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(July 25, 2005)

You are viewing the archives for October 2011

Tax Self-Destruction

Oct 18, 2011 by Ugh | 2 Comments
I often marvel at the inability of the OECD/G-20/G-7/"first world" states to combat rampant and open tax evasion/avoidance by their resident individuals/corporations. For example, there seems to be a persistent tendency across such states to respect for tax purposes transactions between wholly owned affiliate corporations so long as such transactions are entered into at "arm's length." This occurs even in cases where, e.g., wholly owned subsidiary A is paying wholly owned subsidiary B a royalty, when from an economic (or at least GAAP) perspective there is no significance to such a payment, other than for tax purposes.

This "let me hand $$ from my left hand to my right hand and save taxes" game falls into the world of "transfer pricing." As noted, this world is generally governed, at least among the developed nations, by the "arm's length standard" whereby transactions between wholly owned subsidiaries (or between the sub and a parent corporation) will be respected by taxing authorities so long as the price paid from one sub to another matches the price that would have been paid between a sub and an unrelated 3rd party (or some approximation thereof). In other words, if there is sufficient evidence that Microsoft would have paid Google $100x for product X, then if Google sub 1 paid Google sub 2 $100x for the same product, the tax effects of the transaction would be respected as that price would be considered "arm's length."

Unsurprisingly, when the transaction is between wholly owned affiliates, it is almost uniformly the case that the tax rate in the payor's jurisdiction is greater than the tax rate in the payee's jurisdiction, such that the payment is deducted by the payor at, say, 35% but only included in income by the payee at, say, 12.5%, a more than 20% tax rate savings to the parent corporation (who is, after all, no worse off from shifting $$ from one pocket to another, and indeed will be better off after tax). It's unclear to me why this is allowed to go on, especially when, in most cases, there are no comparable 3rd party transactions (the MSFT to GOOG sale noted above), and in fact there would never be a comparable 3rd party transaction (would GOOG turn over to MSFT its IP "crown jewels" such as its search engine algorithm in exchange for a royalty? not so much, and yet this routinely goes on between wholly owned subs). Because of this lack of real world "comparables," the "proof" of arm's length pricing is an "independent" third party "transfer pricing study" that provides a range of "appropriate" prices for transaction X, after which the company soliciting the study chooses the lowest (or highest) price in the range.

Further, these transactions routinely move highly-valuable intangible assets to low or no tax jurisdictions, and then all (or most) future revenue is "booked" in that jurisdiction. Thus, GOOG develops its search engine technology, deducting all of the costs of which against it's U.S. income, then "migrates" the IP behind that technology outside the U.S. to a low/no tax jurisdiction (via a "Double Irish" and/or "Dutch Sandwich" or other method) and then pays little or no taxes on the resulting income. It is, at bottom, accounting gimmickry at it's worst (or best, depending on your point of view), and yet this is almost universally accepted among developed countries, who are now in a race to the bottom when it comes to corporate tax rates so they don't "lose" to other countries with a lower rate (instead of joining forces and telling those other countries to fuck off).

On the individual side, there is a similar dynamic at work, whereby for some reason these same developed countries countenance tax, bank, and other secrecy laws in various jurisdictions that allow their citizens to evade properly due taxes. Thus, e.g., the U.S. is reduced to practically begging Switzerland to force its banks to release data on the accounts of U.S. citizens held in that country in violation of U.S. law, and Germany goes around purchasing for multi-million Euros compact discs purporting to contain data showing its citizens evading taxes in places like Luxembourg. See, e.g., here.

