Comment by alkonaut | Hacker News Reader

Comment by alkonaut | Hacker News Reader

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> The things you say should "simply be outlawed" -- how? How are you going to determine which internal loan is "expensive" versus "very expensive"? How are you going to differentiate between legitimate payments and the "royalties" you put in quotes that you call a construct?

Example for interest rates: Credit risk and intrabank/central bank rates are considered by courts when judging whether a rate is “too high”.

Swedish tax authority guidelines from past cases

https://www4.skatteverket.se/rattsligvagledning/edition/2019...

Summary - interest rates should be based on market conditions and credit risk

- internal loans should not use significantly higher (or lower) than loans between independent parties.

So: the authority already makes a judgment of e.g credit risk. If the tax authority thinks the interest rate was too high, they will say what would have been reasonable - and the company will be taxed for the increased profit as a result of the lower interest rate.

I don’t see anything controversial about this and I assume this is how tax law is interpreted and enforced globally.

It should be noted that such cases are usually lost by the authority - that is, the courts do usually not find the tax authority could prove that the interest rate wasn’t a normal rate based on market rates and risk. I don’t think that’s a problem, but I think it’s important that this is how it works.

It's more complicated than that.

A few percent here or there is all it takes to make a company unprofitable. Most companies don't have huge margins even when they're not trying to reduce them on purpose. You don't need the rate to be higher by a lot, only a little.

And then there is the principal. If you want profits in a jurisdiction, the entity there can get cash by e.g. selling its shares to the parent, which it then has without having to pay interest on. If you don't want profits there, the parent pays nothing (or some nominal amount) for shares and the subsidiary borrows all of its capital, which it then has to pay interest on at prevailing rates which may by itself exceed its profits indefinitely.

And loans are far from the only opportunity for this sort of thing. Pay slightly more for COGS to a sister company and you make significantly less profit, because a small percentage of gross is a large percentage of net.

One percent here, two percent there and soon a 10% margin is -0.1%.

What causes this is trying to tax something (profit) which is independent of any specific activity or jurisdiction. If a company makes phones and sells them, there is no principled reason why a certain percentage of the profit should go to the place where the phone is manufactured vs. designed vs. sold vs. the residence of the investor(s). If your jurisdiction is the one where they're sold but not manufactured or designed etc. and you want to tax that, the bleeding obvious way to do it is with VAT or some similar product/service tax. Trying to contort income tax into that shape is silly and just provides more opportunities for lawyers and accountants to find new loopholes.

Yours is a very well reasoned argument.

We already have rules requiring that! So what's the content of your proposal?

My parent post was a description of how we already have “arbitrary judgement” - so my previous suggestions to e.g tax income based on share of revenue in a jurisdiction would be arbitrary but no more arbitrary than what we already have.

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