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Friday, November 25, 2011

Why Multinationals Pay Little or No Taxes

The U.S. is one of only two nations that taxes its citizens and corporations on their income from wherever it is derived. Anywhere and everywhere in the world. U.S. citizens are also taxed on investments directly or indirectly made through foreign trusts and foreign corporations, including offshore trusts and IBC's. Thus, the fact that an offshore jurisdiction may have low or no taxes does not mean that a U.S. citizen doing business there will enjoy only low or no taxes on the personal income made. There are simply no PERSONAL income tax advantages, at all, for U.S. citizens to use offshore structures, and anyone who tells you differently is telling you a falsehood. The U.S. congress does not care WHERE you make your income, they simply demand their share.

However, corporations are different. They are legal entities holding citizenship in the country where they are organized. For illustration, we will create a company named the Great Widget Company (GWC) and incorporate in the U.S.A. They build manufacturing plants and sell their wonderful widgets in the U.S., Ireland and Germany and taxable profits of $10M are earned in each of the three countries. The chart below illustrates the simple corporate tax liability for GWC.

Country

Cayman Is.

U.S.A.

Germany

Ireland

Total

Taxable Earnings

30,000,000

10,000,000

10,000,000

Nominal Tax

35%

15%

12.5%

Tax

10,500,000

1,500,000

1,250,000

13,250,000

Deduction*

2,750,000

2,750,000

Nominal Tax

7,750,000

1,500,000

1,250,000

10,500,000

* Deduction - The U.S. permits deduction of income taxes paid to other countries

Now we will look at the same calculations if the Great Widget Company was organized in the Cayman Islands and registered in the U.S. as a foreign corporation doing business in the U.S. as the Great Widget Company, USA.

Country

Cayman Is.

U.S.A.

Germany

Ireland

Total

Taxable Earnings

0

10,000,000

10,000,000

10,000,000

30,000,000

Nominal Tax

No Taxes

35%

15%

12.5%

Tax

0

3,500,000

1,500,000

1,250,000

6,250,000

Deduction

Nominal Tax

0

3,500,000

1,500,000

1,250,000

6,250,000

As the above chart shows GWC reduced their taxes from $10,500,000 to $6,250,000 for a tax savings of $4,250,000 or 40% simply by eliminating U.S. taxes on the German and Irish earnings. Couple this with transfer payment accounting and other credits and you're like GE and not paying any taxes


One must bear in mind that our imaginary company is relatively small and operating in only three countries. Just envision the potential savings of very large corporations earning billions of dollars in profits and operating in sixty or seventy countries. Increasing the above profit chart from millions to billions and suddenly the 40% tax savings become significant. It does not require gifted intellect or imagination to understand why nearly twenty thousand companies are registered at Ugland House.

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