property in which you then live as a tenant. In most countries (certainly in the UK) tenancy contracts are purely bilateral and non-public. There is no way for the government to know whether you are:

1) living in a property owned by a third party ownership company that you genuinely have no links to - btw many rich people do this for at least some of their homes so it's not like its an inherently suspicious activity. You can rent whole houses in central London for 10s of thousands a week.

2) living in a property owned by a company of which you are secretly the beneficial owner and paying market rent (to yourself). This may be allowed under some very carefully structured circumstances but usually not.

3) Like 2 but not actually paying rent. Definitely not allowed.

Technically they could find the difference between 2 and 3 if they audited your outgoings but they would first have to have a reason to even start doing that. It's not like you can take a tax deduction for rent, so this doesn't even show up on your taxes, they would literally have to pull your bank records to look for the expected outgoing rent. Telling the difference between (1) and (2) is impossible without the secret ownership information.

Another favourite is to use offshore accounts to buy things like jewellery, clothes, furniture, almost anything that isn't registrable property (i.e. anything other than real estate or vehicles). That is certainly illegal since you're taking a benefit which should be counted as income and taxed but good luck proving that.

[toyg]

Offshore entities can own properties in most open economies. They don't typically get taxed where they own the property or good, but where a profit is realized or an action takes place.

For example, in TFA it's mentioned that the Blairs bought an offshore company that owned a building in London; they really bought the building, but doing it this way allowed them to avoid property taxes in the UK that relate to ownership transfers ("stamp duty"). They could then hire out offices, and if they do that through the offshore company that "taxable income" would similarly disappear. Her Majesty's Revenues & Customs might eventually object to the arrangement, but if the offshore owners are not known, what are they going to do, bulldoze a historical central London property? Obviously not.

[slavik81]

> what are they going to do, bulldoze a historical central London property?

Seize the property and auction it off to the highest bidder. The process would be quite similar to a foreclosure. The problem the UK has is more that the stamp duty has countless loopholes. If he doesn't actually owe tax, then legally that's the end of the discussion.

I have little faith that all the loopholes in a stamp tax can be closed. It would be much easier to enforce a property tax system. Events are abstract and ephemeral, but real property is tangible and immovable.

Survey the area to assess a property tax each year. Mail the assessment to the property's address, and include a unique account number for payment. You can audit that all land in the tax jurisdiction has been assessed, and that all assessments have been paid. The only thing you really need to be careful about is what criteria you use for the assessment. Market value is relatively safe for that.

[toyg]

That's effectively what Council Tax was originally meant to be, but after a while nobody could be bothered with the survey activity. They even closed the door to piecemeal re-classification, after enough people started challenging the band their property sat in, by passing legislation that basically states the band is fixed as it is until Parliament says otherwise (i.e. likely forever).

[curryst]

Probably stock buybacks. Company 2 then spends the profit on buying company 1's stock, which they basically burn. Stock prices go up and owners recoup value through capital gains.

[dataflow]

How do you "burn" stock to raise the price in the home country? Sorry, I'm not following the scheme you're describing.

[salawat]

Company 2 bought stock in Company 1. Company 1 owns Company 2. Compamy 2 purchased stock that confers no rights or dividends.

The money still changes hands. Once you realize enough growth, you do a stock buyback. those stocks you issued to yourself? poof.

The magic of finance.

[dataflow]

It boggles my mind that two companies can own each other cyclically like this, but regardless:

I still don't get the "poof" part. So we're saying C2 is paying C1 for its stock, and I imagine that revenue doesn't count as income for tax purposes since C2 now "owns" part of C1 in return. As I see it, that means C1 is effectively getting a loan from C2, putting part of itself as collateral. It can spend the loan to grow, which is nice, sure. Let's say it does that. Now you're saying C1 performs a stock buyback? Wouldn't that mean it has to pay more for the stocks (since they rose in value)? It'd have to bring that money from somewhere... but where? I mean all it can do at this point is pay back the money it got from C2, but then it's even, right? There's nothing left over after that, it's just repaying a loan as I see/understand it.

[salawat]

From growth. Remember, half the point of these havens is to shelter money from being taxable. Nothing else matters. You move it over there for favorable treatment. Company 2 received back money from Company 1 that they invested in, so it's off Company 1's books virtually, but not in reality.

This is the hell created by multi-jurisdictional legal fictions. Short of a multi-national crackdown, being able to nail down the vagueries a bunch of well compensated international accounting firms and lawyers can get up to is unlikely at best.

[anonymousDan]

In the case of the US, you keep it offshore until you can pressure politicians to grant a tax amnesty.

[csomar]

You wait for a Trumpesque person to give you a tax-break and then you repatriate the money?

[raxxorrax]

Problem is that if some companies employ these strategies, their competitors are forced to do the same as otherwise they would not be able to compete.

Not true for Apple of course... but an appeal to ethics won't work either, the laws need to be adapted. Business ethics itself is a funny term anyway.

[csomar]

Does this actually work in practice? I think most legitimate countries now impose a withholding for any payment to a tax heaven.

[londons_explore]

The step here that is illegal is the moment company 1 takes out a high interest loan from company 2.

Company 1's directors have to do what is in the best interests of the company. If they choose to sign up to a high interest loan which will take all their profits, that isn't decision-making in the best interests of company 1. That's the point they can be put in prison.

I just don't quite understand how nobody is prosecuting them...

[toddmatthews]

When they save of bunch of taxes they have done what’s in the best interest of the company

[londons_explore]

They need to make decisions in the best interest of Company 1 and Company 2 separately.

An action done on behalf of Company 1 which slightly hurts company 1 but provides large gains to company 2 would be illegal (unless they can argue that it was part of a larger strategy to benefit company 1).

[croon]

I assume the owners of Company 1 would need to bring the case, and if they're also the owners of Company 2 they would never want to.

[chrismcb]

Sighs a lot like Hollywood accounting