I'm just going to ask this before really launching into this:
Do we really want to turn this thread into a discussion of the complexities of taxation and nexus issues? It's an EXTREMELY complicated area of the law. Moreover, some recent rulings in the US are moving in the complete opposite direction. To put this another way, this is beyond basic law school level stuff. The people who get really into it are high-level big 4 accounting firm types, JD/MBAs, and tax LLMs.
That said, I don't mind discussing taxation and nexus...but it would completely threadjack, if other people really want to talk about it.
I'd say go for it. Nothing else going on in this thread really, and we can always change topics. Besides, if we're sticking with the metaphor of calling this a war, wouldn't this be a discussion of the tactics?
Anyways, my take on the situation (and I'm generalizing as broadly as I can) is that the last few decades in the U.S. there has been a lot of effort expended to push the tax burden down the economic ladder. The top tier tax bracket has fallen to about a third of what it was following WWII. If we look at the federal budget, particularly for defense, we see billions a year going to government contractors, sometimes with little accountability. We have subsidies in place for most major industries. Lobbying groups have become incredibly successful at funneling government money to private business. Now, I can't deny that many of the industries we've been catering to create jobs. Not as many as we would like given the current situation, but whatever. They're still jobs.
But now we're stuck in a position where we have record low tax's, record high debt, weak infrastructure, high unemployment, and to top it all off our health care system is just plain fucked up. But instead of taking what I think is the common sense approach and raising taxes on the super wealthy, we've decided instead that we would rather lose government services. That is, our leaders have decided were better off laying off teachers, police, fire fighters, canceling public works projects (high speed rail, I'm looking at you), than taxing money from peoplewho won't even miss it. . Now, I'm not an economist, but it seems to me our government is becoming an entity that redistributes wealth upwards instead of downwards. Please enjoy picking apart my misguided assumptions and baseless accusations.
What that article is taking about is actually a very narrow but complex area of tax law called nexus. That is, generally speaking, there has to be a nexus with the taxing authority for there to be the ability to tax. In the old days, before the idea of multi-national corporations, this was very simple. If I'm a company in Dallas, Texas, I can be taxed by the city (Dallas), the county (Dallas), the state (Texas) and the country (the US). I won't be taxed by Oklahoma because I have no nexus in Oklahoma; I'm just a small company in Dallas. As we got into the industrial age, things got a little more complicated. Say I've grown, and now I have branches in Tulsa, Santa Fe, and Phoenix, but my headquarters is still in Dallas. Conventional wisdom would say "Well, Phoenix and Arizona can tax what that branch earns, Santa Fe and New Mexico can tax what that branch earns, Tulsa and Oklahoma can tax that branch, and Texas and Dallas can tax what that branch earns." But with a parent company, the Texas branch is earning both its own earnings plus whatever profit is made in the other branches. Does Texas have the right to re-tax what is being shifted as after tax earnings from one branch to the headquarters? The answer had generally been no, but some recent decisions are broadly expanding the definition of nexus because states are broke and this was seen as an easy tax grab. The first was the slow creeping of sales tax to internet orders, but the recent "big deal" has been imputed nexus for franchises. In short, a franchise is basically a government regulated license to run a concept under a common trademark. Prior to the last year, a franchisor (the company who owns the concept) didn't have nexus just because there was a franchisee in a state. Courts are no longer in agreement on that, meaning revenue greater than what is earned in the state could be taxed in the state because of an imputed nexus.
At the US multi-state level, this is why states like Nevada and Delaware are popular for holding companies and top level companies: they either have no corporate income tax or a calculation method that isn't tied to income (Delaware is based on shares). This can make a huge difference in revenues, too. Say you're going to make $100,000,000 next year. In Texas, you're subject to a 1% franchise tax on that earning; $1,000,000 less on your bottom line. If that same company is in Nevada, that's an instant gain of $1,000,000. And if you're dealing with something like intellectual property that really can be "housed" anywhere, why not move it to Nevada and make $1,000,000?
