While its definition is malleable and open for debate, the “American Dream” remains a standard by which many people gauge perceived success and failure in various segments of our society—even in U.S. territories. The business world is no exception, as successful entrepreneurship and business management are regarded as prime drivers of upward mobility, economic progress and financial reward.
Unfortunately, an increasing number of influential people in the business world believe that the current corporate tax rate in the United States is hampering the ability of companies to effectively and productively operate in the country. With tax rates ranging from 15 percent to 39 percent, the country has one of the highest corporate tax rates in the world. On the other hand, thanks to tax breaks and a variety of legal financial maneuvers, the average corporation ends up paying even less than the minimum tax rate.
Nevertheless, with tax rates at their current levels and competition increasing in many lucrative business sectors, there is a growing tendency for corporations to move their money offshore, where it is treated very differently by the U.S. tax code. There are two key advantages to doing so. The first is that taxes paid overseas may be deducted from taxes to be paid to the Internal Revenue Service. For example, if a corporation is to be taxed at a rate of 20 percent, but has already paid taxes under a 10 percent rate elsewhere, it can apply that 10 percent to its U.S. tax return — thus paying a rate of 10 percent in the United States, as well.
The second advantage of setting up a subsidiary overseas is that U.S. corporations may hold off on paying taxes on foreign income through the deferral process. By recording profits as overseas profits under the control of a foreign subsidiary, a corporation is not liable for taxes on those profits until it decides to return them to the control of the parent company.
Escaping tax liability
One result of these tax practices is that there is considerable wealth being held overseas, protected from taxation. And although estimates vary, there seems to be broad agreement that the dollar amount can be measured in the trillions.
Many of these overseas tax havens are located in the Caribbean. In Bermuda, the Cayman Islands and the British Virgin Islands, for example, subsidiaries of U.S. corporations reported profits in 2010 that dwarfed the gross domestic product of those countries. Bermuda had a GDP of $6 billion that year, compared to $94 billion in profits reported by U.S. corporate subsidiaries.
While these practices have raised the ire of many groups that argue the American Dream is on the decline in the United States and call for alterations to the federal corporate tax code, the fact remains that these practices are legal and offer great incentives for companies to take risks and expand. If you have questions about how the corporate tax code applies to your business, contact a knowledgeable corporate law attorney today.
BoltNagi is a well-established and widely respected business law firm serving corporations and partnerships throughout the U.S. Virgin Islands.