[adventured]

The best argument for the holiday, is the fact that we're one of the only major nations doing something so foolish as double taxing foreign profits.

The idea of eg paying China's corporate income tax, and then paying America's on the way home, is absurd to say the least. A lot of companies will be stuck with 45% to 60% income tax bills on foreign profit. I can think of few things to make America less competitive overseas.

[gamblor956]

That's patently wrong. Corporation-level double taxation only applies in the extremely rare instances where the US does not have an income tax treaty with the other country.

We have tax treaties with all nations worth doing business with. Nobody is going to pay China's corporate income tax then U.S. income tax again at the corporate level for a 45-60% bill before it even gets to the shareholders.

[sbov]

My spider sense is tingling - from an ignorant observer on the subject of corporate taxes, this seems wrong.

As someone who isn't 100% ignorant about taxes in general, I've noticed that there's a shitload of completely wrong information about taxes out there. It's amazing how many smart people are incredibly ignorant, and then spread that ignorance, about how taxes actually work. So I have to ask:

Is this how it really works? At least for personal investments, IIRC you get some sort of foreign tax credit. From my initial searching, it seems like there's something similar for corporations.

[mikeyouse]

The whole idea of 'double-taxation' is a canard. That's another topic though.

> Is this how it really works? At least for personal investments, IIRC you get some sort of foreign tax credit.

Any money Apple pays to foreign governments as income tax on profits is included in the calculation of their domestic tax liability. So if Apple had $1B in overseas profits, paid 5% in Ireland as income tax, then wanted to repatriate the remainder to the US, the government would seek $300M in tax -- not the $350M that would be indicated by our 35% corporate income tax rate.

People trotting out the 'double-taxation' nonsense are promoting the idea that Apple should be able to venue-shop for an ultra-low-tax locale to claim their profits, then be free-and-clear of their US obligations.

Two more things worth mentioning:

1. The 'overseas' money typically isn't physically overseas. The money is in US banks, circulating as loans in the US economy, but is only overseas on an accounting ledger for tax purposes. This greatly blunts the potential impact of tax holidays.

2. If Apple takes out debt to fund operations purely to avoid repatriating money, the US taxpayer would then be subsidizing Apple even further. Interest on debt is a deductible expense, so that 2.5% per year Apple is paying, would be deducted from their income in the next tax year.

[AnthonyMouse]

> So if Apple had $1B in overseas profits, paid 5% in Ireland as income tax, then wanted to repatriate the remainder to the US, the government would seek $30B in tax -- not the $35B that would be indicated by our 35% corporate income tax rate.

That's not what double taxation is. Double taxation is that both corporate income and corporate dividends are taxed. Suppose a corporation makes $10/share in profit and wants to issue it as a dividend. First they would pay corporate 35% income tax on the profit and be left with $6.50/share, then if they issued a $6.50/share dividend, the shareholders would have to pay income tax on it again and be left with only $4.225 of the original $10.

If a foreign government also extracted a cut then the money would be taxed thrice.

[mikeyouse]

This is an even sillier definition of double taxation than I was giving you credit for.

Dollars don't pay taxes, taxable entities do.

A corporation is a separate legal entity that serves as the tax base. If it makes an income, it will pay a tax on that income.

An individual is also a separate legal entity that serves as a tax base. If a corporation pays an individual dividends, then the individual will pay tax on the capital gains from their investment.

How is this any different than when a company pays you an income. First, the Federal government taxes you, then the State government does, then come Payroll taxes, then any local taxes, then you have to pay property tax, then you have to pay sales tax. Each dollar is quintuple-taxed! Or more!

edit: GWU PhD Law Professor spells it out better than I could: http://writ.lp.findlaw.com/buchanan/20030220.html

[AnthonyMouse]

> edit: GWU PhD Law Professor spells it out better than I could: http://writ.lp.findlaw.com/buchanan/20030220.html

The crux of his argument is this:

> "Would you rather pay 10% income tax twice a year, or 50% income tax once a year?"

But that obviously misses the point. The problem with double taxation is that it makes the rate misleading. If you've lost 35% to corporate income tax and then 15% to qualified dividends or capital gains tax, you're paying ~45% in total, but people point to the 15% rate and trot out the "pays lower tax rate than secretary" trope.

