It is very naïve to think adding staff won’t help. Just look at what the IRS did before staff was cut; they investigated Microsoft aggressively and announced $29 billion in back taxes for 2004 to 2013, plus penalties and interest.
$29B over ten years is an annual amount of less than 1% of Microsoft's current annual revenue. Meanwhile the company is appealing it so the government hasn't actually won anything yet (but is incurring additional costs), and on top of that it means there is now going to be a court decision about how this works, which benefits the companies wanting to do it by clarifying the law so that even if they lose the courts will have told them what they need to do differently next time in order to win. Of course, if they win then it's even better for them because then they can just keep doing what they were doing before.
The actual problem is that "transfer pricing" is inherently ambiguous and subject to manipulation but it would take structural legislative changes to the tax code (e.g. tax corporations using something other than corporate income tax) to take it out of play.
The goal of the IRS is to enforce payers paying the correct amount, not to like, extract some huge fraction of companies' annual revenue. If that's less than 1%, but it is net additional revenue for the Treasury, great.
The problem with transfer pricing is that there is no correct amount. We maintain this conceit that there is a sufficiently exact "fair market value" for transfers between subsidiaries in different jurisdictions and therefore we can calculate how much of a company's profits are attributable to each one for tax purposes.
Meanwhile the bulk of Microsoft's profits in the years in question were attributable to global market power downstream of anti-competitive practices.
If they had engaged their US workers through a staffing firm instead of employing them directly, would the staffing firm have made billions of dollars? No way. If they engaged an external marketing firm to handle enterprise sales in Europe, would the marketing firm have ended up with the lion's share of their profits? Not bloody likely. The factory in Puerto Rico where they stamp the CDs is just as valid (i.e. just as farfetched) as any of the others because it obviously wasn't any of them. It was the fact that zillions of companies and individuals were locked into Windows and Office, which isn't something that exists in a specific jurisdiction.
Microsoft is presumably going to argue that the small operation in Puerto Rico was the entity that held ownership of their copyrights, which really is (via the anti-competitive practices) the thing responsible for nearly all of their profits. That aggravates the IRS because it's easy to move into any jurisdiction you want, which would make them want to argue that it's ridiculous for a small CD factory to be responsible for billions in profits, and it is ridiculous, but that's the end result of taxing "profit" when the thing that generates the profit is so easy to move. The ridiculous outcome is the result of a tax code that imposes a method of taxation which is inherently subject to such arbitrary manipulation.
I mean, serious question: Suppose assigning that much to Puerto Rico is nonsensical. Microsoft has offices on six continents. What's the IRS case that the profit should then be assigned to the US in the alternative rather than anywhere else in the world?
If you take that into court, the judge then has to maintain the facade that people are being asked to do something serious instead of something capricious and incoherent. Then someone will win based on a justification that will have been made up after the fact and either the IRS will have wasted a lot of taxpayer money in order to lose, or they'll have wasted a lot of taxpayer money they still shouldn't have had to spend because the law shouldn't be this ambiguous, in order to extract a small minority of the money that multinational companies didn't pay when purely domestic ones did.
IRS enforcement is a hopeless tool for that. "Net additional revenue" is not only not guaranteed, it's a false dichotomy. The real way you get them to pay the same amount as other companies is by changing to a method of taxation that isn't subject to transfer pricing.
> You're saying auditing megacorps is hard, but somehow more staff won't help? I don't buy it.
It's not so much that it's hard, it's that it has a lower return on investment, because the IRS gets money from finding mistakes or intentional fraud. Megacorps have entire legal teams dedicated to preventing those things from happening, while lowering their taxes by finding lawful ways of reducing their taxes to almost nothing by pouring over the unfathomable complexity of the tax code to find obscure credits or chain together the right sequence of things so their profits end up in a jurisdiction where they're not taxed.
If you audit them you spend an enormous amount of resources because their accounts are so complicated and then only get money if they screwed up, which they're less likely to have done than someone with fewer lawyers, and even then it will typically be something like you found a credit they weren't allowed to take and they owe $50,000 but the thing where they have a hundred billion in revenue and 0.2% of that in taxable profit was all by the book.
Meanwhile smaller entities are far more likely to have screwed up because they have fewer resources to navigate the complexity of the tax code, and their accounts are less complicated, which makes it easier for the IRS to find mistakes and therefore get money. So if you give the IRS more resources and tell them to do audits to maximize recovery, those are the people they audit.
