ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

The Acquisition of Foreign Companies to Avoid US Taxation

Updated on November 13, 2016

Introduction

According to the Organization for Economic Co-operation and Development (OECD), the United States has the third highest tax rate when you take into consideration the top thirty-five industrialized nations. With tax rates reaching as high as 39%, American companies are trying to find alternative ways to avoid taxation. It’s pretty simple; the American company buys out a small foreign company, and the foreign company becomes the new headquarters of the cooperation, at least in the documentation. Then from there, the corporation is taxed under the new countries rules. The company itself isn’t changed all that much, just the address on the official documents is altered. The company therefore still gets to enjoy all the benefits of being and American company such as the laws, research and development, access to the US markets, enforcements of patents and intellectual property and the American workforce.

Is it Really That Easy?

Now, if it were that easy, everyone would be doing it. There is always a catch. This method only changes the tax rates for the profits earned in the foreign country. So, if they are still paying the same US taxes for the profits earned in the US, which, unless they actually changed their business plan, is essentially all of their profits, why was the acquisition of a foreign company beneficial? Of course, there is always a way around everything in accounting.

Accountants or Magicians?

I have a professor who always says “tell an account what numbers you want and they will get you there.” The same concept of number manipulation is used in corporate inversion. No, they are not magic, but any successful accountant will certainly know how to work the system. There are a few different methods companies use in order to move the profits from the US based company to the foreign company. One way to achieve this is when the newly acquired foreign company makes a loan to its parent company back in the US at a high interest rate. This is called earnings stripping. When the US Company pays out the interest expense to the foreign company, its profits drop (Profits = revenues – expenses), and the foreign companies’ profits rise. However, since they are all owned by the same company, the company as a whole is not losing or gaining any money off of its net profits. When it comes time for taxes nonetheless, the US based company now has less profit to be taxed on, and the money has been legally moved into the foreign company with a lower tax rate. Kind of sneaky, kind of tricky, but as of right now, it is one hundred percent legal.

Should America Do Something?

With the projection of twenty to forty billion dollars lost in US taxes in the next 10 years according to Congress’s Joint Committee on Taxation, it is pretty clear that America should do something to get at least some of that money back. The money lost is affecting the middle class families. The money could have been used towards buildings or roads, creating jobs or opportunities for Americans, making college more affordable, bettering the education system, or creating jobs but because of the loophole of corporate tax inversion these opportunities are lost. The only problem is, the Republicans and the Democrats cannot come even close to agreeing on what should be done or how the problem should be addressed.

The Republican Party believes that America should only tax their corporations on economic activity that occurs within the borders like the rest of the G8 countries (Canada, France, Germany, Italy, Japan, Russia and the United Kingdom). However, this raises concerns for the Democratic Party that companies will continue to use the power of legal accounting manipulation, to stay in the lowest tax jurisdictions as well and distributing profits back to shareholders, such as paying dividends, so they can avoid taxation as well. Both sides do agree that corporate tax rates need to be lowered.

References

Cleaver, Alan. Tax- It's Easily Defined. 2009. Flickr, Whitehaven, UK. Flickr. Web. 13 Nov. 2016.

Olhoft Rego, Sonja. "Tax-Avoidance Activities Of U.S. Multinational Corporations." Contemporary Accounting Research/Recherche Comptable Contemporaine 20.4 (2003): 805-833. EconLit with Full Text. Web. 14 Oct. 2016.

Regnier, Pat. "Everything You Need to Know About Companies Leaving America for Taxes." Time. Time, 23 Sept. 2014. Web. 14 Oct. 2016.

"What's Driving American Firms Overseas." The Economist. The Economist Newspaper, 16 Aug. 2015. Web. 14 Oct. 2016.

Comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)