Friday, November 2, 2012

Managing Tax Liability

Companies are often measured on the basis of Pre-Tax Profit.  That is the percentage earned by subtracting expenses from revenues; to reflect perhaps a 10 or 12% profit.  But that is just part of the story.   It is not what a company earns that is important, but rather what a company gets to keep to make further investment in the growth and development of the company.   Governments all over the world impose Corporate income tax rates ranging from about 12% to the highest in the world in the US at 35%.   The US corporate income tax rate does not include state corporate income taxes, which can add another 3 - 10% depending on the state. 

As a result, companies that do business in the US may be paying as much as 45% of their Pre-Tax Profits in corporate income taxes, unless actions are taken to Manage Tax Liability.  This does not imply doing anything illegal; but rather taking advantage of lower tax states, or countries to cut corporate income tax liability.  In essence, when corporate income taxes are too high companies, just like people, often vote with their feet when determining the site of a new plant, or office location. 

Today, that decision is made on a global basis as companies choose to locate operations in countries that levy lower corporate income taxes to attract business   So, in addition to considering other cost factors, like labor, shipping and materials, more and more, tax considerations play a big part in locating a new plant or office.    

This Blogger CEO has watched and been involved in business migration for the last 30 years.  In the US, many companies have moved from high tax to low tax states.   For example, California that 30 years ago had 250 major companies with 5,000 employees or more, today only has 106 such companies because California has very high corporate income taxes and regulations that make doing business in that state difficult.   As such, large and mid-sized companies have been leaving California for years.

The same thing has been happening related to movement from country to country.   Since the United States has very high corporate income taxes, companies have moved operations to other countries with lower corporate income tax rates for years.  Accountants are paid millions of dollars every year to legally assist companies with Managing Tax Liability.   Again, it not what companies earn that matters, it is what companies get to keep to invest in future growth and development that is important.   

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