fund that masquerades as our country’s budget. (title bar is too short!)
I’m not asking for advice on anything illegal - just wondering the feasability of a small-time company emulating the big guys.
There are several thousand large US corproations not paying taxes on their income because they incorporated and have headquarters in the Caribbean. How feasable for a small time company to do the same?
Right now I’m doing home-sewing piece work, but I only get a few items cranked out an hour. And I shop for materials on my lunch break and if business keeps up, I’ll poop out.
But if I outsource it to a sweatshop or even a reasonable wage-paying house, I’d be paying taxes on that useless War on Oil; not something I’m interested in doing. But if I incorporated, as is legal by US law, and was headquartered at a drop box in the Caymans (also legal), could I then not pay those taxes directly to the government to feed into the war machine?
My intention is not to evade paying for what I get like the big multi-millon dollar companies; more accurately I’d funnel it into a taxation with purpose deal - money to the local libraries, community outreach programs, et cetera.
Is it that hard to set up the Cayman dealie? Can I do it on the cheap without going there?
Offshore banking for the purpose of tax evasion is illegal.
IIRC the United States requires anyone liable for US taxation (be you a company or individual) to list ALL assets wherever in the world those assets may be and you will be taxed accordingly on those assets. Using numbered bank accounts may make it harder for the feds to figure out what money you have in an offshore account but that does not mean they won’t get you if you try.
I think you’re misinterpreting something you’ve heard. (Or perhaps just parroting the words of an Internet wing-nut.) How about a cite to show that your premise is correct in the first place?
Well, for practical purposes, yeah, you probably could set up a corporation offshore and make that corporation exempt from US taxes. But that doesn’t make you exempt from US Taxes. Your corporation has to pay out expenses, i.e., pay you your salary. That’s income to you! Or, your corporation pays out dividends. Hey! That’s still income to you! And you owe it in the United States. Then there’s the potential for a double-whammy – maybe you have a personal income tax liability in your offshore country, now, too!
As for corporations not paying taxes, well, duh! It’s in their best interest to not pay taxes. It means that that shares that you own will be worth more or pay higher dividends. Well, that’s not very GQ’y, but this is: even for corporations that don’t pay corporate income taxes, they’re still paying a hell of a lot of other taxes. If they own or lease equipment, have employees, or in anyway conduct business in the United States, several governments are all getting pieces of that pie. Of small, private corporations in the United States (you know, Mom&Pop Inc), I would imagine that the great majority (even without being offshore) don’t pay any form of corporate income tax at all – the management/shareholders/etc take out 100% of potential profits as expenses. Otherwise Mom&Pop Inc. have to pay taxes on the profits, and then pay taxes again when they disburse the dividends.
Now my example above is simplistic – taxes and corporations are a vast, huge, complex topic and it’s unfair to characterize “evil corporations” as being tax evaders.
Oh, and Senators often have agendas. And many of them aren’t much smarter than you and I ;).
First, the NYSE and NASDAQ combined only list about 6000 corporations. Can anyone believe that thousands of these are headquartered offshore in the Cayman Islands and don’t pay taxes? It’s an absurdity.
Besides, just because a corporation is headquartered elsewhere it doesn’t absolve them of paying taxes for money earned in the U.S.
There may be some specialized financial businesses that allow investments that are not subject to U.S. taxes because of where they are based. But these are not corporations in the usual sense of the term, even if they have been technically incorporated. And any true evasion of U.S. taxes by the people who invest in them is illegal and will bring down the authorities on their heads.
That’s why I’m totally suspicious of the OP’s statement. At most there could be a grain of truth wildly distorted.
It’s true that lots of big corps don’t pay much or anything in income taxes, but it’s not because they’re doing anything illegal. It’s because they don’t technically have much taxable income. For instance, you’ve herad of corporations writing something off? Any loss a corporation has is balanced against any profits it earns, and IIRC my Tax I class (not a safe assumption – it tied for the lowerst grade I got in law school), you can carry losses over to a new tax year under some circumstances.
