But how does not licensing IP make sense? That creates a whole set of new problems, i.e. why should affiliated parties allow IP to be licensed for free, where the same expenses would be tax deductible for unaffiliated parties?
It makes sense to license the IP. Pushing the IP fees to the point that the subsidiary doesn't make money, not so much.
Likewise, it makes sense to loan money to your subsidiaries so they can grow. But making large, unnecessary loans of money from tax havens to sink your subsidiary's profitability doesn't sound honest.
You've actually hit on the basic 'integrity rule' for these kinds of arrangements (at least in Australia): foreign related entities must charge on-shore related entities using 'arms-length' pricing (the 'transfer pricing' rule). Same goes for the interest rates on loans made by foreign related entities, because the interest is deductible against gross profits (the 'thin capitalisation' rule). I've simplified somewhat, but this is the basic thrust of the law.
Companies will end up in court when their definition of an arms-length price/interest rate is significantly higher than what the national tax authority considers to be reasonable. However, having worked in the offshore tax-haven unit in the Australia Taxation Office (I even went on a tax raid once), and then subsequently worked in tax policy for a few years, I don't think things clear cut with google (and others). I'm not even sure that transfer pricing and thin cap are particularly relevant issues.
In general, I think this issue is much bigger than a simple case of companies crossing the line on transfer pricing and thin cap rules. 'Tech capital' is extremely mobile; it can literally be moved from one country to another in a matter of hours. This creates strong incentives for countries to undercut each others' corporate tax rates to attract that capital. Tax havens (and Ireland) are extreme examples of this. The only way to extract any meaningful amount of tax from tech multinationals is through some kind of international agreement on minimum corporate tax rates (one that is ratified by countries representing a large enough proportion of the world economy). You'd also have to apply trade sanctions to any country, signatory or not, that goes below this minimum threshold.
In short, it's unlikely google and others will have to pay their 'fair share' of tax any time soon. This might sound defeatist, but I think countries will need to shift their tax burden on to less mobile (and therefore, more economically efficient) bases, such as domestic consumption and land.
Even minimum corporate taxes wouldn't work, no? You'd also need to make sure there is no way to artificially extract these profits by imposing withholding taxes on most transactions inside a specific economic system (i.e. the EU). This seems almost impossible to do.
> Companies will end up in court when their definition of an arms-length price/interest rate is significantly higher than what the national tax authority considers to be reasonable.
A second issue I see is that smaller countries will often see certain transactions as "at arms length", whereas larger ones (with higher corporate tax rates) will not. But if a multinational can produce valid evidence from, let's say, 3 different jurisdictions that a transaction is at arms length, this will often be accepted by the court as being at arms length. In most countries, the burden is on the tax authority to prove something is not at arms length.
So yes, countries are often screwing each other over. Add to that that each country wants to stop avoidance (loss of tax revenue), and at the same time attract investment (by granting fiscal deduction for special interest groups) and you end up with a big mess.
This whole tax game is essentially basic arbitrage within a complex framework.
Please post some analysis on the main thread; there is a lot of confusion regarding IP licensing and tax avoidance. It would be good to have an expert opinion promoted to the top comment.
