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List of forums -> Questions and answers. Help. -> prime costs. please reply

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Topic created : 26.04.2010, 10:23
deathincarn
 
ok can someone please tell me why even when i sell a product to my own business at "prime cost" that business still incures a loss? it just doesnt make sense.    

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4.05.2010, 16:09

Last time edited : 4.05.2010, 18:13
Deira
Winner of the Leaders Contest in the nomination of Consumer Goods Winner of the Contest for Managers in the nomination Consumer Goods Winner of the Contest for Managers in the nomination Trade Turnover Winner of the Contest for Managers in the nomination The Standard of Virtonomics
 
No, Chris you got the tax system wrong, it works as intended and as in real life
 

There are two different concept you continually misuse and confuse with each other
 
One is the cash-flow balance of a company, and the other is the base of the income tax
 
Every kind of income and expense is part of the cash flow, but there are a lot of income/expense which is not part of the base of the income tax. (for example, replacement of equipment and other kind of investments)
 
What is displayed in this game as profit is the cashflow balance of a subdivision or the whole company, BUT its not what you pay taxes after
 
You pay taxes after the difference of the sales price of the stuffs you sold and the basecost of those - and only those - goods, which you sold in a give time interval and you can also deduct some cost, but not all.
And especially you cant deduct the price of those goods what you paid for in a given turn but not sold
Whether you can deduct investment or not is depend actual law of your country
In Virtonomica I think you cant deduct investment from your taxes.
 
NOL deduction from your past tax is not working in every country - BTW its one of the phony accounting tricks, which cause global companys IRL to pay virtually no taxes at all
And its a very abusive system. Think about it. Just one example. If you continously buy/merge bankrupt companies for next to nothing, you always have previous year losses, hence tax deduction, so no tax payment, because of the NOL loophole
 

--> You have revenue of 1 billion in country/region 1. No expenses in this region.
--> You have expenses of 2 billion in country/region 2. No revenue in this region.
--> Thus you will have no profits, but losses of 1 billion.
 
This doesnt make sense, you have prime cost in Country 1, so you have expense, and of course you have to pay taxes on the difference of primes cost, sales price minus certain costs
In country 2 you have to have revenue, because sooner or later you sell your produced goods, so again, prime cost, sales price, normal taxes.
 
And no, IRL, you cant offset your revenue in France with cost in Germany
In each country you have to use internal prices(sales cost to those division selling/exporting and prime cost to those who buying/importing) to sell between your divisions and you pay taxes according to that.
Of course you can set those internal prices in a way that you can decide which country you want to pay taxes, but if you set either too low or high internal prices, the state/country come after you because of tax evasion or so.
 

Bilaterial tax agreements in Europe mean that you dont have to pay taxes TWICE after your earnings and not that you can offset a revenue/profit in a country with cost in another
 

An example
You create in a factory 10K widget with cost 100K each, total cost 1B
You sell 1K widget 500K each, whit prime cost 100M(1K*100K)
You have negative 500M cash flow (1K*500K-10k*100K)
You have 400M taxable profit (1K*(500K-100K))
 
So you have to pay taxes, - as far as I know, in every developed country in the world, even though you have negative cash flow, because the 9K widget is not counted till its not sold, until that time they are stock, and you only can recognise the cost of those 9K widget, when they cease to be in your property ie. sold, destroyed etc. 
 

4.05.2010, 18:09

Last time edited : 4.05.2010, 18:09
pectopatop
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Deira, BIG + 
 

4.05.2010, 20:45

Last time edited : 4.05.2010, 20:50
ChrisBerlin82
Winner of the Leaders Contest in the nomination Quality label Winner of the Leaders Contest in the nomination of Consumer Goods Winner of the Leaders Contest in the nomination Markets Storm Winner of the Leaders Contest in the nomination The Standard of Virtonomics Winner of the Contest for Managers in the nomination Raw Material Base Winner of the Contest for Managers in the nomination "Knowledge is power!" Winner of the Contest for Managers in the nomination Consumer Goods Winner of the Contest for Managers in the nomination Trade Turnover
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I agree with most of what you say, but for example...
 
Every kind of income and expense is part of the cash flow, but there are a lot of income/expense which is not part of the base of the income tax. (for example, replacement of equipment and other kind of investments)

Repair of equipment are expenses that are deducted from my taxable income. Also investments are deductable from income. I agree that this is handled differently in every country, but in general it is deductable. For example electronic equipment can be written off your taxable income over a period of 3 years in Germany and buildings (depending on the building) over a period of 10-35 years. Just to give two simple examples. Since this mechanism doesn't exist in the game, I think it should be counted to your expenses in general and deducted from your taxable income.
 