Moreover, the United States allows you to take a deduction for reasonable trade or business expenses. Internal Revenue Code (26 U.S.C.) Sec. 162. That means that anything a business spends for salaries, rent, inventory, consultants, marketing, housing, professional licensing, lawyers, etc., etc., etc., ad nauseum, ad infiniteum, is knocked off the total of its earnings for tax purposes. Since a significant chunk of what a business earns goes right into growing the company further or paying operating expenses, very little in a given tax year is considered income by the IRS.
Then, of course, there are a million tax incentives that state, local and the federal governments give to businesses to entice them to locate in a particular area or to do a particular kind of business, or to make a particular product available that might otherwise be uneconomical. All of these can lower taxes further. And that’s how large corporations typically manage to pay little or no taxes – they’re not avoiding taxation, which is illegal. They arranging their business so as to minimize taxable income and maximize deductions in, ideally, a legal fashion.
My small business doesn’t pay nearly as much in Income Tax as we pay in Payroll Tax. I think we pay somewhere around 20% of our total earnings out in payroll taxes. Income tax is more like 4% after all is said and done. If you are writing yourself a paycheck and you live in the US I don’t think you can avoid payroll taxes.
It probably would not work for you. Since you’d own 100% the Cayman company directly, you will be taxable on the foreign earnings (whether as earned or as distributed). Your sweat shop workers would probably not be in the Caymans so you’d also need to set up a company in some place with workers. The rules are very complicated. It might be possible to defer tax for a while (if you don’t bring cash back to the US) but owning a Cayman company can be something of a flag for audit. Also, the tax complexity would probably eat your profits just in compliance costs.
Your suggestion is different from the corporations you mentioned. The corporate owner moved to Bermuda. You could do the same if you moved to Bermuda and renouced your citizenship. As I recall, if done for tax purposes, you could be taxable in the US for the next ten years and would not be able to even travel in the US during that period.
The ability of US multinationals to reincorporate the holding company into a foreign country has been curtailed by JOBS act in 2004.
<stupid rant>If you don’t like where your tax money is going, work to change the law or the legislators. If you feel like the elections are fraudulent, file a lawsuit. If you feel like the bulk of the electorate are jingoistic sheep, work to educate them. If you don’t pay your taxes because you don’t like how the money is spent and instead funnel the money to your favorite projects, even if you get away with it, you are subverting democracy.</stupid rant>
However, I would like to know what the purpose is of setting up an offshore corporation if it is not to avoid taxes. Liability concerns?
Another is easy transferability of share in the company. Let’s say you own property in some foreign country. If you sell the property, there are often regulatory hurldle. Imagine selling your house. You go to the county clerk and switch the registration. Now, if the house was owned in a corporation, you could sell the shares of the corporation. Much easier.
One of the other big items is the people a country expect to deal with a corporation in their country. The Japanese are famous for prefering to deal with someone with a formal legal presense in their country. German executives like to have the title of director of a German company. Often the Multinational group will establish a local corporation to deal with local matters.
Is it the case that some large corporations set up in the Cayman Islands which don’t own anything other than a bank account there? I can see Coke or Pepsi setting up there, for example, because they might own a bottling plant or a regional headquarters or something, but does anyone do it who doesn’t have a presence there? If they do, is it to hide assets?
Thanks for your help and I hope that isn’t too much of a highjack,
Rob
Many US companies have Cayman subsidiaries. Very few have “real” operations there. The Caymans have a few things going for them. It is easy to set up a company. There is no corporate tax on these paper companies. There is no withholding tax on payments made from the Caymans to other countries. Its fairly easy to transfer the shares.
For US multinationals, the Cayman company doesn’t offer much tax advantage if it is earning passive income through a bank account or whatever. That income would be taxed to the US shareholder as it is earned. The Cayman company could be used as a holding company to own shares of other foreign companies. Often this is done for convenience since it is so easy to establish and maintain a Cayman company.
