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As I understand it, the problem with corporations taxation is there are international agreements countries would not tax products in the country where the enterprise isn't registered.

So wouldn't it be easier if all countries, beginning with countries with a greater impact, switched to taxing the profit gained on the ground of the given country?

Is there such an effort?

  • No, there is no such international agreement of not not tax products in the country where the enterprise isn't registered. Perhaps you mean corporate revenue and profits. – mootmoot Dec 27 '18 at 8:44
  • Some countries in the EU profit massively from the current situation - why would they want to change that? – janh Dec 30 '18 at 10:47
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Most countries already tax companies on the profit they make within the nation's borders. It's a straightforward principle and should mean that taxation doesn't provide any special advantage or disadvantage to multinational companies versus local companies trading with each other.

Unfortunately it doesn't work out like that.

When company A sells stuff to company B in another country at "arms length" (meaning both companies are trying to make the most money for themselves as they can) it's very clear how much profit each has made. However if a multinational does the same thing between subsidiaries its not at all clear. Components are shipped from factory A to factory B in another country, but how much are they worth? The company can shift profit to whichever country has the lower tax rate by simply declaring a different value for the components; high-ball the value and factory A makes the profit, low-ball it and factory B makes the profit. Since these components are not being traded on the open market there is no simple way to fix a "real" value for them, and hence determine which factory is really making the profit.

However in recent years tax authorities have been cracking down on this, setting rules for this kind of internal transfer. However intellectual property has become a new way of moving profits around. A company brand is recognised as valuable; sometimes a company will be purchased just for its brand and the customers that will automatically follow it. Therefore when MyCoffee Corp opens up a new coffee shop in Elbonia some of the value of that new business is due to the good reputation of the MyCoffee brand. But how much? The answer depends on how much profit MyCoffee wants to make in Elbonia versus the location that owns the brand.

It gets worse: MyCoffee can transfer ownership of its trademarks to a subsidiary in a country with low corporate taxes, and then move all of its profits to that country. After all, who can decide how much their logo is "really" worth? From the referenced website (a company offering this as a service):

Companies often profit from intellectual property (often abbreviated as IP) using offshore IP structures, holding their intellectual property in low tax or no tax jurisdictions. A company typically does this by incorporating an offshore affiliate company and then transferring the title for the intellectual property to this offshore entity, whether a patent for a new technology or a copyright for a song. The company can then sub-license this piece of intellectual property for use in the other jurisdictions in which it operates. The company will receive franchise fees and royalty payments from the branches of its operations in other jurisdictions that are sub-licensed to use the intellectual property, and because this income accumulates in a low tax jurisdiction, the company is able to increase its profits.

For example, let’s say a US-based tech company has operations across North America and Europe. If it registers its intellectual property – the patent on the technology it has developed and commercialized – at an affiliate in the Cayman Islands and then sub-licenses this intellectual property to its affiliates in other jurisdictions, it will pay lower taxes on the franchise fees and royalty payments than if the intellectual property was registered in the US. This serves as a lucrative way for the company to reduce its tax liability.

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Most countries already take a tax on all profits made within their borders in the form of Value Added Tax. Yes, officially VAT is a tax paid by the one who buys a product. But if you would convert it to a tax paid by the one who sells it, it would reduce their profit margin, which they would compensate by raising their prices, which would result in the exact same end-price for the consumer. So economically speaking, which side pays the VAT makes no difference. But it makes a difference legally. When a local person buys a product from a foreigner and no VAT is paid to the government, the local entity is easier to prosecute for tax evasion than the foreign entity.

So if all countries wanted to tax all business activity based on the country of the consumer instead of the country of the supplier, they would just have to eliminate corporate tax altogether and increase the VAT accordingly.

So why does corporate tax exist at all?

Corporate tax systems vary vastly around the world, but usually corporate tax is levied at least partially on the local level. That makes it an important instrument to micro-manage economical development. When a municipality wants to attract more businesses, they can reduce their local corporate tax. But companies need infrastructure, which is to be provided by the local government, which the local government can afford if they raise the corporate tax. This is why small villages like Cupertino or Walldorf happen to get chosen as headquarter locations for IT companies like Apple or SAP. The municipalities have the flexibility to optimize their corporate tax and infrastructure spending on the needs of the company.