A simple example will show you why the tax system is flawed. Let's consider all what is described below happens within 1 region:
1. You buy grain for $1 from the independant supplier at your mill. Base prime cost will be $1 (for the ease of the example I leave out other expenses).
2. You sell flour for $10001 at your mill thus making a profit of $10000. You will immediately pay tax on the profits!
3. Your bread bakery buys the flour for $10001 and thus simplified prime cost is $10001.
4. You sell the bread to a retail store for $1 and thus making a loss at your factory of $10000. Yet you get no tax cash back for your losses.
5. You sell for $11 at your retail store while prime cost is $1 and make a profit of $10. You are taxed for the profits!
 
So let's sum it up...
Your production chain starts with paying $1 to an external supplier and your final selling price of the resulting product is $11 and thus your REAL profit is $10. Taxable income should be $10. This is in all western countries and as I said with some countries like Dubai there are some exceptions as well, because there you don't pay taxes at all.
What will happen in the game is, your taxable income will be $10010. So even though you actually made $10 profit before tax, you will have a huge net operating loss overall due to taxes.
 
As if it wasn't silly enough that intercompany claims are taxed at the full amount, I mean I "buy" products from my own mill which is more like just a "delivery" than buying anything, no, in addition all my profits are counted as taxable income while the buying costs for the flour should clearly be deducted from the taxable income at this point. And again, this even happens when the mill, bakery and retail store are in the same region! I mean buying from myself are no profits simply spoken.
 
My finding is that if you already pay taxes for "buying" products from yourself that you should also be able to deduct the expenses you have for buying from yourself from your taxable income, otherwise this is unrealistic even twice. 
 

5.05.2010, 02:11
warfreak
Overall of the candidate of science Winner of the Contest for Managers in the nomination "Knowledge is power!" Winner of the Contest for Managers in the nomination Consumer Goods Winner of the Contest for Managers in the nomination Trade Turnover Winner of the Contest for Managers in the nomination The Standard of Virtonomics
 
But it is sensible if the system is taxed twice, the reasoning is that for your flour, if you also sell it to another company (not likely...), you will have to pay tax on that revenue. The game is slightly unrealistic in the sense that you need to pay tax on every transaction, and that in reality, if your subdivision is selling to your store, it isn't selling more than it is just a delivery service, and whatever you make at retail is whatever you make. But for simplicity, that is how it goes. But doing this, you are effectively taxed twice.
 
I guess if you want to avoid tax, set all the factories to sell to yourself, and from there, lower the price below the prime cost, that way, your business makes a loss, but no tax on it. However, that will decrease your net turnover, so that's one way of inflating your turnover per turn. I don't do that, but I think some people do....
 
In reality, for a loss like what you mentioned in your example, companies are not refunded tax on that, they are simply ignored and it will affect their overall turnover. So they would count up revenues and expenses, and tax the profits. That's the simple model, I really don't want to go on the hard complicated model on tax. The only time companies are afforded tax breaks is investing from memory, well, in my country anyway, each country has a different tax system. 
 

5.05.2010, 02:18
Deira
Winner of the Leaders Contest in the nomination of Consumer Goods Winner of the Contest for Managers in the nomination Consumer Goods Winner of the Contest for Managers in the nomination Trade Turnover Winner of the Contest for Managers in the nomination The Standard of Virtonomics
 
Thanks Pecto :-)
 

I just checked out and in Virtonomica investment in equipment is deductible from taxable income.
It happens as in IRL, that amortization is part of the prime cost, so effectively lovering your taxable income.
Amortization is 10 years, at least for machines.
 
I understand your example, but this ONLY works in IRL, if all the facilities are in the same country.
If they are in different countries, then you indeed pay taxes after 10K per pieces in one country and have a huge loss in another.
Tax deductions are not transferrable to other countries, - because every country has his own jurisdical and taxation system, and from the view of the country where you have huge profit, there is simply no point to accept a tax deduction from other country, because then the country only loose some tax, in exchange of nothing.
 
If in one given country(A) you made profit, you have to pay taxes after it, its that simple and this is how it works IRL.
And its irrelevant to this country(A) that you export those goods to an other country(B) where you sell it with big losses.
Thats your problem in country(B), and country(A) couldnt care less about it
Of course you can constantly transfer money to country(B) from country(A), but the insane tax in country(A) will kill you short order.
 