It provides a quick and easy ownership structure but the operations are probably outside of the Caymans. Those operations would generally be taxed in the country of operations. In some countries, the tax laws may allow reductions by using Cayman entites in some way. The US multinational could reduce its income tax in another country using a Cayman company in some structure. This would be a tax avoidance strategy but not aimed at US taxes. Specifics beyond that are difficult because it is so fact dependent.
"The General Accounting Office has concluded that four of the 100 largest federal contractors are incorporated offshore in tax haven countries as a way of lowering their corporate taxes. "
From the other perspective, what makes a company a “US” company? Accenture, for example, claims to be a global company and in fact is headquartered in Bermuda. If you are going to be a large global/multinational company, what is the right way to decide where to be headquartered? One might argue that the decision should be made to maximize shareholder returns.
The info above was provided as a semi-cite for the OP’s premise.
To the OP’s main point, perhaps you can minimize your business’s tax liability by making contributions to charity in the name of your business, accomplishing essentially what you set out to do. Consult a real tax person before attempting, professional driver on a closed course, etc.
Here’s why corporations pay little tax.
Corporations pay tax based on their profit, you pay on revenue. This means that corporation can expense out things you can’t such as depreciation, rent, etc. In addition, naming rights for stadiums, private jets, limo service, etc are all expensed out as well. Many of the corporations work their accounting so that they have paper losses but real profit.
So if a corporation makes $50,000 a year and spends all but $1, they get taxed on $1. You make $50,000 a year and spend all but $1, you get taxed on $50,000. If you want to change the system, start with the inequity of this system
Let’s supposed you manage to play a similar game and get a lot of deductions - sorry, you pay the Alternative Minimum Tax.
Maybe I can help with this. Most public companies you have heard of are actually groups of corporations all ultimately owned by a single corporation. If that top holding company is incorporated under the laws of a US state, the group is considered a US based company. If that top holding company is incorporated under the laws of a foreign country, the whole group is considered foreign based. This is the basis of the US tax rules. The rules also apply to subgroups within that larger group. If a US corporation owns a foreign corporation, that group would be included within the larger US tax net to some degree even if ultimately both are owned by a foreign corporation.
For example, a Bermuda corporation could own a US business through a Delaware corporation and a Mexican business through a Mexican corporation. In Bermuda, the company is just a piece of paper with some share certificates in the Delaware and Mexican corporations. In that case, the business owned by the Delaware corporation is taxed under US tax law. The Mexican business in taxed in Mexico. If (alternatively) the Delaware corporation owned the Mexican corporation directly, the US tax law would look at the Mexican profits for taxation in some circumstances.
In the US, the tax law looks to the place of incorporation for tax treatment. In some countries, the law looks to the place where the company is “managed and controlled.” In practice, this often means where the board of directors meets.
Generally, the US multinationals that transferred the “headquarters” to Bermuda simply switched the place or incorporation of that top company to Bermuda. The board of directors may fly to Bermuda for a meeting but the top management of the business likely didn’t move.
Thanks, your post had lots of good info. Beyond that factual perspective, I was kind of raising a philosophical point, too. As in, we may think of one of these companies as a US company, but really it is a US, Mexico, Brazil, China etc. company, all owned by a Bermuda/Cayman/whatever corporation.
The part of your post I quoted above seems to indicate the Bermuda corporation is not effective at avoiding US taxes on US earnings, but may be effective at avoiding taxes by some other countries on earnings in those countries. Is that the correct interpretation?
In general, the whole point of switching the place of incorporation for that top company was to avoid paying US tax on the earnings of foreign subsidiaries. Some commentators have expressed concern that the US sourced income could also be reduced. For example, the Bermuda company could charge the US company for some sort of “management service.” This could reduce the taxable income in the US while moving the income to Bermuda where there are no taxes. This looks like an IRS audit problem. The agent would demand to know what these services are for since there really isn’t any activity in Bermuda. It doesn’t seem like something that would stand scrutiny but some companies may bet on no one asking any questions.