Hopefully, there’s a factual answer and this doesn’t become a Great Debate.
President Obama today is promoting his program for “insourcing” - returning manufacturing jobs to the US. One part of the proposal calls for the removal of tax breaks given to US manufacturers that outsourced jobs overseas.
Excuse me? That seems like a no-brainer.
So when did we start giving tax breaks for outsourcing, and what was the rationale?
I don’t know anything offhand about this, but I wonder if the tax breaks being referred to were unrelated to outsourcing, but being taken away as a sort of penalty program. “Well, you donated to charity (or whatever), which would ordinarily give you a tax break of $20,000 - but you also took 40 jobs overseas, so we’ll call that a wash.”
As I understand it the tax incentives being referred to have to do with deferred payment on income earned in foreign countries. US-based companies have to pay the corporate income tax on that profit but not until the money is transferred back the US. By keeping it overseas they can avoid paying the tax. They obviously cannot do this for increased economic activity based in the US.
As for when it started, it was at least prior to JFK as he also called for these rules to be removed.
Here is a summary from a partisan source (didn’t have time to find a more unbiased one, sorry): Issues - Center for American Progress
What income earned in foreign countries? If a company is selling widgets outside the U.S. then there is income, but what income is there from paying workers to manufacture those widgets?
Thanks,
Rob
Here’s an example from a potential client. (I referred him on becuase I’m not an expert in international taxes).
He owns a company in the US that imports widgets. He owns a company in Cambodia that manufactures widgets. He also owns a company in Cambodia that rents the factory to the widget manufacturer. His tax rate in Cambodia is 10% and it’s 35% in the US. So he wants to charge high rent to the manufacturer so that the manufacturer can justify high production costs for the widgets. The import company then pays a price for widgets that it can just barely afford.
The result is two companies paying tax at 10% on $10 million in profits to Cambodia, and one paying 35% tax on $0 to the US. Of course, this scenario means that money accumulates in Cambodian entities. To “bring it home” he’d generally pay it as dividends from one company to another. (Of course, he could also loan the money to the US company. Now he’s got another deduction in the US and more profit in Cambodia.)
There wouldn’t be foreign profits if the outsourcing was to a fully independent foreign company, but the big multinationals just own subsidiaries on both sides of the border.
In that example if the U.S.-based company owns the Cambodian companies and is paid dividends by it, don’t those count as profits on the U.S. company’s balance sheet?
If the Cambodian companies loan the profits to the U.S. company and the U.S. company doesn’t pay it back, what are the tax implications in that situation?
It seems like the upshot is that the profits are only taxed once in the U.S. Is that true?
Thanks,
Rob
P.S.: what does he sell that he can get away with artificially jacking up the price like that?
Just from the context on a radio news spot, I got the impression that a company could take a legitimate expense for relocating facilities. The issue is that when that relocation happens to be out of the country, the same expense can be claimed as if moving from NJ to SC.
It’s more than that. Link:
From the response, they don’t pay taxes until the dividends are paid, which could be several years later, and only what the parent company wants. Any money sitting overseas is tax-deferred.
A loan forgiven becomes income - since at the time of forgiving, what you are essentially doing is the equivalent of GIVING the person the money to repay their debt, and then taking it back as repayment. Formal loans are not income, giving money is. But it is only income if the person is ahead of the game - if they no longer owe the money, if they no longer have to pay approximately market rate interest.
md2000 gave good answers for the other two questions.
As far as this question goes, the what isn’t important. They key is that he sells it to himself, from one subsidiary to another.
If you look at the total operations, including subsidiaries, you might see (in millions):
$10 gross sales
-$2 cost of goods sold
$8 gross profit
-$5 overhead expenses
$3 net profit.
But he only manufactures the widgets for himself. So he can inflate the price and make his US company look like this:
$10 gross sales
-$8 cost of goods sold
$2 gross profit
-$2 overhead expenses
$0 net profit
And if he inflates the rent on the Cambodian manufacturer, it looks like this:
$8 gross sales
-$2 cost of goods sold
$6 gross profit
-$2 overhead expenses
-$4 rent expenses
$0 net profit. (Thereby justifying the high selling price to the US Company under at least a cursory inspection).
And the Cambodian company that rents the factory shows:
$4 gross rents received
-$1 overhead expenses
$3 net profit.
So… he’s intentionally setting all of his prices so that the only company with a profit is the one renting the factory. Since one person controls all three entities, he can do that. Of course, there are laws to try to prevent huge abuses of this, but there are lawyers and accountants who come up with ever-more-convoluted ways to justify it.
I get that. What I meant was that that seems like cash on the table. I guess they are making something with a high barrier to entry.
Thanks,
Rob