Now what about those companies which claim to have their headquarters on the Bahamas or the Caiman Islands to avoid corporate tax while their best paid employees all work and live in the United States and/or Europe? Shouldn't that business activity get taxed where those people reside who personally profit from the company? It already does, in form of income tax. Here we have the same situation as with the VAT. Income tax is paid by the employee, not the employer. But employees care only about their net income. if you would convert income tax to employment tax paid by the employer, companies could just reduce wages so the employees get the exact same amount of cash each month, and nothing would have changed for anyone.

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    VAT is a tax on value added, not profit. They are different things. – Paul Johnson Dec 23 '18 at 13:20
  • @PaulJohnson Can you explain what difference this makes on a macroeconomical level? – Philipp Dec 23 '18 at 13:24
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  • @PaulJohnson The rest of the first paragraph of my answer explains why the answer you linked isn't relevant here. – Philipp Dec 23 '18 at 14:26
  • "if you would convert income tax to employment tax paid by the employer [...] nothing would have changed" - as long as you implement only flat rate taxes that is. Progressive taxation of total personal income would become more difficult. – cbeleites Dec 27 '18 at 0:55
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Let me answer from the perspective of the owner of a small company based in Germany that, however, has international customers.

wouldn't it be easier [...] taxing the profit gained on the ground of the given country?

Short answer:

I don't see that it would make things easier - to me it looks as if that would create an amount of additional burocracy which I estimate to be more than at what I'd estimate the gain in tax collection fairness.

I'd like to add a personal political statement in this context: it is my political opinion that more rules inherently create more unfairness. At least at the level of laws and regulations we have in Europe nowadays.
If it weren't so sad, I'd find the estimates of "no additional costs" that often come with new proposed legislation quite funny: MPs seem to forget systematically that there are people out there who have to put in working time (at European hourly wages) to read these even just to understand whether they are affected by that legislation. And that this is time/money that is lost for being productive in business.

Long answer:

  • Others have already said that VAT rules typically put the country where things (goods or services) are delivered/sold as the one who gets the VAT. So we there already have a situation that is to a certain extent similar to your proposal.

  • Being in the B2B sector, I (my business) have the advantage that for the other countries I've been dealing with so far, there are tax treaties that handle this in practice by the so-called reverse charge process: usually (i.e. with domestic customers) we collect the VAT for the tax office and then every so often wire the net amount of due VAT to the (German) tax office. Reverse charge means that our customer takes care of the due VAT.
    Now VAT, say, for a product sold in France is due to France, and with their tax level. With the reverse charge procedure, our French customer who as a business knows about French VAT (naturally much more than we do) and does have a French VAT number does the burocracy.

  • Without the respective tax treaty allowing reverse charge procedure (or with French consumers as customers), we'd have to find out how, which and when to pay those taxes in France, plus doing the respective tax declarations.

Declaring (incl. keeping track of deadlines, getting tax numbers, etc.) taxes in every country where we ever had a customer* would be a burocratic nightmare that for small businesses like ours would be prohibitive: we wouldn't be able to offer our services internationally because the costs of taking care of tax burocracy would make it uneconomic. So one side effect of your proposal would be that only businesses above a certain size would be able to offer services internationally. Ironically, the big multinationals would be best able to do this. In other words, we'd get an entrance barrier that would protect big companies from small competitors...

  • VAT is much easier in this respect than corporate taxes, though: the legal construction (at least here in Germany) is actually not a value added tax: it is a tax on the full sales price. And a second tax on the full sales price of goods I buy that gets reimbursed. This construction makes it easy to calculate how much VAT is due to France in my example above, without the need to track what fraction of tools I bought can be attributed to the sales in France and thus deducted: if I buy the tools in Germany, clearly a German VAT reimbursement is due.

  • For a tax that is calculated on the basis of profit, however, it would be necessary to find out which fraction of the business costs can be attributed to each of the countries where we had customers.
    This means that for coporate tax in each country of sales we'd have even more burocracy. And if the purpose of the per-country-taxation is to have a more fair distribution of taxes, there would be tons of rules for these assignments (see the explanations of other answers on how conglomerates of corporations shift around profits and losses - that would suddenly be possible not only for big multinationals but for every small business. But businesses who'd not be after tax evasion (or optimization within the legal possibilities**) would have to shoulder their part of the burocratic burden that becomes necessary.

