Monday, August 11, 2008

America: Corporate Tax haven?

Here's an inspiring article from the Associated Press in the New York Times. It inspires me to try to avoid paying taxes! I used to think American tax rates were lower than those of other countries. But our taxes approach the 35-50% rate similar to those of many other countries.

Most companies in US avoid federal income taxes

...The study by the Government Accountability Office, expected to be released Tuesday, said two-thirds of U.S. corporations paid no federal income taxes between 1998 and 2005, and about 68 percent of foreign companies doing business in the U.S. avoided corporate taxes over the same period....

'It's shameful that so many corporations make big profits and pay nothing to support our country,'' said Sen. Byron Dorgan, D-N.D., who asked for the GAO study with Sen. Carl Levin, D-Mich.

Wikipedia has much to offer on the subject of tax havens, such as:

"What ... identifies an area as a tax haven is the existence of a composite tax structure established deliberately to take advantage of, and exploit, a worldwide demand for opportunities to engage in tax avoidance."

...On 25 January 2007 Senator Byron Dorgan (for himself and on behalf of Carl Levin and Russ Feingold) presented a bill to the U.S. Senate to amend the U.S. Internal Revenue Code 1986 to treat controlled foreign corporations which are established in tax havens as domestic corporations, and subject to full taxation as such within the U.S.[36]
[....A CFC (controlled foreign corporation) is a legal entity that exists in one jurisdiction but is owned or controlled primarily by taxpayers of a different jurisdiction.]

Although the Stop Tax Haven Abuse Act ran out of time in 2007, Senator Levin has promised to re-introduce it during 2008.

Hence, the focus above. Again, from Wikipedia:

...draft legislation was superseded late in the same year (2007) by the unambiguously named Stop Tax Haven Abuse Act which was introduced by Senator Levin together with Presidential candidate Barack Obama and Senator Norm Coleman.[39] The Act would introduce a large number of measures designated to attack transactions perceived to facilitate unlawful tax avoidance by the use of offshore tax havens.

Here are ways they propose to mitigate tax avoidance, according to Wikipedia:

  • empowering the U.S. Treasury to take special measures against foreign jurisdictions which "impede" U.S. tax enforcement.
  • requiring U.S. financial institutions that open accounts for foreign entities controlled by U.S. clients, or open accounts in offshore secrecy jurisdictions for U.S. clients, or establish entities offshore for U.S. clients, to report such actions to the IRS.
  • taxing income originating from offshore trusts used to buy real estate, artwork and jewelry for U.S. persons, and treating as trust beneficiaries those persons who actually receive offshore trust assets.
  • increasing current penalties on promoters of unlawful tax shelter.
  • prohibiting the U.S. Patent and Trademark Office from issuing patents for "inventions designed to minimize, avoid, defer, or otherwise affect liability for Federal, State, local, or foreign tax".
  • requiring hedge funds and company formation agents to establish anti-money laundering programmes equivalent to those which apply to banks and other financial institutions.
Is this idealistic or realistic? Companies have left America and they won't come back if they will be double-taxed. They will only do what they must to do business. America loses unless it is lenient.

The point not to miss is that the official corporate tax rates are likely not true final tax rates, at least in the United States.

Here is a list of Tax Rates, corporate, individual, payroll and sales tax rates, around the world. It looks like North America and Europe have the highest rates.

Wikipedia, on tax rates in the United States, says that:

Nevada and Wyoming are particularly well known for not having any state income tax or corporation tax.

The United Arab Emirates would appear to be the clear winners on the tax avoidance list where all tax rates are 0%. Of course, then again, there are certain drawbacks to living in the U.A.E. where women aren't allowed to drive. That would nix it for me.

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