That’s true too, but it’s a different issue.
All of Washington (with a few specific exceptions) uses the tax code for lining their own pockets. K street lobbyists get special exemptions and tax credits for their clients and the congressmen get all the election money and money for all their relatives from K street. The only ones fleeced are the ordinary tax payers. I oppose high taxes on individuals for welfare whether corporate or individual. Money to the federal government should only pay for the constitutionally mandated item: Defence(including border security), weights and measure, Post Offices and post roads. I neither want to pay for welfare to General Electric nor the drunk down the street.
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Exactly. What we need, instead of a 35% rate which is negotiable down to 27% or 11% or 2% or 0% depending on lobbying skill, is a no-wiggle-room tax rate of say, 15% computed straight from audited financials. (We would need a way to not make this a burden on non-publicly traded companies that don’t normally get an audit, possibly make the cost of the audit allowable 100% as a tax credit)
Never work in the USA though. Too few opportunities for graft.
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You forget the other half of the equation: it is much easier for a CEO – who is likely to move on to a different company (and probably industry) in a few years – to concentrate on what will make the stock price and thus their own perceived value to the company go up the most NOW. Investment in long term equipment has an immediate cost (both actual dollars and the inability to use that money or line or credit on something else) plus takes a long time to depreciate and requires higher employment. Investing in the long term future of a company is more expensive than “cutting costs”.
If corporate taxes shifted so that profits plowed back into the company were not taxed at all and any outside financial investment made with that capital instead (rather than being applied to the company) was taxed at full value instead of the lesser capital gains tax, we’d see more investment in equipment and employees.
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Do you mean sole proprietorships? Because any company employing more than family members is going to get an audit as the normal cost of doing business.
But I agree that for companies so small they have not been paying for audits, your solution to allow them to credit the cost 100% makes sense.
The US is cracking down on fake offshore businesses. I have a number of friends who have been moved by their employers to Luxembourg, for example, so that they can demonstrate they actually have a headquarters in Luxembourg.
Also, the scenario you describe defers taxes, but doesn’t necessarily eliminate them. If/when the dollars that build up in Barbados ever move back to the US, there should be a repatriation tax on them. It’s important, however, that the government remain vigilant in keeping repatriation tax consistent and not give in (like Congress did in 2004) to lobbyists pushing for repatriation holidays.
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Britain introduced repatriation taxes on money building up in tax havens. The upshot was that companies like Subway moved their headquarters, er, “headquarters” mail drop, to the Netherlands. A country that wasn’t a tax haven, but whose tax laws let them keep using tax havens for their British operations.
There was an excellent British TV show on this a few months back. A comedian rounded up several small business owners in one small town, where a single barista in a privately owned coffee shop was paying more income taxes than an entire popular coffee shop chain. The goal was to set them up to use the same tax dodges that the big companies use.
He helped them to set up a tax haven subsidiary on the Isle of Man. While there they tried to order coffee from the Starbucks mail drop. Then they went to the Netherlands to set up the “head office” there. While there they tried to order a meal from the Subway “head office” / mail drop.
It was worth watching.
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There’s a scene in Sir Terry Pratchett’s novel Jingo
where the high and mighty of Ankh-Morpork are seated around a table in a council of war. The Patrician, Havelock Vetinari (he calls himself a tyrant), explains Ankh-Morpork doesn’t have enough cash on hand to fund the war the council wants with Klatch (Klatchistan?).
Lords, peers, heads of various guilds are all completely surprised to hear the Ankh-Morpork is basically insolvent. As Vetinari reads a list of guilds’ annual pre-tax profits, and lords owing the most money to the state, we learn that none of the rich have paid taxes. The Guild of Accountants has this huge profit and also applied for a refund.
Hilarious. Try the unabridged audio book version read by the able and amusing Nigel Planer. Try to laugh to keep from crying.
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This is pushing the bounds of my tax knowledge, but I don’t think the loophole you describe would work in the US, because US tax law already taxes all the profits a US corporation makes anywhere in the world. The UK system (about which I know only a little) has to specifically target tax havens for repatriation taxes (enabling loopholes like you describe), whereas the US system automatically has a repatriation tax, so the main loophole is if you can convince Congress to suspend it for a while.
From Wikipedia: Apple Inc.: Corporate affairs: Finance: Tax practices:
In 2015 Reuters reported that Apple had earnings abroad of $54.4 billion which were untaxed by the IRS. Under U.S. law corporations don’t pay income tax on overseas profits until the profits are brought into the United States.
As Bloomberg explains it using Google as an example:
Income shifting commonly begins when companies like Google sell or license the foreign rights to intellectual property developed in the U.S. to a subsidiary in a low-tax country. That means foreign profits based on the technology get attributed to the offshore unit, not the parent. Under U.S. tax rules, subsidiaries must pay “arm’s length” prices for the rights – or the amount an unrelated company would.
Because the payments contribute to taxable income, the parent company has an incentive to set them as low as possible. Cutting the foreign subsidiary’s expenses effectively shifts profits overseas.
The expenses are shifted to a country like Bermuda where they don’t pay corporate taxes.
The bolded words are the key. You can shift profits to foreign subsidiaries, but you can’t actually return them to US shareholders without bringing them back into the US and paying tax on them (unless you can convince Congress to give you a pass).
The difference (as I roughly understand it) in the UK is that UK law doesn’t tax foreign profits at all, even if they’re brought back to the UK and distributed to UK shareholders. Hopefully some Brit will correct me if I have that wrong.
What stops you from giving shares in the foreign subsidiary to your shareholders? Or just having it pay money into your shareholders’ own overseas accounts? No doubt there’s a tax-free way to do that. I doubt that Mitt Romney has his bank accounts in the Cayman Islands and elsewhere strictly as a hobby.
No need to abolish it for larger corporations. That would require setting a dubious threshold. Capping the tax credit would do the trick without opening a can of worms.
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In most cases that would itself be a taxable transaction. It may be possible to structure it to be tax free (I’m not really sure–this is a bit beyond the bounds of my knowledge), but there are lots of other barriers to doing this in terms of securities law, foreign tax withholding concerns, corporate control (the subsidiary may no longer be a subsidiary but a separate company altogether with different ownership), and politics.
There are some examples of public companies doing “inversions,” where they merge with a foreign company and the foreign company survives the merger so that the company effectively moves overseas, allowing it to avoid US corporate tax altogether. But that’s a pretty major transaction that is extremely expensive to do and politically controversial.
Two issues with that:
- If you’re talking about shareholders of a US corporation (that is subject to corporate income taxes) trying to get profits out of a foreign subsidiary, then the profits would have to flow through the US corporation to get to the shareholders, and the US corporation would recognize the profits when they did so. With a nod to the late Senator Ted Stevens, corporate subsidiary structures are like a series of tubes…
- If you’re talking about the shareholders becoming direct shareholders in the foreign company so the money doesn’t flow through a US parent corporation, then there are the issues in my first set of responses above. Assuming you get through those issues, then non-US shareholders in the foreign corporation would no longer pay US taxes. But US shareholders are still supposed to report profits (and pay tax on them) even if they receive them in foreign bank accounts. I’m not familiar at all with the tax devices Mitt Romney and his ilk may use, but if they have overseas bank accounts,my guess (and again, this is pushing the limits of my knowledge) is that those accounts are not held personally by US individuals, but held by foreign companies that reinvest the profits from overseas ventures into other overseas ventures or find some other way so that there isn’t a profit realized by the US taxpayer. If/when the dollars come home to somebody in the US, there will be tax to be paid.
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