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Jens 'n' Frens
Idle thoughts of a relatively libertarian Republican in Cambridge, MA, and whomever he invites. Mostly political.
"A strong conviction that something must be done is the parent of many bad measures."
-- Daniel Webster
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Wednesday, August 27, 2014 :::
I'm scheduled to meet with my advisor, and appear to have given up on any hope of being prepared for that, so I'm reading Matt Levine instead. If you don't know about the difference between the way the US taxes income and the way every other country does — i.e. that basically every country taxes economic activity within its borders, but the US taxes a lot of economic activity outside its borders as well — then Welcome to our blog! and maybe go read his synopsis of the international corporate tax system. The upshot as it concerns the Tim Hortons deal is that, if BK and TH join to become a Canadian company, BK will pay somewhat less in taxes (viz. on its non-US operations), while if they join to become a US company, TH will pay a lot more in taxes (viz. on its non-US operations), and this is a legitimate merger for non-tax reasons, but TH kind of doesn't want to volunteer for all those new taxes. What I want to address is more
- Your U.S. subsidiary makes a pill for $1.
- Your U.S. subsidiary licenses the patent on that pill from your Bermuda subsidiary for $9,995.
- Your U.S. subsidiary sells the pill for $10,000.
- Your U.S. subsidiary has $4 of net income, which is taxable.
- Your Bermuda subsidiary has $9,995 of net income, which is not.
This seems fair to me if the R&D work behind the patent is done in Bermuda. Since (If?) it's not, at least in theory you might tax the value of the patent minus its R&D "cost-basis" as it leaves the country; in practice, it probably wouldn't be easy to value the patent. I'm not sure whether making expatriation of capital a taxable event is workable or not.
I will add that "eliminate corporate taxes" is another idea I like in theory more than in practice; my practical objection is that it's hard to say what is an expense incurred in the production of revenue. If I'm a traveling salesman, maybe I need a car for work as a legitimate business expense, so I go find myself a Maybach and write off its depreciation on my taxes. Well, I am not a tax lawyer, so this isn't tax advice, but the IRS is going to see through that. In actual practice, a lot of expenses are going to necessarily be a combination of employee perk and unavoidable expense, and there are going to be rules of varying levels of arbitrariness and well-foundedness to try to keep evasion to a minimum without screwing people too hard, or at least let's suppose that's an IRS goal. A lot of that complexity can be kept out of individual income taxes only to the extent that it can be shoved into corporate taxes, where I think complexity is likely to be easier to bear (and easier for those who can't bear it to legitimately avoid it at lower cost). So ultimately perhaps you can (should?) have a corporate tax rate of 0, but you still might want corporations filing forms that clarify whether some of the employees or clients are receiving in-kind income that can be taxed at some other level.
::: posted by dWj at 11:31 AM
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