Instead, it seems to me, a better approach would be for the U.S., Germany, U.K., France, and other nations to get together and threaten to cutoff Switzerland (and the other bank secrecy/tax haven jurisdictions) from the international financial payment system if they didn't comply with simple transparency measures (such as, "please tell us what U.S. persons hold accounts at Swiss banks."). They could similarly join forces and agree not to respect transactions between wholly owned affiliates for tax purposes, and also tax all transactions "booked" in tax havens (did you really "earn" multi-billion dollars worth of revenue in the Cayman Islands?). The U.S. could take a good first step on its own by requiring states to collect information regarding the beneficial ownership of legal entities when such entities are formed and then holding the owners responsible for subsequent transactions carried out by those entities (this lack of transparency makes Delaware a haven for non-U.S. person tax evasion/avoidance).

That these countries haven't taken such measures, or at least they have only made middling steps in that direction, tells you all you need to know about who controls the tax policy levers around the world.

If I were to put my conspiracy theory hat on...

Oct 12, 2011 by Ugh | 16 Comments
So I see that the U.S. gov't has announced that it disrupted (in its telling) an (link is to CNN live blog so who knows if it will remain stable) Iranian directed plot to assassinate the Saudi ambassador to the United States on U.S. soil. Reading the complaint, the evidence includes recorded telephone calls between the U.S. based co-conspirator (post-arrest) and the other based in Iran. So, it seems like pretty solid evidence. Nevertheless, since I'm not feeling charitable toward the Obama administration right now, let me question both the substance and the timing of this alleged conspiracy.

Substance questions:

1. Really? The Iranian government decides it wants to off the Saudi ambassador to the U.S. and do it on U.S. soil using members of a Mexican drug cartel? That seems extraordinarily stupid. If you parse the complaint close enough it never directly alleges that this was official Iranian gov't policy, merely that the Iran based conspirator was a member of the Qods force (based on allegations by the co-conspirator) who was working for a higher up person in the Qods force (and upon a re-read that the purported leader of the Qods force was aware of what was going on). Nevertheless, statements at the press conference indicate that the U.S. blames the gov't of Iran writ large. [Update: Further bonus, by making up this over the top, insane conspiracy, the administration can state "See, Ahmadinejad really is crazy! What if he gets nukes!"]

2. The complaint also alleges that the Iran based conspirator and/or the person he was working for was involved in at least one bombing in Iraq, presumably during the U.S. occupation. How convenient. (Foxnews is also reporting that the plot involved hitting the Israeli embassy in the U.S. as well - I don't recall reading that in the complaint and it's not searchable, but I may have missed it).

3. Of all the Mexican drug traffickers who the U.S. based conspirator could have approached, the one he picked just happened to be an FBI informant? Gosh. Note the ominous footnote 14 of the complaint where it says, without any detail, that "during the course of his interview, [the U.S. based conspirator] explained how he came to meet" the informant. Given what seems to be a long history of "terror plots that wouldn't exist and/or succeed without the FBI," this seems suspect.

4. This is all too perfect right now to burnish both the administration's anti-Iranian (and thus pro-Israel) bona fides and its anti-terrorism cred.

Timing questions (IOW, why announce this today?):

1. Subpoenas were issued today by congress (via nutcase Darrell Issa, but no one in the MSM is allowed to say that) to AG Holder in the Fast & Furious investigation. This announcement, presented by Holder himself, will obviously push the former off the front page. [Update: And even more cynically, though this probably belongs on the substantive list, the administration is saying "Hey, see how useful these drug cartels can be in terrorism investigations? Backoff the subpoenas already!"]

2. The so-called "underwear bomber" trial gets underway today. This announcement keeps the GOP from pushing their ridiculous, but somehow popular enough to cause worry, argument that the bomber should have been sent to Gittmo and/or doesn't deserve any rights (and maybe the gov't's case is weaker than we think?).

3. Just as the Occupy Wall Street protests were going viral and (some) democrats were praising them, this gets them off the front page (why would the administration care? They need Wall Street's $$ for Obama's re-election campaign). Further, they had (and I think carried through with) some rather dramatic actions today, but now they're on page 2 as well.

So, it all just seems very convenient.

Update: I see Josh Marshall notes the press conference pushing the Iranian gov't involvement angle very hard as well.