Sorry to open that can of worms, but taxing on profit in the country (and not headquarter placement) is actually one of the few early Trump suggestions that differed from the mainstream and made sense.
That doesn't really make sense for America First...Why would US want its corporations taxed with 20% all over EU instead of 1% in Luxembourg? It would be less left to bring back home (whenever the corporate tax is lowered to make that possible).
The profit made in US is taxed in the US. Isn't that so? Maybe I didn't understand it but the article is more about the import/customs tax. As far as I understand from that link Trump wants to make the import costs non-deductible and basically pay an extra tax(due the lack of deductibility) on top of the custom tax. It's a pure protectionist policy.
The issue in EU is different. The companies operate in a certain state(i.e. Italy) but pay the tax in a different one(i.e. Luxembourg). Like BMW would do all its tax/accounting in EU with no regard to US's IRS even if it operates a business in US(i.e employs people, sells products etc).
See the excerpt:
>> Lawyers said the impact of the border adjustment and deductions for U.S. costs meant that imports would face an effective tariff of up to 20 percent.
“The total tax rate on the 100 percent domestically-produced good is going to have a lower effective tax rate than the rate on the import,” said Scott Lincicome, counsel with White & Case in Washington.
That would breach Article 3 of the General Agreement on Tariffs and Trade, which is policed by the WTO. This allows signatory states to impose permitted tariffs on goods entering their country, but precludes them from treating a domestic item more favorably than an imported one when it comes to internal taxes like sales or income taxes.
Hypothetical analogy: say BMW GmbH owned an American subsidiary (BMW Inc) that did all the US manufacturing under license via another subsidiary in Panama. BMW GmbH controls the cost of the IP (design, patents, control software) being licensed to BMW Inc - this cost can be tweaked so that BMW Inc never turns a profit, and so will not pay any American taxes. All the profits will be accumulating in Panama while waiting for Germany to rework its repatriation laws.
- Import tax on all the products(IP, patenets, licenses etc) licensed/purchased from BMW Panama
- Sales tax?
So the US would get more customs and sales tax and less profit tax. Nevertheless the scheme you mentioned is meant to lower the tax paid(i.e. the import tax may be lower than the profit tax) so I fully agree that something should be done. I guess only solution would be the term "tax avoidance" to be defined, put into the trade agreements(i.e. WTO, EU etc) and governments allowed fine the companies employing such practices just like the "state aid".
The issue in EU is way worse because there is no import or sales tax so using your hypothetical story BMW GmbH pays only the profit tax in Panama.
Related: In Europe the operating company takes loans at high interest rates from its shell in Luxembourgh to siphon off the profits.
Let's say someone buys $1B worth of junk, has expenses like salary etc of $1B, does something with it and sells products and services worth $2.2B. Do they pay taxes on $2.2B or on $0.2B? I think we can fix some kinds of tax dodging by taxing the $2.2B. If I'm on a low margin business, that's not the government's problem to pick winners and losers, right?
I personally don’t see the point of corporate tax, other than to make other taxes seem smaller than they’d otherwise have to be. Profits are not in and of themselves useful to people; they have to be converted to income somehow.
- I'm sure Amazon did its best to pay the lowest possible tax. In EU they are taxed on profit so if they woundn't make a profit(i.e. they would reinvest) they would not be taxed.
- Amazon Europe is not Amazon US. They don't want to trade as Amazon US in Europe because they would pay even more tax(in the US).
- It's not enough that they are registered in a country with the lowest possible tax, they get a special deal there too to pay less tax than the other Luxembourg based companies/business. This is what EU is sueing them for...they've got state aid(as tax break) from Luxembourg.
That does not quite add up .... let's say the tax rate is 20%. The tax on $0.2B is $40m, the tax on $2.2B would be $440m, which would mean the company is making a $220m loss. But not only that, say the salaries are $1B then the government would $200m in double taxation, maybe socialise the loss and take $200 million from the workers salaries.
Then not only that, lets say the $1B of junk is made in the same country as the above company, the government would make another $200m by taxing them. That is a little regressive.
So you would penalize companies that are offering a useful service and making less profits over those that are offering a useful service and making more profits. The former may be reducing cost greatly to the consumer but may not be able to stay in business due to this type of tax. Thus, it would artificially prop up the cost of goods to the consumer.