But that also involves auditing a ton of individuals and small businesses who didn't do anything wrong in order to find the ones that did, and they rightfully hate that because nobody is paying them for the actual costs of the audit where the IRS found nothing, which is why they keep lobbying to stop the IRS from getting more resources to do that to them. And if the IRS had to pay the taxpayer's side of the audit costs then their "recovery efficiency rate" would go way down.
> It's not so much that it's hard, it's that it has a lower return on investment, because the IRS gets money from finding mistakes or intentional fraud. Megacorps have entire legal teams dedicated to preventing those things from happening
Or: Megacorps have entire teams of people looking for ways to reduce their taxes, many of which are legally dubious but the risk of being caught * the size of the fine means it makes business sense to do it regardless of legality.
> Megacorps have entire teams of people looking for ways to reduce their taxes, many of which are legally dubious but the risk of being caught * the size of the fine means it makes business sense to do it regardless of legality.
"Legally dubious" is the problem, because ambiguous laws are supposed to be interpreted most favorably to the defendant rather than the government, and then all parties have to incur much higher costs because the ambiguity means it goes to litigation, and there is a significant chance that all of those resources are consumed and it comes out in favor of the corporation in the end. The IRS much prefers to find cases where the taxpayer is clearly violating the law.
If someday we get some kind of supergenius congress that can write laws that are unambiguous and have no loopholes then this won't be a problem. Until then there will be a constant back and forth between people who want to fund things with tax revenue and people who don't want to pay taxes about how to interpret the wording.
That's not the problem in this case. There is no one complaining about corporations avoiding their property tax or payroll tax. When Walmart collects sales tax, they're not finding some loophole that allows them to keep the money themselves instead of remitting it to the government, because that isn't really a thing.
The problem is specifically a structural defect in the way corporate income tax works for multinational corporations, because it's nominally a tax on profit. But unlike workers or land or customers, that isn't a thing with a physical location and that gives the corporations an unlimited number of ways to move it around so it ends up where they want it, which is in a place where they pay the least in tax.
It's not a matter of writing the law better. When you use that type of tax, the ambiguity is in the facts. If their global profit margin is e.g. 15% and you can't measure the fair market value of the things the subsidiaries in one country buy from a subsidiary in another with a smaller margin of error than that, they can shift all of their profits to wherever they want.
There is no reasonable way to fix it while still using that type of tax because it's not possible to measure the fair market value of everything with enough precision that they can't manipulate the outcome. You have to use a different type of tax instead, but then people don't do that and complain about the inevitable result.
> It's not so much that it's hard, it's that it has a lower return on investment, because the IRS gets money from finding mistakes or intentional fraud....
Isn't this exactly what all megacorps are hoping for everyone thinks? I am not saying that you are wrong but these megacorps are some of the most evil the Civilization has ever seen (see Meta) and now you and I are hired as tax attorneys - pretty soon (if not right away) one of us will go "this shit's very much so illegal but who is actually going to audit us? - the answer, per your comment is basically no one because we think these megacorps and their lawyers are there to play by the book...
In order for that to make sense to them, it would have to be impossible for them to avoid paying taxes without breaking the law, but the very nature of applying "corporate income tax" to an international supply chain makes that relatively straightforward.
The general problem is this. You have a company with its headquarters in Ireland that designs a product in California, manufactures it in China and sells it in Germany. In which country did they make a profit and therefore owe taxes? It depends on what each subsidiary bought from the others and how much they paid, so they're going to structure their operations so that the profit ends up in the one with the lowest taxes. That's the defect in "corporate income tax" for international companies, and why it gives international companies an advantage over domestic ones.
In order to fix that you need a tax code that says the taxes have to be paid to the country where whatever subset of their operations you want to tax is actually present. But then it's not "corporate income tax" anymore. If you want to tax them in the location they have workers it's payroll tax, if it's where they have buildings it's property tax, if it's where they have customers it's VAT, etc. You need it to be something they can't so easily move out of your jurisdiction. Because if you say that it's profit then they'll just arrange to make their profits in Ireland or Bermuda.
Or the US could tax it's corporations just like it taxes it's citizens.