  • This part of the additional burocracy may be avoided if tax rates are similar between the different countries as the incentive for shifting around profits and losses vanishes. The burocracy of declaring in each country the profit there would stay, though, without any net change in collected tax.

  • Some countries have the idea that unburocratic handling of one-time situations is beneficial, so they do it:

    • (Non EU) countries I've dealt with: In Canada, instead of going through the process of getting a tax number (and from now on hand in Canadian tax declations as well) there was the possibility of the customer with their tax number paying a so-called withholding tax on our behalf. IIRC, Switzerland also has a so-called Abgeltungsteuer which basically is a flat-rate taxation on sales in Switzerland.
    • The smaller a country is the more it needs foreign suppliers: there will be all sorts of niches where its domestic market is too small to host even a single company catering that demand - not to speak of a healthy competition. And of course, the entrance barriers for that market cannot be too high: otherwise foreign companies will decide it is not worth while to serve that market which would throttle the economic branches demanding the goods/services in question. So while big countries like the US or also the EU as a common market may have the power to dictate their rules, small countries just cannot.

    • As for sales within the EU, the ease of having to declare and pay taxes basically to your home country only instead of is one of the basic ideas of a domestic market and the "four freedoms". And yes, that can only work long term if the tax rates aren't too different across the member states (taking into account differences in infrastructure etc.). But an important idea with the EU is that a large number of countries who on their own are each of them too small to be able to negotiate their position in the international market can form one common market that is then a sufficiently big player internationally.

  • One important question is what you want to gain in terms of taxes: Do you think

    • the distribution, i.e. where tax money arrives in the end shoud be improved, or
    • whether unfair advantages in competition should be reduced, i.e. companies from countries A and B should have the same tax burden when competing for customer in location C?
    • Or is is rather a fair competition between countries if each of them can decide their own tax rates (maybe within limits)? Or even a much needed instrument for countries to offset e.g. infrastructure they still miss? Would you rather have countries paying subventions to businesses that are willing to settle there?
  • For distributing collected tax money within the EU, it may be much cheaper overall (though also less transparent) to do this approximately via negotiations on payments between member countries. After all, it is already known who sold how much to whom in the other EU countries (we have to submit this data as part of the reverse charge VAT procedure).

  • In terms of tax logic (yes, I'm an optimist and still think there's a certain amount of logics also behind taxation ;-) ): corporate tax is roughly speaking the income tax of a corporation. From that point of view, it does make a whole lot of sense to me to handle corporate tax and income tax along the same lines (also because otherwise there'd be a lot of headaches about loopholes and double taxation - or still more burocracy to try and catch up with these headaches). In Germany one of the ideas in the tax system is that ultimately, how much tax you pay should be approximately independent of the legal form you choose for your business.
    The changes would be quite far reaching if also income tax for persons is affected.

  • Similarly, at which level do we want to stop to distribute according to customer location? Körperschaftsteuer (lit. corporate tax) in Germany goes part to federal and part to state/province taxes. Should the Länder (states) get a more fair treatment by customer location as well? And then there's the remaining part of a German business's "income tax", the Gewerbesteuer (literally commercial tax) which goes to the municipality where the business is registered. Should that also change to be distributed according to where customers are located? (see also @Philipp's answer).

  • One important point with the taxation at the location where the business (or the person) is registered is that this way you can have progressive taxation more easily. In Germany, that is more pronounced for personal income tax (freelancers), but for sole owners also Gewerbesteuer has an exemption limit. With taxation according to location of the customer this would in the extreme case require reporting to all countries where you had customers the total profit in addition to the local profit. And as soon as the rules for busiess expenses differ between countries, you'd end up submitting $n$ different full tax declartions! (Already inside Germany the rules for what commerial law and tax law consider profit and valid business expenses differ in some important points...)


* In my experience the duty to declare taxes would also stays for at least several years without business before the country in question would close your tax account and invalidate the issued tax number.

** Side note: depending on what type of business we're speaking there could arise situations where the management is basically forced to do such an optimization. And this is not only responsibility against stakeholders, but if, say, a limited liability corporation ends up being insolvent and it turned out too much taxes were paid, managers could be liable with their private money e.g. to creditors.

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