Intellectual Property is being abused in the name of tax evasion.
The IRS finally grew a pair and is going after Microsoft for $29B in tax evasion. That's 29 BILLION dollars! How did Microsoft do this, and is it illegal?
It is a common tactic amongst the big tech firms. You open up a subsidiary in a "tax haven" country which has low corporate tax rates. To the "tax haven" country, even a low tax rate rakes in millions, if not billions of dollars, and is essentially "found money" to them. Ireland was a popular choice for a while. Microsoft used Puerto Rico, which although not a country, is a "territory" of the United States.
The gag works like this: You set up a subsidiary in this tax-haven country and then transfer all your "intellectual property" to that subsidiary - Patents, Trademarks, and Copyrights. You then license-back this IP to the main company, which then pays a "royalty" to the subsidiary. Oddly enough (or not so oddly) this royalty ends up being equal to the profits made in the United States!
So the US division shows no profit (and thus pays no taxes) while the "subsidiary" in the tax-haven country shows huge profits - but pays little or no taxes on it. Whoopee!
Now, to most people, this makes no sense. You are taking money out of your left pocket and putting it in your right pocket - and then turning the left pocket inside-out and claiming to be broke! It is such a thin reed that any idiot can see through. It is an accounting "trick" and a pretty obvious one. As the IRS noted, transferring the IP to an off-short subsidiary and then licensing back served no real business purpose, but served only a tax purpose.
Sadly, so many "tricks" in tax law are based on illusory scenarios like this. As my tax law professor once put it, the whole tax law business consisted of lawyers at cocktail parties having a few drinks and coming up with these schemes, which they would sketch out on a cocktail napkin. They would then try these stunts, which the IRS would initially deny, and end up in court, and hope that a friendly judge would side with them. Better yet, they could get these schemes coded into the law by friendly Republicans! Failing that, they could get the GOP to cut the IRS enforcement budget to the point where the IRS would just give up and go after people who can't afford white-shoe lawyers.
But maybe that is about to change. The enforcement budget for the IRS has been ramped up and they are going after tax cheats. The GOP is crying "foul" over this and trying to scare voters (who are always anxious about the IRS anyway - they might get audited and lose their trailer home!).
Of course, I have written before about corporate income tax and double-taxation. In many other countries, corporate taxes are very low or nonexistent. The idea was that shareholders would pay tax on dividends or on capital gains (or both). In the US, many companies - particularly "tech" companies, pay no dividends (and thus no taxes on dividends are paid). Dividends are taxed as ordinary income. When shareholders sell, they pay capital gains taxes, but those are at a far lower rate than ordinary income taxes. Even when taxes are paid, it is still a "win" for shareholders.
How odd is it that unearned income is taxed at a lower rate than actual manual labor? Why aren't people more pissed-off about that?
Of course, numbers confuse people and the GOP is doing a good job of destroying schools so no one learns about numbers. This makes it easier to say, "Well, Billionaires pay upteen billion in taxes every year!" which is technically true, but represents only 5% of their overall income, if that. Meanwhile the janitor pays 25% of his income in taxes. But that's fair because he pays less!
It is akin to the trope that the "1/3 pound burger" was discontinued because people thought it had less meat than the 1/4 pound burger. Hey, I might be dumb, but I know that four is more than three! I'm voting for Romney! Duh.
This kind of stupidity is how Kansas ended up bankrupting itself when it abolished taxes on owners of pass-through corporations. As the name implies, pass-thru or Subchapter-S corporations "pass-through" their profits to their shareholders (or holder, as most are owned by one person - we had three, at one time). By eliminating personal income tax on owners of Subchapter-S corporations, Kansas eliminated any taxes on their shareholders. Not surprisingly, everyone in Kansas suddenly decided to become a corporation!
But I just lost half the audience trying to explain that. That's how this works - make things complicated so the plebes vote against their own self-interests. "But cutting taxes creates jobs!" they cry. No, it doesn't. Cutting an individual's personal tax rate does nothing to create jobs. You don't hire someone because you have money leftover and laying about. You hire someone to make more money and if you can make more money by hiring someone, then it really doesn't matter what your tax rate is.
Meanwhile, in Kansas, the W-2 laborer who voted for this nonsense is still paying State income tax. His boss, however, is not. "Hey Clem? Wanna see my new Ferrari? Great! Now get back to work!" Creating jobs - at the Ferrari dealer and the Yacht brokerage. But not many jobs, to be sure.
And meanwhile, deficit spending and subsequent inflation act as a tax on everyone, but mostly the working class.
It remains to be seen if the IRS can follow through with this. Can they hold corporation's feet to the fire and start collecting taxes? Some companies have eschewed these schemes on the grounds that they are, in fact, tax evasion (and not tax avoidance, which is legal). I think it was Warren Buffet who was poised to re-incorporate overseas and then pulled back at the last minute, realizing that it was somehow wrong.
Of course, a simpler tax structure might avoid some of these games. But sadly, ideas like a "flat tax!" or "national sales tax!" (both always with an exclamation mark!) end up being a tax on the poor and a sop to the rich. Simple answers to complex problems are always the wrong answers.
No, it is "hard" to go after corporations for tax evasion. Hard, but not impossible. It just takes the willpower and the money to slog through the documents, audit the parties and file the lawsuits. It also takes political will, which means that voters have to educate themselves as to what is really going on and not the sideshow some want to present.
You decide what is important - twenty-nine billion dollars in tax evasion, or drag queen story hour?
Sadly, a large number of people think the latter is the burning issue of the day.