And BTW in most european country there are laws which makes it forbidden to sell any goods lower than your prime cost, at any stage of your production/retail chain, which is very logical in my book.
 

In Virtonomica, they indeed handle every unit as they are in different countries, so they have to pay taxes after their profit. Its not very realistic, but well, they made it like that. We have to adapt to it.
 
Of course this make it so, that for tax optimisation purposes, you should sell everything intracompany at prime cost, and realise all the profit at the retail level. Its the best way only if you retail in the developed - high tax rate and more importantly high customs - countries.
If you sell at one point in the production chain lower than prime cost, then you pay taxes twice after a certain amount, and if you sell higher, then the tax and custom on the seller country will be higher than the tax in the retail country. 
 

5.05.2010, 02:30
ChrisBerlin82
Winner of the Leaders Contest in the nomination Quality label Winner of the Leaders Contest in the nomination of Consumer Goods Winner of the Leaders Contest in the nomination Markets Storm Winner of the Leaders Contest in the nomination The Standard of Virtonomics Winner of the Contest for Managers in the nomination Raw Material Base Winner of the Contest for Managers in the nomination "Knowledge is power!" Winner of the Contest for Managers in the nomination Consumer Goods Winner of the Contest for Managers in the nomination Trade Turnover
Winner of the Contest for Managers in the nomination The Standard of Virtonomics
 
Ok, I think we are cleared up now and came to a conclusion Well
 
But now a different factor comes in. When selling at or below prime cost your factories won't earn money obviously and from my understanding production qualification growth will suffer from this. I couldn't really see any change in my qualification growth due to higher factory income so I am thinking about going back to prime cost selling instead of small profits which are taxed and actually cost me money. Does anyone know more about the algorithm behing qualification growth? 
 

6.05.2010, 11:16
Mike1
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ChrisBerlin82
Ok, I think we are cleared up now and came to a conclusion Well
 
I am thinking about going back to prime cost selling instead of small profits which are taxed and actually cost me money.

I'm not sure you understood all the clever responses from the other players, even your own one?  With your conclusion, you actually put all them into question again.
 
ChrisBerlin82
Does anyone know more about the algorithm behing qualification growth?

You may read up on some forum threats about this subject, there's a lot of useful information.
 
In short, keep your worker quantity as high as possible (according to the tables of the Great VLLord); if your top-manager efficiency sinks below 100, lower the worker qualification and/or the amount of workers. I was told that the higher your qualification is, the more effect has it if you have large factories with many workers, opposed to many smaller businesses. Also, having to many subdivisions on holiday may lower Q-growth 
 

7.05.2010, 09:45
Ixnad
Ten years with Virtonomics
 
This is good thread, lots of info. Thanks guys. Well
 
Mike1
Also, having to many subdivisions on holiday may lower Q-growth

I can more or less confirm this. At one point I had close to 10 factories on holiday or empty sitting idle, my growth was about 0.05, as I slowly bringing them back and starting up production, my growth also improved, to 0.12.
 
Also, I read it somewhere you will get faster growth with factories whose sizes are approximate to your level. Can anyone confirm? 
 

7.05.2010, 11:15
JuleBCN
 
ur qualification grows faster if your manager's workload is at maximum and all enterprises are functioning with 100% capacity 
 

8.05.2010, 01:18
Ixnad
Ten years with Virtonomics
 
JuleBCN
ur qualification grows faster if your manager's workload is at maximum and all enterprises are functioning with 100% capacity

Thanks.
 
So I take it if I want max growth, having "minimal safety factor" is actually better than having other ones ("standard/good/excellent"), and having my regional office's administrative load as close to 100% as possible also helps? 
 

8.05.2010, 03:05
ChrisBerlin82
Winner of the Leaders Contest in the nomination Quality label Winner of the Leaders Contest in the nomination of Consumer Goods Winner of the Leaders Contest in the nomination Markets Storm Winner of the Leaders Contest in the nomination The Standard of Virtonomics Winner of the Contest for Managers in the nomination Raw Material Base Winner of the Contest for Managers in the nomination "Knowledge is power!" Winner of the Contest for Managers in the nomination Consumer Goods Winner of the Contest for Managers in the nomination Trade Turnover
Winner of the Contest for Managers in the nomination The Standard of Virtonomics
 
I can at least confirm the last. Management qualification growth will be significantly higher when your office have high load. 
 

8.05.2010, 10:24
Ixnad
Ten years with Virtonomics
 
ChrisBerlin82
I can at least confirm the last. Management qualification growth will be significantly higher when your office have high load.

Cool info. Thanks bro!Very we! 
 

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