Taking this to a multinational level and trying to put this as simply as possible, say you're operating in 20 countries. In general, nexus would exist solely with the operations in that country, but the big (and complex) game of international structuring comes into play because of the tax treaties that may prevent what the article is talking about: double taxation. Say you have a branch in Country X, and your main office is in the US. Country X has no tax treaty with the US, which means taxes paid there cannot be credited against tax liabilities here. When you bring the funds back to the US, you've already paid Country X taxes, and now you're paying US taxes on the same money. On the other hand, if Country Y has a tax treaty with the US, and your branch there sends funds back to the US, you can count the taxes paid in Country Y against the tax liability in the US. To take this to the level of a basic law school class, if County Z has a tax treaty with the US and Country X, then you might set up a new entity in Country Z to receive the payments from Country X, and then only Country Z Company would repatriate funds to the US. In reality, it's substantially more complicated than that...tax treaties change a lot, and the network of treaties is far from comprehensive. This is why companies spend thousands and even millions working with large firms that specialize in this to be able to optimize their tax-based cost structure on a multi-jurisdictional basis (and this still hasn't gone into tariff analysis, FTZ, transfer pricing, tax incentives, etc.)
Now, you look at the UK article and see that as a tax break and shifting the burden to the "little people." In reality, allowing flow through transactions encourages substantially more business be routed through the country. Which means more jobs in the UK, and in turn more tax revenue. Multi-jurisdictional tax discussions, in general, are too complicated for the average person to even follow, much less the average journalist to fairly report on, so I don't blame you for coming to the conclusion you did from that article.
I was only trying to use that article as one small example in a broader picture. But your point (I believe) was well made. I'll come back to this tomorrow, but I do want to throw out another quick question. Are banks and investment firms (as far as taxing revenues goes) treated much differently than other businesses? It seems to me they should, given the recent recession. After all, they make fortunes while not employing all that many people. So encouraging their growth may not be much of a net benefit to the state.
I don't do much work with financial institutions, especially outside the US. In the US, income is income by and large. However, the key is what is "income" and what isn't income. If I'm a bank and I loan $1,000,000 and make $5,000 in interest, I do get $1,005,000 in income in that transaction, but my "income" is only $5000. It's a gross vs. net thing.
But there's enough complexity to it for books like this to exist. I by no means claim to be an expert in taxation of financial instruments.
The UK is one is actually the opposite of what you seem to be making out.
What is happening here is that UK-based multinationals are not going to be taxed at all on overseas profits.
Now most people won't have to bother with this, but I'm a dual citizen so it's relevant to me. If you are responsible to two different nations you need to keep in mind your tax liability to each.
Lets say I earn (and this is absolute bullshit) $50,000 in the UK this year. This lands me in a (again, bullshit) 10% tax bracket under UK law. I then have $45,000 taxible income and have paid $5000 in taxes.
I then have to declare that $50,000 as taxable income under US law as well, although I get to take into account having paid 10% tax on it already. I now only have to consider any extra tax that would go over the 10% I've already paid. The details are fucking complex, but be grateful you can ignore that stuff.
In my case the UK takes what taxes it would normally from one on it's citizens, then the US strips me of the difference between that tax burden and what it would take from a local boy. The trick is I always pay the higher of the two rates, but nothing more. And that is pretty much the way most corporate tax works as well.
A UK company working in the US would have to pay American corporate taxes. They would then have to pay British corporate taxes after reducing them by the amount they had already paid.
Lets say that there is an American corporate tax on a Brit company of 8%. They pay that up to the American government . But now there is a similar British tax that is supposed to be 10%. In this case they have already paid out 8% so can reduce that from their payments, so giving the British government only 2% and ignoring the rest. This is a moderate incentive to go overseas/outsource, as it doesn't cost you anything extras as far as taxes go unless you move to a nation where the corporate taxes are higher than the UK's. You are still paying a total of 10% tax on your earnings, as would a local company, but now you can exploit cheaper workforces or other regional advantages.
Under these news proposals no income gained overseas would be taxed by the UK at all. That is, lets say you again earn money in the US. You are still charged at that 8% corporate tax, but now you don't have to worry about the UK share. Compared to a company earning in the UK you are making an extra 2%, even before you take into account regional advantages. This is doubly damaging to the British economy as it promotes outsourcing (and so reducing jobs in the UK) while also reducing government revenue (through less corporate tax payments) and so hiking up the likely future deficit.
