It seems as though the USA and every country in Western Europe are on the war path to uncovering companies who avoid paying taxes by holding funds off shore in “safe havens.” To do this they are all calling for full and complete disclosure of financial infomation between these countries.

I saw a “talking head” on CNBC today discussing the subject. It seems he used to be an advisor to the government of the Island of Jersey, a notorious money “safe haven.” He is now heading up a group pushing to end companies and people hidiing their money in such places as Jersey. Talk about it takes a thief to catch a thief.

The problem with this “noble” venture is that there is no agreement on where money should be taxed. There are three points at which this can be done, the cost center, the sale location, or the delivery location. Think of buyiing over the internet. Where do you apply a sales tax, where the product originates, where it is sold (the location of the internet vendor), or where the product is delivered? If we have trouble working this out imagine how much harder it is when talking about a product made in China, sold in Abu Dhabi, and delivered in New York.

When a product leaves a “cost center” or where it is actually made, it is usually shipped out at cost of production. The maker thus makes no profit in the cost center so has no tax obligation. The sales entity takes delivery and sells to a buyer. For most companies engaged in international trade the sales entity is usually located in a low or no tax location. Here is where the company makes its profits. And of course the company makes no profit at the delivery point.

Where this gets even more interesting is when the cost center is a foreign subsidiary of say a US firm. The US firm buys from the foreign subsidiary but the sale takes place in a sale center, not the cost center or the USA. Thus the profit is taken at the sale center which again is in a low or no tax location.

The important thing to remember is that none of this is illegal. Taxes are imposed on profits where they are created and in this case they are the “sales centers.”

Still another issue is profits made by foreign subsidiaries of US firms. By law these profits are taxed by where the subsidiary is located. The US parent pays no tax until it repatriates these profits to the USA and they enjoy a tax credit for all taxes already paid abroad.

So here we have a tax war where no one really knows what to tax and where to tax it. I see lots of heat and anger but little resolution of the matter.