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You describe the situation as it is. The current system indeed drives US corporations to reincorporate abroad by merging with a foreign companies, because they

You describe the situation as it is. The current system indeed drives US corporations to reincorporate abroad by merging with a foreign companies, because they are able to immediately create huge tax synergies. It also makes US companies more prone to acquisitions from abroad, because those acquirers can save a ton more in tax than any company could with a US holding company at the top.

valuearb 9y ago
You aren’t far away, but not exactly understanding what foreign subsidiaries are. They aren’t created out of mergers (not usually), and they defer taxes, not directly save them. If Apple directly sold in France it would first pay French corporate taxes, then on the remaining profits, pay another 40% or so as corporate taxes to US and California. They might have 40% left for reinvestment and dividends. Instead they create Apple France, which pays the French corporate taxes on its profits, but doesn’t send the rest to Apple USA. By holding those profits Apple can defer the day of taxation until a tax holiday (hopefully) so they can reinvest or pay shareholders as much as 50% of their French profits. This ignores other wrinkles such as moving the French after tax profits to Ireland so the interest earned while they hold it is only taxed at very tiny rates.
- charlesdm 9y ago
  What I'm talking about is the process after the profit has been booked and is held in a foreign account. What you describe is how to profit ends up in one of those foreign accounts. There are certain rules for US controlled companies about what they can and cannot do with the money held in those tax deferred subsidiaries. But if a US company is not US controlled (e.g. a corporate group with a holding company not based in the US) these (anti avoidance) rules do not always apply or are applied differently. Second, if you have an EU company acquiring a US domestic entity, they will generally be able to save more on taxes due to the high corporate tax rate. In its simplest form: say an entity that is taxable at 20% acquires a business paying 35%, they'll be able to convert a significant portion of that 35% by legally stripping earnings in various ways (loans, consulting agreements, ip license agreements, etc). See https://en.wikipedia.org/wiki/Tax_inversion https://en.wikipedia.org/wiki/Tax_inversion
  - valuearb 9y ago
    Inversion is the big gun, but rarely used. Just owning stock in your own foreign subs is enough to give you tax deferral.

valuearb 9y ago

You aren’t far away, but not exactly understanding what foreign subsidiaries are. They aren’t created out of mergers (not usually), and they defer taxes, not directly save them. If Apple directly sold in France it would first pay French corporate taxes, then on the remaining profits, pay another 40% or so as corporate taxes to US and California. They might have 40% left for reinvestment and dividends. Instead they create Apple France, which pays the French corporate taxes on its profits, but doesn’t send the rest to Apple USA. By holding those profits Apple can defer the day of taxation until a tax holiday (hopefully) so they can reinvest or pay shareholders as much as 50% of their French profits. This ignores other wrinkles such as moving the French after tax profits to Ireland so the interest earned while they hold it is only taxed at very tiny rates.

charlesdm 9y ago
What I'm talking about is the process after the profit has been booked and is held in a foreign account. What you describe is how to profit ends up in one of those foreign accounts. There are certain rules for US controlled companies about what they can and cannot do with the money held in those tax deferred subsidiaries. But if a US company is not US controlled (e.g. a corporate group with a holding company not based in the US) these (anti avoidance) rules do not always apply or are applied differently. Second, if you have an EU company acquiring a US domestic entity, they will generally be able to save more on taxes due to the high corporate tax rate. In its simplest form: say an entity that is taxable at 20% acquires a business paying 35%, they'll be able to convert a significant portion of that 35% by legally stripping earnings in various ways (loans, consulting agreements, ip license agreements, etc). See https://en.wikipedia.org/wiki/Tax_inversion https://en.wikipedia.org/wiki/Tax_inversion
- valuearb 9y ago
  Inversion is the big gun, but rarely used. Just owning stock in your own foreign subs is enough to give you tax deferral.