You're looking at it backwards. By saying "We won't tax your overseas income at all," you're incentivising using the UK as a headquarters or regional head office because you're not getting taxed on the foreign downstream income. It incentivises management of foreign operations from the UK, which is job growth.
Plus, to repatriate currency into the UK, you'll have to pay taxes on the amount repatriated anyway, so you're really only minimizing the tax impact of entirely foreign operations.
The thing is that the UK isn't hurting for that sort of business. What it is hurting for is manufacturing jobs. The sorts this does encourage moving offshore.
This is looking far too much like a continuation of the Labour policies where economic growth centred on increasing the size of the banking and management sectors of the City while neglecting other sectors.
It's also still likely to cut down on revenues from corporate taxes, which isn't something we need right now.
Manufacturing, to me, seems like an odd direction to push in the UK. Land is at a premium compared to other countries, and manufacturing by and large requires large facilities. Perhaps a push for tech manufacturing like in Japan, but (and I really mean no offense by this), British engineered goods aren't generally praised for their quality and longterm durability, especially when it comes to electronics (I'm looking at you in particular, car manufacturers). I think the UK could be idea for industries like software development, though, where space isn't the primary concern for development. It's not traditional "manufacture" per se, but it is production. IP development derives a lot of potential benefit from nexus-shifting and planning, and a policy like this (especially coupled with some of the software development tax incentives available right now) could help that sector grow.
I'm thinking more about the high unemployment rate. Manufacturing is one of the sectors that has been hit pretty hard and leaving it in the current state is asking for trouble down the line. The government line is to cut benefits and go hardline austerity which doesn't go well with long term high unemployment. Especially as there isn't exactly much money floating around for retraining into tech jobs.
In any case, software development is a popular and easy one for off-shoring these days as well, so making that easier isn't going to help people either.
The problem is I'm seeing this alongside multiple other moves. One of the relevant ones here is making it harder for foreign students to come to the UK or stay after graduation. International students are huge source of funding for universities while also contributing massively to the R&D industry. And then making it harder for them to stay after they graduate is just stupid on so many levels.
Hopefully they can start pushing some stimulus and incentives into relevant industries. Getting tax relief for the damaged Scottish video game industry (20% job loss last year) would be a nice start.
British engineered goods aren't generally praised for their quality and longterm durability
Meh, six of one half a dozen of the other. There are lots of smaller scale industries known for their quality and a strong engineering tradition. Hell, there is even a fairly major satellite production industry in the south.
The Scottish game development community is a bit of an odd case, since I think the job loss there is a direct result of sales and project cancellation, not the tax incentives.
I generally think the solution to high unemployment isn't more unskilled jobs in areas that create inefficiency. The government needs to either focus on seeing repurposing unskilled labor into sectors that make sense, or train them to do low level skilled labor. Bringing more financial and management institutions to the UK would do that, as there is a boatload of support staff needed to manage those kinds of operations.
You're getting taxed on income not earned in the jurisdiction when you're not a resident of the jurisdiction. That's the equivalent of telling everyone with paid vacation, "Well, you're technically earning income while you're vacationing in our state, so we're going to assess an income tax on you for it." It is a GROSS abuse of the income tax authority.
I get that you have some "I hate everyone better off than me" chip on your shoulder, but save the bullshit for somewhere else.
I'm with Dark on this, and not just because I'm a Texas groupie.
Often times, when states raise corporate taxes or tax the rich at excessively high levels, they'll just pick up and get out, or they'll downsize their presence in a state. I don't think that there's a strong argument that this can significantly happen when you raise taxes on a national level, but there's not a lot of reason why a company would need to stay where it's at other than the cost of a few fixed assets.
What's "excessively high"? Equal to percentage rates on normal Americans that aren't in the top single digits? Also, I love Texas--well, parts of it--but have a pretty strong loathing for that douchetool Rick Perry.
Companies making money off of government services is nothing new nor do I consider it to be wrong unless there is some bidding irregularities or other corruption involved with that stuff.
As for banks improperly doing foreclosures, this is something my state's AG is pursuing. My agency is working with non-profits and the AG's consumer protection unit to make sure that the general public can get the information they need to protect themselves from predatory banking practices in foreclosures.