Doesn't care that the citizens pay tax in whatever country they live in. If they earn over some 6 figure sum, they have to pay tax in the US as well.
That would put US corporations at a distinct disadvantage on the global scene, so it won't happen. Disadvantaging citizens doesn't seem to matter as much.
The problem here is not how the US taxes corporations, but rather that there are different corporations involved. A regular citizen can not establish an additional, foreign citizen that "owns" them or "supplies" them with IP (or labor hours, &c) -- this kind of tax management accounting is not possible for citizens.
You still haven't answered the question: What are you going to do when Apple or Google becomes "subsidiaries of a parent that is ultimately not a US entity"? What about your proposal prevents them from registering the parent company somewhere else while changing nothing else about their operations? Making them file different paperwork doesn't accomplish anything.
Well, it doesn't make sense to treat a local branch of a foreign company like a foreign company for tariff reasons -- one role of tariffs is to encourage local branches.
For example, Toyota builds cars in the USA; and rigorously controls how Toyota USA builds cars in the USA. That's actually kind of the point -- from an industrial policy standpoint, it is valuable and useful if companies bring their technology and approaches here and administer them with their knowhow.
Regarding government contracts, it could probably come down to some percentage of ownership or the way control is administered; but many defense companies are publicly traded and that means they can be owned in part by foreign entities (people or corporations).
> No government contracts (or super strict rules to get them)
Now you've created a disadvantage for corporations to bid on government contracts, reducing competition and causing the government to pay more for stuff. Meanwhile the companies that actually bid are then the ones that specialize in lobbying the government and register locally and other corporations still register elsewhere.
> tariffs
If you were going to use that you could just as easily use VAT to begin with.
foreign-owned companies already are at disadvantage (rightfully so) getting gov contracts. so if you gonna try to evade paying taxes claiming you are based in Burma the government should treat you accordingly. given that there is no bigger customer than US government the companies might re-think their Burmese HQ?
> given that there is no bigger customer than US government the companies might re-think their Burmese HQ?
Only if the percentage of their business represented by US government contracts is more than the US corporate tax rate, i.e. only for companies like Lockheed whose business is focused on government contracts. But those are some of the largest "domestic companies" being put at a disadvantage by the existing tax system because they already can't use the same international tax avoidance strategies as other companies when they're required to use domestic supply chains by those same government contracts.
Meanwhile the companies that do lower percentages of their business with the government would just stop doing business with the government at all, causing the government to pay more for things because that company would otherwise have been the one to get the contract by being the one to offer the government the best price.
The thing the US does to its citizens is bizarre and atypical and it should stop doing that.
But how would that even work for a corporation? Suppose you did that; is anything multinational going to remain a US corporation? Of course not, they'll just register in some other country. The CEO of Stellantis nee Chrysler is in Michigan but how many people can guess which country the corporation is registered in without looking it up?
This is a moved set of goalposts from the comment I responded to -- and we know that, because the original author had already confirmed that replying to me before your comment: https://news.ycombinator.com/item?id=47139400 .
Both of those comments are making a consistent argument: It's easier (and I would add more cost effective) to target smaller taxpayers, so that's what the IRS typically does when given more resources.
Of course it won’t help. If you have an audit target to meet you want target meta?
This exactly why ICE agents tends to target illegal immigrants that actually get a job and contribute to the society instead of criminals. Because the former are easy targets.
Also fundamentally the tax law in the US are intrinsically favor capital owners, especially large corporations, adding more IRS agents only cost more tax payer’s money and give regular people more headaches.
> If you have an audit target to meet you want target meta?
I don't believe the approach the IRS takes is to set targets and only audit the lowest hanging fruit up to some target. They have different sub-organizations pursuing different goals, and some sort of vision about fairness that means going after tough cases.
> This exactly why ICE agents tends to target illegal immigrants that actually get a job and contribute to the society instead of criminals. Because the former are easy targets.
This is completely orthogonal, but also untrue. It's way easier to go after criminals, as long as states cooperate. The recent Trumpian ICE is more expensive and less effective than earlier regimes.
> adding more IRS agents only cost more tax payer’s money and give regular people more headaches.
Many, many regular people underpay the taxes they owe. Additional IRS agents help close the gap between taxes owed and taxes paid, at a cost lower than the additional revenue. Your argument is just "individual tax cheats should be able to get away with it," which I can't agree with.