> How is this any different than when a company pays you an income. First, the Federal government taxes you, then the State government does, then come Payroll taxes, then any local taxes, then you have to pay property tax, then you have to pay sales tax. Each dollar is quintuple-taxed! Or more!

Those are all different taxes. Income tax is the same tax paid on the same money, twice. It's recursive. Compare how corporate income tax works to how sales tax works. If you're a business you don't pay sales tax on your raw materials, you only collect it once on the finished product. The total amount of sales tax paid on a car doesn't increase just because you increase the number of intermediary entities between the iron mine and the car dealership. With corporate income tax, it does.

[mikeyouse]

> The crux of his argument is this:

That's not the crux of his argument whatsoever, it's just a random statement being held up as a straw man.

> Income tax is the same tax paid on the same money, twice.

Except it's capital gains, intentionally taxed at a lower rate than income. The first tax is levied on corporate income, the second tax is capital gains which is taxed on the individual level. Different tax bases necessitate different tax treatment.

> Compare how corporate income tax works to how sales tax works. If you're a business you don't pay sales tax on your raw materials, you only collect it once on the finished product.

That's only true in the US. The majority of G20 countries that don't have capital gains + corporate income tax use a VAT to achieve the same ends.

Look at effective tax rates for individuals and corporations based in the US. We're one if the lowest taxed countries in the 1st world.

[WildUtah]

The corporate dividend tax paid by individuals tops out at 20% today, so the example total should be $5.20. States usually tax both corporate profits and dividends at 5-10% also, so that's another 10-20% but that's usually deductible against the other taxes. Expect to keep about $4.30 from the $10 profit, if it's distributed as dividends.

[AnthonyMouse]

The 20% rate only applies to qualified dividends. If you don't meet the qualifications (e.g. you don't satisfy the holding period requirements) the dividends are taxed at the higher ordinary income rate.

[steveax]

Depending of course on the top marginal rate of the beneficiary of the dividend.

[jessaustin]

I think those numbers have some order-of-magnitude problems? 35% of $1B would be $350M, not $35B. Or maybe I'm just really not understanding this...

[mikeyouse]

Ha, good catch, you're understanding correctly. I was reading a story about Apple's $100B cash pile before I wrote this post.. corrected now.

[gamblor956]

The corporate foreign tax credit is even more generous than the FTC available to individuals. They get credit for taxes paid on the dividends (i.e., withholding taxes) and in some cases for the foreign taxes the dividend-paying company paid on its income.

[kryptiskt]

A lot of this money have been funelled through tax havens and have never been taxed at all. There is no need to feel sorry for Apple and Google. They are abusing the tax system far more than they are hindered by it.

[OnyeaboAduba]

I think this article clears up some of the confusion here http://www.bloomberg.com/news/2011-03-17/tax-holiday-for-1-t...

money quote

"As is often the case in Washington, the scandal isn’t what’s illegal -- it’s what’s legal, in this instance tax- avoidance systems with names like the Double Irish and the Dutch Sandwich. As detailed in a Bloomberg Businessweek investigative story last May, Forest Laboratories Inc. (FRX), which makes the antidepressant Lexapro, sells almost 100 percent of its drugs in the U.S. and cuts its U.S. taxes dramatically by attributing the bulk of profits to a law office in Bermuda.

Similarly, Google reduced its income taxes by $3.1 billion over three years by shifting income to Ireland, then the Netherlands, and ultimately to Bermuda. Microsoft has used a similar arrangement. Records in the Cayman Islands and Ireland show that Facebook is setting up such a structure too. "

[seanmcdirmid]

> I can think of few things to make America less competitive overseas.

How about double taxing American salaries overseas? E.g. if I visit the states on business, I have to pay US taxes AND Chinese taxes for any time I spend there (neither recognizes the other's jurisdiction in that case). That is about a 60% tax rate, and you can't even deduct the taxes you paid to either country from the other.

[anigbrowl]

Not actually true: see article 22 of our tax treaty with China, which has been in place since 1984: http://www.irs.gov/pub/irs-trty/china.pdf

The US has similar tax treaties with a lot of countries. Double taxing is not a significant problem in the real world.